Archive for the ‘medical expenses’ Tag

Back to Basics Part III – More Sch. A

Originally published in the Cedar Street Times

November  14, 2014

Two weeks ago we discussed the purpose of schedules and forms in a tax return and then began a discussion on Schedule A – Itemized Deductions.  We discussed that itemizing deductions is an option if you have more than what the IRS allots as a standard deduction to everyone for things like medical expenses, taxes, charitable donations, and other miscellaneous deductions.  This week we are going to look more closely at the different types of deductions that you can itemize on Schedule A and how these deductions can get a shave and a haircut and look like less than when you started.

The first section on Schedule A covers out-of-pocket medical expenses (not reimbursed by insurance).  Things like doctors, dentists, chiropractors, Christian Science practitioners, hospital bills, prescription drugs (not over the counter), eyeglasses, contacts, copays, etc. all fit into this category.  Health insurance is also deductible here unless it is for self-employed people, in which case it can get potentially better treatment as an adjustment to income on page one of the 1040 instead.  Health insurance would include your Medicare payments which most people see deducted from their Social Security checks.

Sometimes people are surprised to learn that substantial expenditures on your home can be deductible if done to improve accessibility – such as widening doors and bathrooms, installing ramps, hand rails, etc. (there are a number of rules to be aware of, however).  You can also deduct medical related miles at 23.5 cents per mile and even deduct overnight travel expenses if you must drive to a hospital that is not local, for instance. The problem with medical expense deductions is that for the vast majority of people, none of the expenses even make it towards counting as an itemized deduction. 

You have to have in excess of 10 percent of your adjusted gross income (the bottom number on page one of your 1040) in medical expenses before a single dollar counts.  So, if your adjusted gross income is $100,000, and you have $10,500 of out-of-pocket medical expenses, only $500 counts towards your itemized deductions.  If you or your spouse are over 65 you have a 7.5 percent threshold through 2016, and then you will jump to ten percent as well.  A really nice planning opportunity around this dilemma is having a health savings account in connection with a high deductible plan.  It has the ability to effectively convert some or all of your nondeductible medical expenses to deductible expenses.  Ask your tax preparer or insurance agent about this.

The second section on Schedule A covers deductible taxes you have paid. This includes state income taxes you paid during the year, SDI withholdings from your CA paycheck, real estate taxes on your personal residence(s), personal property taxes assessed on value such as annual vehicle taxes (license fee on your CA DMV renewal), boat, aircraft, etc.  Remember, as a cash basis taxpayer, these (as with generally all income and expenses on your tax returns) count in the year you actually pay them (or charge them in the case of a credit card), so it doesn’t matter what year they are supposed to cover – just look at when they were paid.  There has been an option in past years to deduct sales taxes you paid during the year if they were greater than the state income taxes you paid, but that is currently not an option for 2014, unless Congress takes action.

In two weeks we will continue our discussion regarding Schedule A.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Back to Basics Part II – Schedule A

Originally published in the Cedar Street Times

October 31, 2014

Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return.  The 1040 can be thought of as a two-page summary of your taxes in a nutshell.  (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ.  These are for simpler returns and have income limits and other restrictions.  In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate.  For our discussion we will focus on the 1040.)

The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms.   Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers.  Schedules are generally more major topical areas.  For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship.  It may in turn have subsequent forms that support it.  Forms are often more narrowly focused and would generally support other schedules or forms.  For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc.  I have not counted them all, but I have read the IRS has over 800 forms and schedules.  The reality is that most people are covered by 30 or 40 of those 800!

Let’s start at the beginning of the alphabet – Schedule A.  (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!)  Schedule A is for itemized deductions.  You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.”  However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A.  Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it.  Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.

Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions.  The standard deduction was created to generally cover what many people would have on the average anyway.  For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status.  If you believe you would have more than this, then you would itemize the deductions using Schedule A.

Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone.  In other words, if you do not own a home, there is a good chance you won’t be itemizing.  This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year!  Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.

Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

American Taxpayer Relief Act of 2012

Originally published in the Cedar Street Times

January 11, 2013

The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013.  There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people.  I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers.  That patch has been kicked down the road for years.  The indexing will certainly alleviate concerns of a similar problem down the road.  Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.

The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property.  In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it.  Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust.  Family dynamics may of course still dictate a B trust is prudent.

Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.

Quite a few things were extended but not made permanent.  A big one was extending the exclusion from income of cancelled debt on personal residences for another year.  This could be a lifesaver for those still struggling with mortgages that are “underwater.”  Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013.  More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs.  Enhanced provisions of the child tax credit were also extended through 2018.

Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179.  This was slated to return to $25,000, but has been extended through 2013 at $500,000.  Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.

Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy.  For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%.  There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000.  Itemized deduction phaseouts have also returned for high income earners.

Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result.  Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%.  Individuals 65 and up will still enjoy the 7.5% rate for another three years.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Divorce Taxation – Part III

Originally published in the Pacific Grove Hometown Bulletin

July 4, 2012

Since it is July 4th, and we are discussing divorce, I suppose it would be appropriate to say, “Happy Independence Day!”

