Yes, I said “BUY” deductions. They do cost you money, you know.
Did you know that our government has a FREE deduction for most of us?
That free deduction is called the STANDARD deduction. I say it’s ” free” because you don’t have to spend a dime to claim this one. The amount of your standard deduction does change from year to year and is based on your filing status. Single, Married Filing Jointly, Married Filing Separately, Head-of-Household status – each one has a different standard deduction.
There are various categories of deductions that are allowable on 1040 tax return form Schedule A, Itemized Deductions. These different categories are:
- Medical and Dental Expenses
- Taxes You Paid
- Interest You Paid
- Gifts to Charity
- Casualty and Theft Losses
- Job Expenses and Certain Miscellaneous Deductions
- Other Miscellaneous Deductions
In deciding whether to take the standard deduction or whether to itemize deductions, I ask my clients if they own their own home. And if that answer is yes, I ask if they have a mortgage on their home. The reason…Interest paid on a home mortgage is usually the largest of deductions. If you own your own home, you also pay real estate taxes. If you live in a state that has an income tax, those taxes you paid or had withheld from your paycheck are deductible. Since there are states that do NOT impose an income tax, the government allows us to choose to deduct sales taxes paid instead of income taxes paid. And if you have a car, you may also be able to deduct the license plate registration fee.
Unusually large medical expenses can also shift you from taking the standard deduction to itemizing deductions. I tell my clients that this is NOT the big deduction I want them to have. Amounts you pay for medical insurance, doctor and dentist visits, prescriptions and lab fees are the common deductions. There are costs that are deductible and there are costs that are NOT deductible. How do you know which is which? Talk to your trusted tax advisor.
If you know you want to itemize, then you will also want to look at the gifts you gave to a qualifying charity during the year. These gifts can be money and they can be what I call “stuff.” Money does not just mean paid by cash. Money means cash, check, credit card. The important key is to get a RECEIPT for your gift. The Internal Revenue Service is paying much closer attention to this deduction because of fraudulent deductions claimed every year.
Deductions take money OUT of your pocket. Is your expense ordinary and necessary? Is your expense one you decided you needed only because you wanted to lower your tax bill?
Did you know that if you are in the 15% tax bracket and you spend $1000 on an “elective” deduction, you might save $150 of tax, but you are still out $1000! If you don’t need this deductible expense, don’t spend the $1000. Pay $150 more in taxes and you still have $850 in your pocket! If you have a choice, what is YOUR choice?
Changes you should report include birth or adoption, marriage or divorce, moving to another address, changes in household income, incarceration or release from incarceration, gaining or losing heath care coverage eligibility and other changes (including becoming a citizen or a change in immigration status or tribal status) that may affect you income and household size
This list looks simple, but life is complex and there are many components to each category. In most cases the special enrollment period for Marketplace coverage is open for 60 days from the date of the event. Go online to HealthCare.gov or phone them at 1-800-318-2596.
With a life change, such as becoming pregnant or getting a new job, you may be eligible for Medicaid or CHIP, Children’s Health Insurance Program.
Key dates for the Health Insurance Marketplace
Are you ready for the next Health Insurance Marketplace Open Enrollment Period? Open Enrollment is the time when you can apply for a new Marketplace plan, keep your current plan, or pick a new one.
4 key dates you should know:
- November 15, 2014 Open Enrollment begins. Apply for, keep, or change your coverage.
- December 15, 2014 Enroll by the 15th if you want new coverage that begins on January 1, 2015. If your plan is changing or you want to change plans, enroll by the 15th to avoid a lapse in coverage.
- December 31, 2014 Coverage ends for 2014 plans. Coverage for 2015 plans can start as soon as January 1st.
- February 15, 2015 This is the last day you can apply for 2015 coverage before the end of Open Enrollment.
To buy Marketplace insurance outside of Open Enrollment, you must qualify for a Special Enrollment Period due to a qualifying life event like marriage, birth or adoption of a child, or loss of other health coverage.
I am not your insurance sales rep, I am your tax advisor. On the 2014 tax returns to be filed In tax season 2015, one of the questions on the tax return will be, “Did you have minimum health insurance coverage for every month of the year in 2014?” And if you did not have health insurance coverage, do you qualify for an exception? Will you be flirting with a tax penalty for not sharing your responsibility for required health care coverage?
If you are like me, you try to stay healthy and practice wellness, but we still have insurance – just in case. And now we have insurance because it is required. And no, we don’t wake up in the morning saying, “Gee, I haven’t used this insurance for a long time. Let me get my money’s worth and have an accident today.” NO! Buying this insurance is just one of the costs of living in this great country of ours.
I’ve had my share of medical expenses. When you tell me, “Nellie, I need more deductions.” Medical expense is NOT the deduction I want you to have. I want you to be healthy.
Medical expenses are deductible if you itemize your deductions.
Medical costs must be primarily to alleviate or prevent a physical or mental defect or illness. Deductible medical expenses do not include expenses that are merely beneficial to general health, such as vitamins or vacations. I have taken vitamin and mineral supplements for most of my life. I believe we cannot get all the nutrition we need from just the foods we eat anymore. I believe that nutritional supplementation helps keep me healthy and out of the doctors offices. And yes, I do have my annual check ups. I am glad we have doctors. I am glad we have dentists. I am glad for the professionals to help when we need their help. I am just glad to be as healthy as I am.
The Internal Revenue Service does not allow you to deduct expenses for things that allow you to be healthy. The IRS allows you to deduct expenses for diagnosis, cure, treatment or prevention of disease. IRS allows you to deduct treatments affecting any part or function of the body. You can deduct payments for services given by doctors, surgeons, dentists, nurses, chiropractors, acupuncturists, and other medical practitioners.
What can you deduct?
- Include only the medical and dental expenses you paid during the year. If you pay by cash, check or credit card at the time of your visit, you deduct the amount you paid that day. If you wait to be billed, you deduct the payment you made on the date you mailed the check. If you use a credit card, you deduct the amount that was charged on the date it was charged even though you might make payments on the credit card later, or even the next year.
- Prescription drugs from within the US, not from other countries, are deductible.
- Transportation to and from the health care service is deductible. The current mileage rate for medical reasons is 24 cents per mile. Keep a log of your medical miles driven. Travel to other cities or states may be deducible if the service you seek is not available in your city or town.
- You can deduct the costs of equipment, supplies and diagnostic devices needed for these purposes.
Whose medical expenses can you deduct?
Include amounts paid for yourself, your spouse and your dependent child. If you are divorced or separated, you can deduct medical expenses you paid for your child even if the other parent claims the child as a dependent on the tax return. Medical insurance payments that cover doctors, dentists, hospitals and prescriptions are deductible.
What can you NOT deduct?
Life insurance is not deductible. Insurance that pays you a dollar amount for loss of body parts is not deductible. Insurance that pays you a dollar amount per day is not deductible.
The tax laws are complicated. It is impossible to address every aspect of medical expenses here. If you have a specific question, send an email to: Nellie@BulletProofYourTaxes.com.
You may wish to listen to my radio show on medical expenses on Friday, June 27th at 10:00 AM PT/1:00 PM ET. Listen to the recording if you can’t listen live. LISTEN HERE