Tax Tip: Medical Expense Deductions

I know you have been told, “forget about keeping track of medical expenses, you have to have too many expenses for it to matter”. If you ask the question is that always true, the answer is no. Yes, they are right if you do not itemize your deductions. They are also probably right if you really have very minimal medical expenses. If you do however itemize your deductions, keeping track of your medical expenses could give your itemized deduction total a boost.

In all things numbers, folks often underestimate amounts that are not written down.

The reason that we are often told to forget about tracking medical expenses, is that, the only medical expenses that come into play for your itemized deduction calculation, are those expenses that exceed your adjusted gross income by 7 ½ %, so let’s say that your income totals $102,400 (for ease of calculation) and that income was adjusted down by a $2000 tuition deduction, and $400 in student loan interest so your adjusted gross income is now $100,000, you would have to have qualified medical expenses of over $7,500 for them to matter in the itemized deduction calculation and then only the amounts over $7,500 (7 ½%) will qualify.

$102,400 – ($2,400) = $100,000 x .075 = $7,500

Income – adjustments = adjusted gross income times 7 ½% = your 7 ½% number (limit)

So if you had $10,000 in qualified expenses then only $2,500 would apply towards the medical expense component of your itemized deductions amount.

$10,000 - $7,500 = $2500

Total qualified medical expenses - your 7 ½% number = qualified deductible medical expenses

Now, you say, well, I don’t have over $7,500 in expenses – remember that you really can only determine what your 7 ½% number is based on your income and your adjustments to income which is why keeping track of your expenses is important.

If the above example had an income of $52,400, with the same adjustments, your adjusted gross income would be $50,000 – then your 7 ½% number would be $3,750.

$52,400 – ($2,400) = $50,000 x .075 = $3,750

Income – adjustments = adjusted gross income times 7 ½% = your 7 ½% number (limit)

If you do not have many medical expenses, that’s a good thing. No one wants to be sick in order to take a tax deduction; however, if you do have those expenses, you want to be sure that you have used them all to decrease your tax liability.

If you have young children, you may have larger than average co-pay amounts, prescription amounts, and possibly surgery or procedure amounts.

If you are more mature, you may have more diagnostic procedures, surgical expenses, or medication expenses.

If you have a chronic illness, you may have high prescription amounts.

Qualified dental and optical expenses also qualify for medical expenses and folks often forget that.  

If you are having a year where your medical expenses are already somewhat high but you probably haven’t exceeded your 7 ½% number, and you are scheduled for surgery or other procedure at the beginning of the next year, you may want to try to bring your surgery into the end of the current year so that your expenses are accumulated in one year pushing you over that 7 ½% limit, allowing you to take advantage of the tax benefits. Similarly, if you have an expensive or procedure surgery scheduled for the end of the year, and you know that you or your family may have some significant health expenses in the following year, you may want to delay the procedure or surgery to the beginning of the next year.

Caveat: You must have a discussion with your physician to make sure that pulling in or pushing out the date of your surgery or procedure doesn’t compromise your health.

A lot of people are not aware that medical mileage qualify as a medical expense (these are the miles you drive to medical facilities, including pharmacies).

Keeping track of all your medical expenses, will enable you to have the data to determine whether you qualify to include your medical expenses in your itemized deductions and of course is evidence in case of an audit.

You should also check with your human resources department, whether or not your health insurance premiums are deducted from your paycheck before or after taxes. If they are paid after taxes, then they also qualify as a part of your medical expense deduction. Make sure to let your tax advisor know that. Having some documentation from your HR department, or information from your company manual, will protect you in case of an audit. Many companies use income before taxes for employee’s premiums (which means that in that case you already got your tax break).

Important Note: The expenses that qualify are out of pocket expenses, so any portion of your medical costs that's paid for by your insurance company, does not qualify to be included on your tax return.

Stay well.

Preparing for Tax Season

Just a few more weeks before the end of the tax year.  Here Bob Meighan alerts you to some of the tips to help reduce your tax liability.   Watch.

The IRS is on Your Side!

Yes, I know, you never think the IRS is on your side, but it is.  Maybe you noticed that a number of fraudulent tax preparers were apprehended over the last several years.   Tax preparers were creating fraudulent returns - often to their own benefit, while taking advantage of the taxpayer's lack of knowledge about their own tax situation, but at other times, it appeared that the taxpayer was in on the deal, accepting large refunds that they were not qualified for.   Like these guys..., this guy,  and this guy...

Before, pretty much anyone could set up shop and prepare your taxes...resulting in the scenarios noted above.   Although the majority of paid tax preparers are honest and ethical, unfortunately there were fraudulent tax preparers in the ranks, who targeted among others, groups that may not have been savvy about their taxes, or may have wanted their money in a hurry, at any cost.   To make matters worse, these preparers were generally not accessible after tax season when the taxpayer had to respond to an IRS letter investigating the irregularities.

The IRS is now implementing new regulations that require tax preparers that are paid for their services to have a Preparer Tax Identification Number (PTIN) before they can prepare your 2010 taxes, including your CPA, your attorney, or enrolled agents.  Even if they had a PTIN previously, they must re-apply. There is also a fee for obtaining the ID number, which should hopefully reduce the ranks of those who just shouldn't be preparing your taxes.

Now that you know that your tax preparer / tax advisor should have a registered ID number, it is in your interest to ask if they do. 

Coming soon, tax preparers will be required to be certified.  

Last Minute Tax Tips for Tax Year 2007

So you waited until the last minute to file your taxes, probably because you may have a tax liability, or maybe you are like many of us, simply a procrastinator. Well most transactions that could have helped you proactively lessen your tax liability had to be completed by December 31st, 2007, but you knew that, that’s why you will start planning for this year’s taxes right after you have filed the 2007 tax return, right?.