1. You may deduct only the amount by which your total medical care expenses for the year exceed 7.5 percent of your adjusted gross income. You do this calculation on Form 1040, Schedule A in computing the amount deductible.
2. You can only include the medical expenses you paid during the year. Your total medical expenses for the year must be reduced by any reimbursement. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.
3. You may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn’t meet the gross income or joint return test.
4. A deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription except for insulin.
5. You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance may be deducted. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.
6. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if you pay qualified medical expenses.

 

This seems counter logical and most people have a hard time understanding how this is possible.

Usually a client wants to deduct the value of their donated time or services. I tell them you can’t because you have no tax basis in your time. Meaning since you have not paid tax on that time, you don’t have tax basis to deduct. If you are an individual and donate cash to a non-profit, you are using after-tax money. You have already paid tax on this money and you have tax basis.

Often the client is dubious since they have a receipt in hand from the charitable organization acknowledging the value of the time or services donated. But the only way to claim this deduction is to also record the value of the donated time or service as income. Then you have tax basis.

However, at best, the net result is no additional tax benefit on your return since you are increasing taxable income (value of donated services) equal to the charitable deduction (amount of service donated). You are adding income equal to the deduction. At best, they cancel each other out.

I can think of three situations where you will actually pay more by trying to claim the donation of time or service.

1) Partners and Shareholders in S-Corps and Partnerships and Sole Proprietorships have to segregate charitable contributions and report them separately on their personal tax returns, not netted against business income. The charitable contribution is reported below the line (Adjusted Gross Income) and the income is reported above the line. Depending on the income, this may cause come of your other deductions to be phased out since you are increasing AGI, the starting point for phaseouts.

2) The net income for Partnerships and Sole Proprietorships is subject to self-employment tax. In this method, you are increasing the income that is subject to SE tax. Charitable contributions do not lower SE income.

3) If you are taking the standard deduction, you will not benefit by the charitable portion but will be paying tax on the income portion.

My advice is, you are better to book just the amount will receive as income.

 

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born.
2. Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit.
3. Child Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
5. Aoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. Taxpayers claiming the adoption credit must file a paper tax return because adoption-related documentation must be included.
6. Children with Earned Income If your child has income earned from working they may be required to file a tax return.
7. Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate.
8. Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.
9. Student loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage after March 29, 2010, for any child of yours who was under age 27 at the end of 2010, even if the child was not your dependent.

 

If you itemize, you may also be thinking of tax deductions. Here are tips to make the most of your generosity.

• Choose a qualified charity. To be eligible for a deduction, the organization you contribute to must be qualified. In general, that means charities established for religious, charitable, scientific, literary, or educational purposes. For example, nonprofit hospitals and volunteer fire departments are qualified organizations, while your homeowner’s association generally is not.

• Decide what to give. You can donate cash (including checks and charges to your credit cards), stocks, and other financial assets. Noncash contributions such as vehicles, real estate, or artwork are also deductible.

• Keep records. When you make cash contributions of any amount, a bank record, pay stub, or written acknowledgement from the charity is required to support your tax deduction. If you donate via text message, keep a copy of your phone bill showing the amount you gave, the organization you gave it to, and the date of your donation.

  The greater your contribution, the more paperwork you need. As an example, for noncash donations over $500, you’ll need to file Form 8283, and for donations of $5,000 and up, a qualified appraisal is required.

Contact our office if you’d like more details about charitable giving tax rules.

 

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 51 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

 

Needless to say, times have changed. No longer considered a luxury item, cell phones and other mobile communication devices are now part of daily business practices at all levels, and the deduction limitations and documentation requirements no longer make sense. Today, cell phones are more akin to a land line phone which for years an employee may have occasionally used to make a personal call without tax consequence. Detailed documentation is not required for use by an employee of his office phone, and there is no reason that cell phones should be subject to stricter substantiation requirements. You may have read in the news that the IRS Commissioner and Treasury Secretary joined in a statement urging Congress to repeal the law. “The passage of time, advances in technology and the nature of communication in the modern workplace,” the Commissioner said, “have rendered this law obsolete. [We] ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers.”

