Do you claim medical expenses on your tax return? If you do, then you need to know that the rules changed for 2013.
It used to be that you medical expenses had to be higher than 7.5% of your adjusted gross income in order for you to be able to claim them. So if you made $50,000 a year, your medical expenses would have to be higher than $3,750 before you could claim anything for that. Starting with your 2013 tax return, the floor for claiming medical expenses has gone up to 10%, so now your medical expenses would have to be higher than $5,000 in order to claim anything.
So let’s say you had major surgery this past year. After all the insurance reimbursements, you were still out of pocket $7,000. Using the above example, you’d only be able to claim $2,000 of medical expenses on your tax return.
Even if your medical expenses were over 10% of your income, you still need enough other deductible expenses to make your medical expense deduction worthwhile. Let’s say you’re single and your standard deduction for 2013 is $6,100. Suppose you had $3,000 withheld for your state income tax, you gave $1,000 to charity, and you had the $2,000 of medical expenses that you could claim. That only totals $6,000—you’re still better off claiming the standard deduction of $6,100. Keep that in mind as you gather up your medical receipts; it’s not just having enough medical expenses to deduct, it’s having enough expenses overall to make it worth your while. This is commonly referred to as itemizing deductions.
If you, or your spouse, are age 65 or over, there’s a temporary exception to the 10% rule. You can continue to use the medical expenses that exceed 7.5% of your adjusted gross income. You can keep doing that all the way through 2016, after that, you’ll also have to use the 10% threshold.
Please check out my post about maximizing your medical expense deduction: http://robergtaxsolutions.com/2013/02/maximizing-your-medical-expense-deduction/
Even if you can’t claim your medical expenses with your itemized deductions on schedule A, some people are entitled to claim their medical expenses elsewhere. You don’t want to miss out on any deduction that available to you.
People often ask me about deducting job search expenses on their tax returns. Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!” While this is true that job search expenses can be deductible—many times, they really aren’t.
For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation. I do taxes; I’m in the accounting field. If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting. (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)
But say you truly are looking for a new job in your field, what can you deduct? Here’s a pretty good list:
- Employment and job placement agency fees
- Cost of preparing and mailing copies of your resume
- Travel expenses to look for a new job, but only if the trip is primarily to look for a job. (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
- You can deduct your job search expenses even if you do not find a new job
After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A. That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count. And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.
Here’s an example: Christie is an office manager for a small law firm and makes $50,000 a year. She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job. Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses. In this case, Christies total job search expenses were $2,600.
Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.) So in this case, Christie would have a miscellaneous deduction of $1,600. ($2,600 expenses – $1,000 threshold = $1,600.) So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses. If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.
You cannot deduct your job search expenses if you are looking for a job for the first time. This rule keeps most recent grads from claiming job search expenses.
Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job. If your resume needs help, hire a resume writer. If a placement agency can help you, use one. Be sure to put your best foot forward.
For some good free advice about job hunting, check out this website from BestCollegesOnline.com. Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out. Face it, when you don’t have a job, free is a pretty good price. Here’s a link: http://www.bestcollegesonline.com/career-skills-learn-school/
Now that the housing market is starting to buck up again, I’m getting that question more and more. I figured it was time to spell it out in a blog post.
In general, the big tax deductions that go with home ownership are going to be your mortgage interest expense and your real estate taxes. Now, if you’re a first time homebuyer and you buy your home late in the year, you might not have paid enough interest or taxes to exceed your standard deduction for the first year. Don’t worry, you’ll see the benefits of home ownership on your taxes the next year.
When you’re looking at your closing costs, those figures are going to be on your HUD settlement statement. Here’s a link to a blank one so that you can see what that paperwork looks like: http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf
Here’s the deductibility status of closing costs:
Real estate taxes: Deductible beginning on the date of sale (lines 106 and 107.)
Assessments: Condo fees and Homeowner’s association fees: Not Deductible.
Commission: Increases the basis (so when you sell the home, your profit is reduced.) This probably doesn’t affect most people, but it’s still good to know. Increasing the basis comes in handy for when you’re claiming a home office, converting a property to a rental, or if you sell it for more than homeowner‘s gain exclusion. Currently you can sell your home for a $250,000 ($500,000 if married filing jointly) profit and pay no capital gain on it. Bottom line, you can’t deduct the commission you pay to your realtor, but you do want to know that number because it can come in handy later.
