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.

How to Use the Unreimbursed Employee Expense

A very commonly missed deduction is the unreimbursed employee business expense.  You can deduct anything that is required by your job that you personally have to pay for and don’t get reimbursed for.   There are more things in this category than you might think that could be deductible.  The most common are transportation, travel, and meals and entertainment.  Here are a few others you might not know about:

1.     Business use of your home if it is required by your employer.

2.     Certain educational expenses to improve your existing profession.

3.     Legal fees related to your job.

4.     Damages paid to a former employer for breach of an employee contract.

One thing that is really important to know about unreimbursed employee business expenses are that they are limited to over 2% of your income. For example, if you earned $50,000 then 2% of your income would be $1000.  That means the first $1000 of your unreimbursed employee business expense is not deductible. So if you spend $1500 in this situation, $500 would be deductible. 

Sometimes people get really close to the 2% limit but they aren’t quite there.  Well, there is not need to give up because there are some other things you can add to the 2% limitation that aren’t business related.  So if you don’t think you have enough business expense to count, you may have some of the following expenses that will still give you a deduction: 

1.     Legal fees related to producing or collecting taxable income.

2.     Legal fees related to doing or keeping your job.

3.     Legal fees related to divorce as long as the bill specifies the amount.

4.     Cost of managing and maintaining income producing investments including investment fees, custodial fees, clerical help, office rent, and any other expenses.

5.     Appraisal fees for determining a casualty loss or the value of a charitable contribution.

6.     Safety deposit box.

7.     Tax preparation and tax advice fees.

We can’t cover everything in with unreimbursed employee expenses in this post because the unreimbursed deduction can be pretty confusing.  Check out www.avoidbeingaudited.com to learn a more about it!

Deducting Losses on Your Taxes

This week I am going to go over an itemized deduction category that is commonly missed on tax returns, casualty and theft losses.  If you have property that is destroyed or stolen you can deduct a portion of the loss.  Most people who are in the middle of a disaster don’t always think about the fact that it might be tax deductible.  As with most deductions there are some limits.  The loss you can deduct will be the amount you lost after any reimbursement from insurance.  The loss has to be over $100, and it is limited to over 10% of your adjusted gross income. 

There are two types of losses you can deduct.  In this post we are only going to cover casualty loss, which is a loss of property from fire, storm, shipwreck, or other casualty.  A casualty caused by things such as drywall rot and black mold are also allowed.  Usually a casualty loss is covered by insurance, so by the time you get reimbursed, your deductible is often not more than the 10% of your income limitation.  But, if you have a high deductible or no insurance you may qualify for the deduction. 

Let me give you an example of this type of loss using a flood that occurred few years ago in St. George, UT.  The St. George River runs through St. George.  Most people wouldn’t even call it a river because for over 90 years it was not much more than a trickle.  Because there was not much water in the river for so long, people began to build houses closer and closer to the river.  Also, insurance and mortgage companies did not require flood insurance because they never thought it would be a problem.  Several years ago St. George got a tremendous amount of rain, way more than normal and more than they had received in years.  This caused the St. George River to dramatically increase in volume.  Hundreds of people had to evacuate their homes.  Many homes received thousands of dollars in flood damage, and tragically, some houses actually completely washed away.  Because no one carried flood insurance, none of the damages were covered.  Eventually, there was some government assistance.  But the out of pocket expense that these home owners experienced would qualify them for the casualty loss deduction.  

When you experience a casualty loss you can take the deduction the year you experience the loss or you can actually go back and amend the previous year’s tax return, take the deduction, and get a refund.  For example, if you experienced a flood loss in 2010 you could claim the casualty loss on the 2010 tax return or you can amend your 2009 return, take the loss and get a refund for that year.

As I  said earlier, there is also a theft loss you can claim as well.  Check out our MP3 #8, “ItemizedDeductions and Gambling Winnings” on www.avoidbeingaudited.com to learn more about the property loss deductions.

Deducting Mileage on Your Taxes

This week I would like to talk about a common but valuable business tax deduction, vehicle mileage. When you deduct your vehicle mileage, you keep track of your mileage and then multiply it by the standard mileage rate.  You then take that amount and deduct it on your taxes.  For example, in 2010, the mileage rate was 50 cents per mile.  So if you drove 20,000 miles in 2010 you would have been able to deduct $10,000. 

If you choose to keep track of mileage, you will need some sort of way to record the mileage.  The most common method is to use a mileage book that can be purchased at any office supply store.  In it, you find a place for the date, purpose of the trip, and beginning and ending miles.  This is the best way to track miles and the most accepted by the IRS.  However, in the real world it is not always practical and almost never kept up.  We get in such a hurry and don’t take time to write it all down.  Another commonly used method is a small calendar.  Many people write down where they went and the total miles for the day.  There are also computer programs and phone apps that you can purchase as well.  For example, the newer version of QuickBooks has a section to record your miles. 