And lo and behold, that is precisely what Congress has done. The new legislation removes cell phones and similar telecommunications equipment (including PDAs and Blackberry devices) from the “listed property” rules. This makes it easier for employers that provide cell phones to employees, as well as for employee who use their own cell phones. As with other business property, taxpayers must still be able to demonstrate the business use of the cell phone.

 

Here’s an overview of selected provisions:

• Section 179. You can immediately write off up to $500,000 of assets (including computer software) that you buy for your business. The phase-out threshold — that is, the total-assets-purchased dollar point when your deduction starts to shrink — is $2 million.The new law also expands the type of property you can elect to expense. For this year and next, you can use Section 179 to expense purchases of qualified leasehold, restaurant, and retail improvements, up to a maximum of $250,000.

• Bonus depreciation. In addition to the expanded Section 179 deduction, you can elect to write off additional first-year depreciation of 50% of the cost of assets you purchase for your business in 2010.

• Start-up expenditures. This year you can deduct up to $10,000 of costs you incur to get a new business off the ground. You get the full deduction when total start-up costs are less than $60,000, and a reduced benefit for amounts over that.

• Self-employment tax deduction. For 2010, you can subtract the cost of health insurance premiums when computing your federal self-employment tax. Before this change, the deduction applied only to income tax.

The new law also increases the carryback period for business credits, authorizes Roth IRA rollovers for 401(k), 403(b), and 457(b) retirement plans, and changes the rules for excluding gain on small business stock sales.

Please call for details on how the new law could affect your business.

 

Let’s say you’ve come across some extra cash.

Should you invest it or use it to pay down your mortgage? Look at it this way: When you prepay part of your mortgage, you end up paying less in interest. But in the bargain, you also lose part of your mortgage-interest tax break. Your true savings, then, can be expressed as the difference between your mortgage interest rate and the rate at which you take your deduction (a function of your total marginal tax rate). If that net percentage figure is less than the amount you could make investing the cash, you’re better off investing it.

Here’s an example: By adding an extra $50 per month on a $200,000, 30-year fixed-rate loan financed at 6%, you could whack nearly $28,300 in interest payments from the mortgage. How much of a return is that? For someone in the 28% federal-tax bracket, prepaying a mortgage with a 6% interest rate provides a 4.44% after-tax rate of return. (The rate is lower than the mortgage rate because of the tax break on the mortgage interest.) Now, if you could invest that same money in the market and earn more than 4.44%, after taxes, then you’re probably better off with the investment.

As for your investment-return assumptions, one warning: Remember that the rate you earn by prepaying is a guaranteed return. Investing your money otherwise carries all the attendant risks. The higher the assumed return, of course, the greater the risk. That said, if you’re confident you can earn 8% or more in the market, this is definitely something to consider. The same is true if the spread between your prepayment return and your assumed investment return is small. Our recommendations should be taken with this caveat in mind.

And here’s another caveat. If you do decide prepayment is the way to go, don’t get suckered into a “biweekly prepayment program.” These programs — where you pay your lender or a third party for the right to prepay your mortgage — are lousy deals. Typically, you pay a set-up fee somewhere in the range of $350, plus a monthly service charge of about $5 dollars. But here’s a tip: With most mortgages, you can prepay anyway — at no charge.

If you want to prepay, it’s wiser just to add a little bit extra to your monthly mortgage check. But first, make sure there isn’t a prepayment penalty associated with your loan. Fortunately, most loans don’t charge one, although you’re more likely to find one with an adjustable-rate mortgage (ARM).

Of those fixed-rate loans that do carry a penalty, the vast majority only penalize you if you prepay more than 20% during your first five years. With ARMs, the penalty structure can vary, so be sure to read the fine print. Some loans penalize you if you prepay more than 40% of your balance over the first three years. Others may charge a penalty on a declining basis, with the penalty tapering off over a period of five years.