Loan origination fee, loan discount (points): Deductible (including the amount paid by the seller—if any.)
Items payable in connection with loan: appraisal fee, credit report, inspections, etc.: Not Deductible.
Interest: Deductible beginning on the date of sale—but that’s usually included on the Form 1098 that you get from your bank so you usually don’t have to take it off of the settlement statement.
Items required by lender to be paid in advance like mortgage insurance premium, hazard insurance, flood insurance: Not Deductible.
Reserves deposited with the lender such as hazard insurance, real estate taxes etc: Not Deductible. These are the items on lines 1002 – 1004. These real estate taxes are your escrow and not an actual tax paid, that’s why it isn’t deductible. Later, when the real estate tax is actually paid, then it will become deductible. This is probably the most confusing one on the list. Although you’re paying a real estate tax—the real estate tax isn’t actually getting paid—it’s just going into escrow. The tax usually gets paid once or twice a year. When the bank sends the money to the taxing agency—that’s when it’s considered to be paid. So, taxes with a line number in the hundreds—you deduct, taxes with a line number in the thousands, you don’t deduct.
Items payable in connection with title charges (Settlement or closing fee, abstract or title search, title examination, notary fees, attorney’s fees, etc): Increase Basis but Not Deductible.
Government recording and transfer charges, recording fees, tax stamps: Increase Basis
Additional settlement charges (survey, pest and other inspections): Increase basis but not deductible.
The bottom line is you might not receive any benefit from your closing costs on your tax return. (Remember, your itemized deductions need to be more than your standard deduction for itemizing to be worth your while.) But, if you do get to itemize, you need to know what to look for. There’s no sense in wasting a deduction that you’re entitled to if it’s going to help.
Updated for 2013
First things first, the vast majority of people won’t qualify for a medical expense deduction. You’ve got three big things in the way. The first is that your medical expenses have to be over 10% of your Adjusted Gross Income before you can start to claim them. (7.5% if you are 65 or over.) That means if you make $50,000 a year, your medical expenses have to be over $5,000 before any of it can be deducted. (Over $3,750 if you are 65 or over.) Second, even if your medical expenses are high enough to be deductible, you’ve got to have enough other deductible expenses to exceed the standard deduction to make claiming your medical expenses worthwhile. And third, for most people, their biggest medical expense is their health insurance—which, if you get it through work, it’s already been exempted from your income tax so you can’t use it on your Schedule A.
But even though you might not meet the criteria I mentioned above, you might still qualify for some type of medical expense deduction, so please bear with me a little longer.
Do you live in a state that has a medical deduction? Here in Missouri, there’s a deduction for health insurance. Many people don’t even know about the deduction so they don’t bother with it. Here’s the thing—if you list your health insurance, your prescriptions, and other medical expenses in the right boxes when you fill out your federal tax return—if you have a state deduction, it will flow through to your state tax return.
Why is it important to separate out your expenses and list them in the right boxes? Recently, I was reviewing a tax return prepared somewhere else. The taxpayer had several thousand dollars worth of medical expenses, including paying for his own health insurance. The preparer had totaled up all the expenses and put them all on the “other medical expenses” box. Now doing this made no difference on the taxpayer’s federal tax return. But when I separated out the man’s health insurance premiums, it saved him over $200 on his state tax return.
This was a Missouri tax return. Not all states have medical deductions. But if you don’t take shortcuts when you’re putting the numbers into your federal return, the numbers will flow to the proper spots on the state return.
Are you self employed? If yes, and you pay for your own health insurance, then you don’t have to claim it on the Schedule A—you can claim it on the front of your 1040 form on line 29. While this isn’t as good as being able to claim it as a business expense where you get to deduct it from self employment tax, placing a deduction on the front of the 1040 is still better than putting it on the Schedule A. The best part, you don’t even have to file a Schedule A in order to claim it.
But suppose you do have enough medical expenses to claim on your schedule A. You still want to put your self employed health insurance on line 29 first instead of on the Schedule for the best deduction. Let me explain with an example. This is going to have a lot of math but the math is just to prove my point. When you’re preparing your own tax return, all you have to remember is to put your deductions on the right line in the tax software–your software program will do the math for you.
