Medical Deduction Explained

I have received some questions about medical expenses lately, so this week I would like to go over deducting medical expenses.  Generally, medical expenses are subject to over 7.5% of your Adjusted Gross Income.  In English that means that your medical expenses are only deductible if they are over 7.5% of what you earn in a year.  For example, if you earned $50,000 your medical expense would have to be over $3750.  So if you paid $5000 in medical expenses you can only deduct $1250. 

Let’s take a look at some of the things that are deductible. They include: prescriptions medications, doctors, dentists, medical examinations, medical tests, nursing care, hospital expenses, special treatment programs, medical aids, corrective surgery, certain lodging and travel expenses such as mileage to and from any of the above places.

There is one more thing that is deductible but a little confusing and that is health insurance premiums.  Today there are many ways that insurance premiums are paid: HSA, cafeteria plan, employer paid, self-employed pay, just to name a few.  If you are an employee, you may deduct only the premiums you pay after taxes.  Anything pre-taxed are not deductible.  If you are self-employed or have a S Corp or LLC and you pay your own insurance premiums you can deduct these premiums without the 7.5% limitation.  (they are 100% deductible)  It doesn’t matter if the company pays the premiums or you pay them personally because they are deducted the same on your personal tax return.

There are many things that are not deductible. They include: the cost of diet food, elective cosmetic surgery, life insurance, Medicare taxes paid from your pay check or from self employment, nursing care for healthy babies, illegal operations or drugs, imported drugs that are not FDA approved, foreign versions of drugs, non-prescription medications , travel your doctor told you to take for rest or relaxation, funeral, burial or cremation costs.

Often people don’t try to deduct their medical because they don’t think they have enough to deduct.  I have found, however, that often if people take the time to keep track of all the things that are deductible they actually do have enough to deduct them on their taxes.

For more detail information about medical deductions check out to www.avoidbeingaudited.com

Deducting Interest on Your Taxes

This week I would like to talk about the Interest or Interest Paid deduction, which is recorded on the Schedule A.  The most common interest is home mortgage interest.  A home mortgage loan is secured by your main home or a second home. It includes the first and second mortgage on the purchase of the home, a home equity line of credit, and the loan from a refinance. A home can include a house, condominium, co-operative, a mobile home, house boat, or similar property.  To be considered a home it must include sleeping space, a toilet and cooking facilities.  So, if you have a boat and you live in it 3 months out of the year and it has a bed, a galley, and a port-a-potty, you can deduct the interest on the loan as a second home.  Keep in mind the loan has to be to purchase, build, or improve your home.  If you take equity out of your home to buy a car, only the percent of interest that was for your home can be deducted.  A travel trailer and RV can also be considered a second home. 

Sometimes people buy a home and the previous owner finances the purchase.  This means that instead of going to a bank and getting a mortgage loan the buyer makes payments to the old owner.  In this current economy it is becoming more common.  A mortgage lender is required to report the interest paid by the homeowner to the IRS, but if you have owner financed a home you can still deduct the interest.  To do this you must put the name, address, and social security number of the person you are paying on your Schedule A.  If you don’t, the IRS can disallow the interest deduction.

One other thing considered interest paid is points paid to the lender.  When you buy a home you are often charged points that show up on the settlement statement.  Points are fees paid to the lender to borrow money.  They are tax deductible over the life of the loan.  That means if you have a 30-year mortgage you can deduct 1/30 of the amount charged for points every year.  It is almost pointless.  But of course every little deduction can help.  If you get a loan to make improvements to your home and you are charged points on the loan, you may be able to deduct the points in the year you make the improvements. 

The last type of interest that is deductible is investment interest.  Investment interest is interest paid on money you borrowed for property that is held for investment.  It doesn’t count for passive investment activities or for activities that generate tax-free income.  Generally, if you have paid investment interest it has been paid through an investment company such as Merrill Lynch or Smith Barney and will be reported on your annual statement.  If you have borrowed money for investment purposes be sure and tell your tax advisor so they can determine if it is a deduction. 

There are a few more things to consider when you are deducting your insurance.  Visit www.avoidbeingaudited.com to learn more!

Some Post-tax Season Tax Tips

Hello everyone!  It’s been a while since my last post.  Tax season took me over!  But I am back, and now that tax season is past it’s peak, I wanted to give you a few quick tips to get you ready for next year.  When it comes to taxes, it is always best to start on the right foot.  So here are a few things I suggest to start doing now, to be prepared for next year.

1. Set up a good file system and/or bookkeeping system and record your income and expenses on a monthly basis.
2. Meet with your financial planner to strategize your retirement plan and investments
3. Review your finances and businesses on a quarterly basis so you can see where your money is going and if you should be making adjustments to your spending.  If you have a good bookkeeping system in place this will be easy.
4. Keep a mileage log in each car.  There are deductions for mileage in many areas: business, employee expense, medical and charitable.
5. Review what kinds of items are tax deductible so you know what to keep track of during the year.

I hope this helps you get ready for next year!  Let me know if you have any question or need any help! Also check out my website for more information about tax savings! www.avoidbeingaudited.com.

Continuing Education and Personal Development Seminars

No matter what kind of business you are in, you constantly need to keep up-to-date on new techniques, new products, new laws and regulations, new marketing techniques, etc.  People call continuing education by many different names including: educational expense, professional development, seminar expense, and conference expense.  Whatever you call it or classify it in your accounting program, it all boils down to continuing education. 