If you have certain places you go all the time, it is easy to record those miles and it is appropriate to keep track of when you go there.  For example, some years back I owned a sandwich shop.  There were certain places that I would go every day.  I would go to the bakery to pick up rolls; I picked up the produce; and I had to go to the bank to make the previous day’s deposit.  One day I clocked the miles and recoded it in the front of a mileage book.  Every day after that, I simply recorded the total miles.  If I had to make extra trips I would just add them to the book.  This is a perfectly acceptable way to track miles. 

However, you choose to record your miles the important thing is to be consistent and accurate.  If you have more than one vehicle that you use, you will need to record the miles for each vehicle separately.  If you have a vehicle that is used exclusively for business, in other words you do not use if for personal activities, then you can record the mileage at the beginning of the year and then again at the end of the year.  It must be used only for business though.

I hope this helps you know how to track and deduct your mileage.  There are a few more options when it comes to tracking mileage.  Check out www.avoidbeingaudited.com to learn more about vehicle expense as well as other tax saving deductions.

How to Deduct Charitable Property Donations

This week I want to talk about charitable donations.  This is a great deduction, and I hope this explanation will help you as you are filling out your taxes this year.  There are three different deductible ways you can donate to charity.  This post is going to focus on donating property. 

Property is something physical you donate such as clothing, toys, household goods, a car, art work or even real estate. If you donate more than $500 of property, you must report the name and address of the organization, what you donated, when you donated it, how and when you acquired the property, what you paid for it, what the fair market value is and how you determined the value.   It sounds like a hassle but for most people it is very simple.  Most people go through their house a couple of times a year and get rid of the things they don’t use anymore.  They may end up with a garbage bag of clothing and toys or a truck load of things.  Then they take them to the local Goodwill or Salvation Army type store.   When you get to the drop off place there is usually someone who you can get a receipt from.  Often the receipt is blank and you fill in the date, what kinds of things you donated and the approximate value.  There are books and online websites that can tell you what a men’s dress shirt in good condition is worth and if you want to be thorough you can list each item out and look up the value.  Or you can write on the receipt clothing and estimate the value.  A good way is to consider what you might get for the items if you had a garage sale.  The same goes for furniture, appliances, electronic equipment, toys, etc.  This covers when and what you donated and the value.  That leaves how and when you obtained the property and how much you paid for it.   Most of this kind of property is purchase over the years and no one keeps track of everything they have purchased.  Realizing this, the IRS allows you to put the word “various” in the date acquired box.  What you paid for it is another tricky question.  But an educated guess will work for this as well. 

Donating anything valued over $5000 such as real estate or artwork requires a little more work.  For these types of donation you do need to be very accurate and you need to obtain an appraisal to determine the value.  If you are thinking of donating a house or art piece or other collectible item, consult your tax advisor to make sure you have everything done correctly. 

There are some things you cannot deduct even though it may be an act of charity.  They are:

1.     Political contributions

2.     Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar organizations.

3.     The value of your time or services.

4.     The value of blood given to a blood bank.

5.     Gifts to individuals or groups that are run for personal profit.

There is a lot more to know about the charitable donations deduction.  I’ve really just covered some of the basics.  To learn more about charitable donations as well as other tax deductions, check out this great MP3, “Itemized Deductions and Gambling Winnings” at www.avoidbeingaudited.com.

When Life Hands You Lemons, Ask if it has Anything Else in the Fridge...

I was visiting with a friend of mine who is in his late sixties. He has been in the trucking business for most of his adult life.  In fact, he owns a trucking company.  Now that he is getting a bit older, he has tried several times to sell the company.  He has tried to sell it to his son and to a couple of old friends.  Every time they started to take over, but because they don’t have his experience, they don’t know how to run the company, and he ends up taking it back.  As we talked, he admitted that he loved the trucking business.  He said, “The only way I will ever quit is if I go bankrupt.”  My friend is passionate about what he does.  Because of that passion he is good at it and successful. 

I have another young friend who is in his early thirties.  He doesn’t have a high school diploma let alone a college degree.  He has had a few setbacks in life and was going to, out of desperation, try and get a job working in a coal mine.  As I talked with him the other day, I asked him what he likes to do and what he thinks he is good at.  He told me that no one had ever asked him that before and that he had no idea.  A couple of days later I talked to him again, and he said he that likes to help people and make them laugh.  So we talked about how to go that direction instead of a career as a coal miner. 