A taxpayer aged 65 had medical expenses of about $10,000 of which $4,000 were for his self employed medical insurance. Let’s assume he had an AGI (adjusted gross income) of $50,000. If you lump all the medical expenses together, you take 50,000 and mulitply that by 7.5%–that becomes the floor amount; $3,750. All of the expenses over the $3,750 are deductible. $10,000 minuse the $3,750 equals $6,250. So if you’re in the 25% tax bracket, you’ve saved $1,563–sweet right?
But, if you took the $4,000 as your self employed medical insurance deduction first, that $4,000 would come off of your AGI. So your AGI would be $46,000. To compute the rest of your medical expense deduction you’d take 46,000 x .075 = $3450–that’s the new floor for claiming your medical expenses. But now, since you’ve used the 4000 someplace else, you have to take that out of the calculation so now your medical expenses on Schedule A are only 6000. With me so far? You take that 6,000 and subtract the 3,450 floor and you still have $2,550 in medical expenses on your Schedule A. So now, instead of writing off $6,250 you’re writing off $6,550 (the 2,550 plus the 4,000). Now your tax savings are $1,638–that’s $75 more than before. All you’ve done here is just move the number to the correct line.
$75 isn’t a lot of money, but wouldn’t you rather have that money in your pocket than give it to the IRS? I thought so.
People ask me every day, “I heard I can claim driving for my job on my taxes, can I?” Or, “I spend a lot of money on lunches with clients, how do I deduct that?” Or the most common one, “I just bought a new computer for home but I use it mostly for work, how do I write that off?”
These things all fall under the category of “employee business expenses”. You’ll see a section for that on your Schedule A of your tax return, but if you’re serious about claiming them, you’ll be using form 2106—the number from that form gets rolled onto your schedule A.
Before you even try to start deducting employee business expenses—here’s some things you need to know.
1. If your employer reimburses you for something—you can’t deduct it… Example: you fly to Chicago for a business trip and charge it all on your American Express Card. You pay American Express but then you submit an expense report to your employer who writes you a check reimbursing you for your trip expenses. That’s called a reimbursable plan and you cannot claim the trip as a deduction.
2. If your employer pays for the expense up front—you can’t deduct it. Recently I had a young man in my office wanting to claim 69,000 miles on his taxes. Yes, that’s a lot of miles but it was perfectly in line with his occupation and he had the documentation to prove it. But the income didn’t match up—there wasn’t enough income in his W2 to pay for the gas to drive the vehicle that far. It turns out that the vehicle was owned by his employer and his employer paid for all the gas and maintenance. There’s no deduction to the employee in this case.
3. If your employer pays you a stipend for something, you may still be able to claim the expense, but you have to deduct the stipend from your claim. For example, I have a client who requires a cell phone and needs to drive for his job. His employer gives him $100 a month towards the cost of the cell phone and gas. The employee doesn’t submit any special paperwork to his boss; he just gets the $100 a month no matter what. That’s called a “non-reimbursable plan. “ We prepare his 2106 form claiming all of his business related expenses, and then we back out the $1200 extra that his employer pays him for his phone and gas expense. It’s important to show on your tax return the stipend and that you’ve backed it out of your calculations. This is probably the number one point of contention when these returns get audited.
4. In order to claim an employee business expense deduction, your business expenses must be more than 2% of your adjusted gross income for it to even register on your tax return. For example, let’s say you made $50,000 last year and you took a special training class for work which cost $950. Well, 2% of $50,000 is $1,000 so you wouldn’t have even spent enough for it to begin to count. But let’s say you spent $1,350 on that training class. Well now you’ve got enough to make a claim—you could claim $350 on your schedule A. But here’s the next issue—if you don’t have enough other items on your Schedule A to make itemizing your deductions worth it, then you still don’t have a deduction.
5. it’s harder to claim employee business expenses if you’re married. If you are married, when figuring the 2% threshold figure, you use both incomes together. For example, let’s say you have a job where you make $30,000 a year and you have $1,000 in employee business expenses. You’re clearly over the threshold (30,000 x 2% is $600) so you have a $400 deduction. But if you’re married and your spouse also makes $30,000 a year, then the threshold just moved to $1,200 and you’ve completely lost that deduction. (30K plus 30K = 60K. 60K times 2% = $1,200.)