Continuing education is anything you go to or subscribe to that will give you information about how to operate your business.  It can be for the business owner or to educate employees.  Often people go to a seminar or trade show and don’t think about the cost of traveling there, staying there, or even the cost of the event as tax deductible.  Also, this is where travel and vehicle expense combine with educational expense. 

There are a few types of continuing education that you should be careful with.  One is the personal development seminar.  These can be a gray area in the tax deduction arena.  There are a lot of promoters of personal development, positive thinking, etc. that have been very popular over the past few years.  These events can be tax deductible as long as the information can lead to improving your business.  An event about improving your marriage would not be tax deductible.  But one about learning how to relate to others and develop business relationships could be deductible.  Just make sure you keep good records about what the seminar taught. Or you can keep information about what the seminar advertised it would teach can help verify that the event was considered tax deductible.  If you can determine the event is educational, all of the expenses are deductible as previously mentioned.

There are many things you can count as continuing education.  Check out this MP3 “Vehicle, Travel, & Continuing Education” to learn more about ways that you can deduct continuing education on your taxes. Just visit www.avoidbeingaudited.com.

Some Mid-Tax Season Tips

As tax season heats up, there are a few things I would like to update you on.  They are not changes but just some helpful information.

First, I’d like to talk about the new e-file system the IRS put into place this year.  They sent my firm an announcement that it is supposed to be faster and more efficient and that people would receive their refunds sooner than in past years – BUT they did not test it before tax season started.  It did not instill much confidence, but I tried to keep an open mind.  As it turns out, during the first ten days of February the system got clogged up and refunds were delayed 2 to 3 weeks.  Many people, including me and my accounting firm, were very frustrated.  The good news is that the system seems to be running more smoothly now.   The IRS provided charts are not exactly accurate but they are close.  Also, if you are looking on the IRS website to see the status of your refund and it is not showing up, don’t panic.  There have been many times when the information doesn’t show up on the site until a day or two before the refund is to be deposited.  It is a flaw in the system that hasn’t been completely resolved.

Moving forward, there has been some confusion about personal property taxes.  In most states, when you license your vehicle, boat, trailer, motorcycle you are charged a property tax or fee.   Some of these fees are deductible and some are not.  The type of fee or tax that is deductible is called an Ad Valorem tax.  An Ad Valorem tax is a tax on personal property that is determined by the value of the property.  If the tax is determined by age or weight, it is not Ad Valorem and is not deductible.   Before you give your information to your tax preparer check with your department of motor vehicles and ask them how they determine the tax.  Usually it does not make a big difference on your taxes, but if it is deductible, it can lower your tax liability. 

One last thing, personal income taxes are due on April 17^th this year.  The 15^th is on Sunday and the 16^th is a holiday only in Washington DC called Enumeration Day.  So that puts us out until the 17^th.  Be careful not to use this as an excuse to delay getting your information together and your taxes done.   Your tax preparer will be happy if you can get them your info ASAP.

Also, be sure to check out www.avoidbeingaudited.com for more tax time tips!

Best Practices for Tracking Your Expenses

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Whether you have your taxes done or you are about to have them done, you are probably wishing you had kept better records.  Good record keeping can alleviate a lot of tax time drama.  And keeping good records of your expenses can save you money at tax time.

So let’s talk about some basic ideas for keeping track of your expenses.  There are many systems out there, but the most important thing is to have a system that you understand.  If you get audited the burden of proof is on you.  If you understand how you kept track of your expenses, it will be much easier to explain it to an auditor if necessary. 

The first step to developing your own system is to understand what a receipt is.  A receipt is anything that proves you spent money and what you spent it on.  Of course the paper receipt you get when you purchase an item at a store is a receipt.  But other things that can be considered a receipt include cancelled checks and your bank account statements, which show your debit card transactions.  Credit card statements are also considered receipts.  Also, a statement from any place you have an account with is a receipt.  If you have a business, your suppliers often keep track of your purchases and can provide you with a statement listing your purchases, which function as a receipt. And what do you do with all those receipts?  You need to keep them where you can find them easily at tax time.  Develop a storing system that works for you. 

It’s also good to track your expenses in a software program or a paper ledger.  If you are computer savvy, there are programs that you can purchase to record your transactions.  For a business, QuickBooks has programs on different levels that would be appropriate and that are reasonably user friendly.  However, QuickBooks does require a basic knowledge of accounting, but there are classes that you can take to help you.  For your personal finances, Quicken is a friendly program that can help you track not only your income and expenses, but it can help you balance your checkbook and track loans, credit cards, and investments. If you plan to use a computerized program, the biggest problem we see is that people don’t take the time to enter their receipts into the program.  But if you do it on a regular basis, it can be a great tool for you not only at tax time but throughout the year, and you can see exactly where your business and finances are. 

I hope this gives you an idea of where to start keeping track of your expenses. Of course there is always more to learn, so check out our other resources at www.avoidbeingaudited.com.

Payroll and Tax Deduction Infographic

This week I have a special post.  I came across a blog with an infographic all about payroll and tax deductions.  Infographics are a new technique used to make complicated material easier to understand and fun to look at.  This infographic does a great job explaining payroll and tax deductions, so I thought I would share. It's kind of hard to see, so click the link  the see it larger!

This we found this infographic at http://www.coolinfographics.com/blog/2012/2/28/payroll-and-tax-deductions.html.  To learn more about taxes and tax deductions check out my website www.avoidbeingaudited.com.