These experiences remind me of on of my favorite sayings, “Many things in life will catch your eye, few will catch your heart.  Pursue those” (Author Unknown).  Many people spend their life stuck, taking what life gives them and trying to make the most of it.  They rationalize that it is ok because they feel that they don’t have any choices.  But they do have choices and so do you!  You can do and be anything you choose.  If there is one thing I have learned from life it is that when you choose to pursue your passions, you will be successful and happy. 

My mother used to say, “When life gives you lemons, make lemonade.”  That is a good positive attitude.  But I like to take it a step further.  I like to ask the question, “What if you don’t like lemonade?”  Why not trade those lemons for oranges or grapes or apples.  I would like to challenge each of you to discover your passions.  Think about what you really enjoy doing.  What do you feel strongly about?  What kinds of things would you do if money was not an issue?  What kinds of things would you do whether others thought you were ridiculous or not?  After a lifetime of doing what you might think is the right thing to do and what you think you have to do, it may be hard to discover your passions.  But give it some thought – find your passions!  As Dale Carnegie once said, “People rarely succeed unless they have fun in what they are doing.” 

Once you think of some things you are passionate about respond below.  I would love to hear what you are passionate about!

Understanding the New Form 1099

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Last week I mentioned that there are changes in 1099 reporting this year.  1099s can be tricky in general not to mention there is a lot involved in the changes, so I thought I would use this week’s blog post to expound a little on 1099s.  This is especially helpful for you ladies who own your own business.

There a couple of new rules to be aware of.  First, investment companies are now required to report the cost of investments, such as stocks, sold during the year on a 1099B.  This “basis” will help the company and the IRS when reporting investment sales. 

The second change is the addition of a form 1099K.  If you or your business have a merchant account and take payments from people by credit or debit card, the credit card processing company is now required to report those transactions to the IRS.  If you receive a 1099K this year, make sure you give it to your tax preparer, as there is now a special line to record it on.

Now that we have the new rules out of the way, let’s review who receives a 1099.  Form 1099s are sent to individuals, businesses, and/or attorneys who have been paid $600 or more by another company.  For example, if a company pays an independent web designer $500 a month to maintain their website, the company would need to send the web designer and the IRS a Form 1099 with the total amount you paid them.  So in this case the 1099 would report $6000.

There is one more instance where a 1099 is given, and that is for owners of rental properties who use property managers to maintain their rental properties.  The property managers must send the property owners a 1099 reporting the rental income from the properties—as long as the income was $600 or more.

1099s are an important tax document and they must be submitted to the IRS and sent to the respective recipients by a certain due date each year, which is January 31^st.

I hope this has helped you understand 1099s a little better.  If you have any questions, post them below! I’d love to answer any questions you have!

You an also check out www.avoidbeingaudited.com to learn a lot of information just like this.

Changes and Updates for 2011 Tax Preparation

The 2011 tax filing season is here, and as a accountant, I wanted to give you all some updates on some of the things that have changed as well as a few things that haven’t remained the same.

1. There are changes in 1099 reporting this year.  Investment companies are now required to report the cost of investments, such as stocks, that you sold during the year on a 1099B.  This “basis” will help you and the IRS when reporting investment sales.  There is also a new form 1099K.  If you or your business take payments from people by credit or debit card, the credit card processing company is now required to report those transactions to the IRS.  If you receive either one of these forms you should review them, and if there are any amounts that are incorrect, bring them to the attention of the one who sent the form to you so they can correct it. 
2. The Standard Deductions have gone up as usual.  For 2011 the deduction for Single and Married Filing Separate is $5800.  For Married Filing Jointly it is $11,600 and for Head of Household it is $8500. 
3. The Standard Mileage Rate for 2011 is different for the first half of the year than the last half.  This happened once before in the year of hurricane Katrina.  Business travel will be $0.51 per mile the first half and $0.555 for the second half.  Medical and Moving Mileage is $0.19 for the first half and $0.235 the second.  But Charitable Work Mileage stays the same all year at $0.14 per mile. 
4. The IRS is implementing a new efile system called MeF.  It is supposed to make efiles more accurate and process refunds better/ faster.   However, the system has not been tested with the anticipated tax return volume expected this year, so we will see how well it goes.
5. The Child Tax Credit remains at $1000. 
6. Qualified teachers may continue to deduct up to $250 of out-of-pocket classroom expenses. 
7. You may continue to take the Sales Tax Deduction as an itemized deduction instead of deducting State Income Taxes. 
8. The College Tuition and Fees deduction also remains in place. 

These are just a few of the changes this year.  You can go to avoidbeingaudited.com to learn more about changes in the tax system.  Also check out their tax organizers.  They'll help you capture all your deductions this year!