Tax Carryforwards

When going through a divorce it is important to realize you may have valuable “tax assets” that need to be divided according to tax law or negotiated between spouses.  Capital loss carryforwards (such as those generated by stock sales) are supposed to be allocated based on whose assets from the past created the losses.   Net operating loss carryforwards (such as those generated by a large business loss) are supposed to be determined by recalculating what the losses would have been if you had been filing separate.  Minimum tax, general business credit, and investment interest expense carryforwards can be negotiated.

Suspended passive activity losses (such as those generated by rental properties) go with the individual receiving the property, however, there are some pitfalls to avoid that could require the passive activity losses to be added to basis, rather than becoming immediately available to the spouse receiving the property.  If you happen to have bought a house with the $8,000 homebuyer credit that has to be repaid, the person who takes the home becomes solely responsible for repayment.

In practice, I have not seen the IRS come down heavily on how carryforwards are divided, but it is important to know what you are entitled to, so you do not miss out on something that could save you money down the road.

Children

Children present a number of planning issues in a divorce.  Tax benefits related to children include the child’s exemption, child tax credits, dependent care credits, exclusion of income related to dependent care benefits, earned income credits, education credits, and head of household filing status.  The custodial parent (defined for tax purposes as the parent who lived with the child most during the year) is generally the one eligible for these benefits, although the custodial parent may release two of those (the exemption and child tax credits) to the noncustodial parent by filing Form 8332, and keep the remaining benefits. As discussed in a previous issue in this series, it is also possible for both spouses to claim head of household if the abandoned spouse rules are met.  If both parents meet certain qualifying child rules, they can also each claim medical and health insurance expense deductions they pay for the child and can distribute money from HSAs, MSAs, etc. for the child’s benefit.  When multiple children are involved, planning can be done to preserve the head of household status for both spouses.

Child support payments are not taxable income to the recipient parent, nor are they deductible by the parent paying the child support.  Alimony on the other hand is income to the recipient, and deductible by the paying parent.  Be sure your divorce decree is clear and specific on the payment of alimony and child support.  Alimony is a tricky area and you must be very careful about how it is paid.

To be continued next issue…

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

I’m Having a Baby!

Originally published in the Pacific Grove Hometown Bulletin

Decembery 7, 2011

Well, not me, technically, but my wife is.  After 12 years of wedded bliss, we are entering the baby business.  Like most future parents we are excited, but being a CPA takes it to a whole new level of joy!  There are so many planning opportunities around children.

Planning can start well before birth or even years before conception.  For example, the highly tax savvy high school senior could think, “Someday, I am going to have a family of my own.  Knowing the high cost of college I am about to incur, I should really start saving for my future child’s education now to maximize tax-deferred growth!  That raucous week in Cancun is really a waste of money, anyway.”  Instead this high schooler opens a section 529 plan and names his older sister’s child as a beneficiary.  After four years in a frat house, a year traveling after school, a few years bouncing around finding himself, falling in love, getting married, and finally having a child, this new parent then renames the beneficiary to his own child with a ten-year jump start on tax deferred education saving!

What about the expense of having the child?  This natural process which has gone on quite successfully for a few million years or so at no cost, mostly outdoors in the dirt, can now be quite pricey, and sterile.  It may cost $5,000 if you use a midwife or $25,000 in a hospital!  You will likely go over your deductible and insurance will pick up the rest.  A great option is to have a high deductible health plan going forward with a health savings account.  This setup makes virtually all of your family medical expenses deductible whereas people with traditional plans are stuck itemizing with a 7.5 percent of AGI floor – meaning most people do not get any tax benefit.  It also allows the deductibility of more types of expenses and alternative care.

Next, there is the additional exemption deduction to get excited about – we are talking $3,700!  You are also eligible for child tax credits – up to a $1,000 per child.  And if you are low income, the child may help qualify you for a larger earned income credit: up to $3,094 with one child or $5,751 with three or more!  Child tax credits and earned income credits can be refundable – meaning, even if you do not pay a dime in tax, the federal government will “refund” the money to you anyway – but having children is not a great way to get rich.   For advanced tax planning, you aim to have your child near the end of December and still receive the exemption and credits for the whole year.  No expense, but full benefit – brilliant!

Do not forget about dependent care credits and education credits either.  Dependent care credits will save you up to $1,050 for one child or $2,100 for two or more children.   Education credits for college age children such as the Hope credit can save you up to $2,500 in tax.

My favorite planning opportunity which I have yet to implement with a client is baby modeling.  If you can get your baby into print or TV commercials, then I feel you would have a strong case to say the baby has earned income.  Maybe the “talent’s” agent, a.k.a. mom or dad, would need to be paid out a heavy agent fee since it really required a lot of work on their part – but then again, I am sure that many famous actors and actresses have to be babied by their agents too!  Once your baby has earned income, you can establish a Roth-IRA for retirement!  Think about 18-22 years of additional investment compounding!  (Call me if you have a child in this situation – I want to put this in action!!)

So when is our baby due – LATE April…we hope!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Advertisements