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.