You hear a lot in the news about claiming employee business expenses, and for some people, it’s a great deduction. But as you can see from the list above, it’s a rather limited deduction for many people.
Here is the link to our free donation tracker!
Good afternoon everyone. Being my first official blog post, I would like to start off by formally introducing myself—my name is Michael Siebert and I am a recent graduate of the University of Missouri – St. Louis. I have a bachelor’s degree in Business Administration with an emphasis in personal finance. My affinity for taxes began when I was a volunteer for the Volunteer Income Tax Assistance Program also known as VITA back in 2010. One day in November 2011, in search for a tax preparation job, I typed in “St. Louis Tax Preparation” in the Yahoo search bar. I saw Roberg Tax Solutions as the first link and decided to click and explore. I clicked the “Contact Us” tab at the top and thought, “Well, I guess I’ll give this a try, but no one answers these things anyway so probably nothing will happen.” In less than a day, I received a heartfelt reply email from Janice Roberg. I then thought out loud, “This person really cares about people and their well being. If she responded quickly to me, she must respond punctually to everyone else.” And believe me, she does.
We set up a day for lunch, conversed, and from that moment on, I was determined to work for her. So in the beginning of 2012, I worked for Roberg Tax Solutions part time while working another full time job—to get my feet wet in the compensated tax prep world. It is now 2013, I am a full time employee, and I could not be happier. Jan’s dedication to her business, her ability to empathize with clients, and determination to grow are just few of the many facets that make work enjoyable. I am truly happy to come into work every day.
Alright, enough sucking up. Let’s get to our topic of charitable giving. Above is a link to a donation tracker that I made which is free for you to use, disburse amongst your friends and family, or even frame and display in your office if you’re into that sort of thing. Kidding aside, I am pretty good with Excel but definitely not a guru. If you see any problems or improvements feel free to leave a comment. It includes a fair market guide for used items which can save you some research time. It also includes important little tidbits of information, useful links, and the record keeping requirements for charitable contributions.
Charitable contributions go on your Schedule A if you itemize deductions in place of your standard deduction. The 2012 standard deductions are:
- Singles: $5,950
- Married Filing Jointly or Qualifying Widow(er): $11,900
- HOH: $8,700
The 2012 additional standard deductions for people age 65 or older, legally blind, per person, per event are:
- MFJ, QW, MFS: $1,150
- Single or HOH: $1,450
Are Your Contributions Eligible to Receive Tax-Deductibility?
Use the IRS online search tool, Exempt Organization Select Check: www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. Or call the IRS at 1-877-829-5500.
Contributions made by cash or check go on line 16 of your schedule A. Boring. Out-of pocket expenses incurred in performing volunteer work for a charitable organization (including the charitable mileage deduction) are also considered contributions. If you are reimbursed by the organization, you cannot deduct them on your schedule A. No double dipping—unless you’re with your friends and the dip is good. The charitable standard mileage rate is 14 cents.
Contributions that Benefit you—Mr. or Mrs. Taxpayer
If you receive a benefit for a charitable contribution, your deduction is reduced by the value of the benefit received. As much as I would love to provide examples of this, I have to keep you awake a little while longer to finish reading.
Contributions of Property and One of My Favorite Tax Forms, Form 8283
Yes, I like tax forms. Jan thinks I am an extreme nerd because of this and she’s probably right.
Contributions of property are reported on line 17, Schedule A. (Mike, nobody cares about where it goes because the software will take care of it!) The deduction is generally equal to the fair market value of the contributed property.
An important and common planning tip: If the fair market value of stock is less than what you paid for it, you could sell the stock, recognize the capital loss, and then donate the cash to the charity rather than give the stock directly to the charity. This reduces your tax liability more so than if you were to donate the stock directly.
Form 8283 Noncash Charitable Contributions is required when the total value of your noncash contributions exceeds $500. The four methods of evaluating fair market value are the appraisal, thrift shop value, catalog, or comparable sales method. Most people use the thrift store value for common household goods. You have to have the Donee tax identification number, the donee street address, the property description, the physical condition, the date acquired, date contributed, your cost, and the item’s fair market value. They should give you a receipt verifying your donated property that acts as proof for your donation. Isn’t this stuff fun?
Charitable Contributions Deduction Limitation
The total deduction for all charitable contributions is limited to 50% of the taxpayer’s AGI. Charitable contributions in excess are carried forward for up to 5 years. There are also 30% and 20% AGI limitation rules that I will not delve into here.
Donating Your Car
You must obtain written acknowledgement from the donee organization, which includes details on the use or disposition of the vehicle by the donee organization. A copy of the written acknowledgement must be attached to the tax return. Check out http://www.irs.gov/pub/irs-pdf/p4303.pdf for more information.
To those of you who made it this far, thank you for reading. I look forward to writing more blog posts in the future as my skills and knowledge increase. But remember, the intrinsic value of the donation will always exceed the dollar amount of tax saved. You should feel good about helping needy families!
Here is the link to the donation tracker again.
If you’ve done your taxes and there’s an amount in box 45 for Alternative Minimum Tax (AMT), then you should read this because it might help. If the box is blank, you don’t have to bother with this post.
Also, this post is going to be a little more geeky and technical. If you’d like a basic introduction to AMT then you might want to check out my AMT for Dummies post first: http://robergtaxsolutions.com/2011/03/the-alternative-minimum-tax-for-dummies/
Now for the geeky part:
AMT is a pretty sneaky little tax. A lot of the issues with AMT revolve around what goes on your Schedule A-Itemized Deductions form. If you do your own taxes you can go in and play with the numbers to see what I mean. Let’s say that your real estate taxes were $4000. If you go into your tax software and change that number to $2000 or $6000, your final tax bill will probably stay the same. The AMT will rise and fall to adjust to the regular tax change. (Make sure you put your real estate tax number back to where it belongs.)
You can’t lie about what you put on your tax return, but sometimes you can choose which deductions you want to take. You may take a deduction for the state income tax that you pay on your wages, or you can take a deduction for the state sales tax that you pay. In most cases, the state sales tax is a smaller deduction, but if you’re using a computer program the computer will always choose the bigger deduction for you. The AMT can make your bigger deduction worthless, so in this case you want to take the smaller one. Why? First, if you claim sales tax instead of income tax as a deduction, you won’t have to pay income tax on your state tax refund next year. Second, in some states, like here in Missouri, although you can’t claim a deduction for your income taxes paid, you can claim a deduction for your sales tax that you paid.
So, the bottom line is you’re not changing what your total federal tax is. You are preventing taxable income on next year’s return and potentially reducing state income tax. For some people, this will do nothing at all because it depends upon your state.
The other category that has room for movement is your miscellaneous deductions; they wind up on line 27 of your Schedule A. For the most part, this includes your Form 2106 Employee Business Expenses. If you’re in the AMT category, you’ve already been dinged pretty hard by the 2% rule, because to claim a deduction here your expenses have to be more than 2% of your adjusted gross income. The AMT is like a double shot – first you lose part of the deduction due to the 2% AGI rule, and then the AMT takes the rest of the deduction away. A lot of people with AMT don’t even bother claiming their employee business expenses because of it. But don’t forget your state income tax return. Here in Missouri, your Schedule A deductions still carry through to the state tax return so you really should include your deductions even if they don’t help your federal return.
A suggestion for AMT payers with employee business expenses: If you’re in a sales position, or any job that has high employee business expenses, and you’re in a position to negotiate a salary increase. You might want to toss in having your business expenses reimbursed. Let’s say for example that you make an annual salary plus commissions of $200,000 a year and you average $10,000 a year in employee business expenses. You put those expenses on form 2106 and after the AGI limitation you only get a $6,000 deduction for it. (200,000 x 2% = 4,000. $10,000 – 4,000 = 6,000) But once you add AMT in there, your $6,000 is worth nothing.
So, by having your employer reimburse your business expenses on an “accountable plan” (that means you submit expense reports for your mileage and meals and stuff) then that money comes to you tax free. It’s a win/win for you and your boss: $10,000 tax free income to you and a $10,000 business expense write off for your employer.
Think about it, what would you rather have; a $10,000 pay raise that you have to pay state and federal income tax on or a $10,000 tax free reimbursement on money that you already spend anyway? I thought so.
AMT is a hard tax to manage. These little tips barely make a dent, but there’s not much there to work with. Hopefully it’s been some help to you.