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taxMedical Expenses are not the deduction I want you to have. But medical expenses are deductible if you itemize your deductions. Here are 8 tips direct from the Internal Revenue Service and one more from me.

“If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return.  Here are eight things you should know about the medical and dental expense deduction:

  1. AGI threshold increase.  Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years. .
  2. Temporary exception for age 65.  The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016. .
  3. You must itemize.  You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction. .
  4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment. .
  5. Costs to include.  You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction. .
  6. Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long-term care insurance. The cost of prescription drugs and insulin also qualify. For more examples of costs you can deduct, see IRS Publication 502, Medical and Dental Expenses. .
  7. Travel costs count.  You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013. .
  8. No double benefit.  You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.”
And here’s the extra tip from Nellie. If you wonder if your disability insurance is deductible. Yes it is. But I encourage you NOT to deduct this insurance. If your disability insurance premium is about $800 each year and you have enough medical expenses to exceed your AGI threshold, you could deduct this $800. For easy math, if your tax bracket is 25%, this deduction could save you $200 of tax. But if you ever file a claim and collect on this disability insurance, those insurance benefits will be income taxable. And when you are out of work due to disability, do you want to add to your tax bill?
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TAXESThis is not just a come-on TV pitch.  This now applies to taxes, too. If you have interest income of $10 or more, you will get a Form 1099 INT showing you the interest you earned during the last year.  If you made less than $10 of interest income, you will not get a 1099 INT. Your total interest earned for the year will be shown on your last bank statement of the year. Bank tellers will tell you correctly, that if your interest is less than $10 you will not get a 1099…that is true.  What is NOT true is “Don’t worry about it, It’s not taxable.” Americans are taxed on their WORLD-WIDE income. Every dollar is taxable unless it is specifically excluded by law. Remember, bank tellers are in the banking business, NOT the tax business. If you own stocks in companies that pay dividends to their shareholders, and you have dividend income of $10 or more during the last year, you should get a Form 1099 DIV.  This 1099 will show many things and that is why your tax preparer will want to see the actual form. You may not have received any actual cash – your dividend may have been used to purchase additional stock. That is still dividend income that needs to be reported on your tax return. You may have interest income or dividend income from tax-exempt sources. While these may be exempt from federal income tax, they may be taxable on your state tax return AND you must still report this on your federal 1040 tax return. Income tax is not the only tax that is collected from the Form 1040. Some taxpayers must also pay what is called Alternative Minimum Tax (AMT).  Tax-exempt investment income is used to help calculate this AMT. Most taxpayers pay a regular tax that is above the minimum. They just don’t know that their regular tax is more than the minimum tax This is not because the tax is figured incorrectly. When a taxpayer has a large amount of itemized deductions, and may have tax exempt income, and perhaps has other tax-favorable events on a tax return, that person may have taken their income below the minimum tax level. That is when the AMT will kick in and raise the lowered tax up to the minimum regular tax. When I started this article I said, “Wait, There’s More”.  If you are an investor with a brokerage account that contains mutual funds. you may not have the final income picture when your 1099B is issued. Originally these forms were to be issued on January 31st. Brokerage accounts were rarely able to meet this deadline so the IRS allowed them until February 15th. Why did they get this extra time? Because the IRS understood that the mutual fund companies needed to finalize their number crunching. The mutual fund companies are invested in multiple different stock companies and if every company waited until January 31 to file their reports, there was no way the brokerage account could also meet that January 31 deadline. But wait, there is even more. When you get your 1099B in mid-February for the year before, they may tell you to expect an amended 1099. They are letting you know that the companies they are invested in also may need more time to finalize their numbers. What a vicious cycle! Be prepared to delay the completion of your tax return until after mid-March. If there are changes to the income reported on your 1099B, it is often better to wait a few weeks, than to file your tax return in February and then have to amend it later for the corrected amounts.
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irs tax auditWhen our Congress shut down the government last fall, even the program developers at the Internal Revenue Service had a couple of weeks of involuntary vacation. I say vacation because they were ultimately paid for these layoff days.  I thought these people would have been considered indispensible.

The Internal Revenue Service is the ONLY branch of the government that actually brings money IN. I thought, certainly, their tax return form designers and processing system programmers would be considered essential. The Internal Revenue Service claimed that this interruption of work made it impossible for them to be able to accept any tax returns before January 31st. We used to start filing returns electronically the second Friday of January. The government has shaved three weeks off our already time-compressed income tax season and while the start date was extended, the due date was not.  

Individual 1040 series tax returns are still due April 15th. Corporation returns are due March 15th. Partnership returns are due April 15th. What if YOU need more time? That is why we have the ability to request an extension to file. These requests are never turned down. The IRS automatically says YES to your request for more time to file, but you MUST file the paper to let them know you are extending your tax return due date. The extension only gives you more time to send in the paperwork. The extension does not give you more time to pay any tax that might be due with your tax return. So it is important that you estimate how much you expect your taxes will be. If you don’t have enough federal income tax withheld from your paycheck, you can make an Estimated Tax Payment. I’ll talk more about Estimated Tax Payments in my next blog. Who signs your tax return?  You sign your tax returns under penalty of perjury. You are swearing your return is correct. If  you paid someone money to prepare your return, they must also sign your return. They are stating they have done everything they can to apply the tax laws properly. They are attesting they have prepared an  accurate return.  If you pay them and they don’t sign the return, then they are breaking the law and you need to find a reputable advisor. The IRS will want to put them out of business because you deserve someone on YOUR side. You certainly do not want someone working to put you on the INSIDE – inside the “tax jail”, that is. Just because you pay someone to prepare your return, and just because they sign your return right under where you sign, YOU are still the one responsible for paying your correct tax.  YOU are the one the IRS will call to collect the tax. So take the time you need to collect your tax data. “Haste makes waste” and can cost you interest and penalties. Be sure to report all of your income. Take the deductions you are allowed to take. Don’t guess about your numbers. Be accurate. Double check your numbers. Review your return. File electronically.
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Attention Employees: This is the blog I promised you. . You are required to attach your W2 to your tax return when you file this important once-a-year tax form. Every year you have the chance to “look yourself in the eye” and sign your tax return under penalty of perjury that it is correct and accurate. .. If you don’t already have your W2 for 2013, you should be getting this important form very soon. Employers are required to issue their W2 forms by January 31st. .. Did you move since you were first employed? Does your employer have your correct current address? Did your employer go out of business during the year? Did they pay their accountant in advance to issue the year-end W2 forms? They probably did not.  On payday did you get a paystub showing the cumulative, or year-to-date income earned and taxes withheld? Did you keep track of these numbers yourself? Most people won’t but it is a good idea. .. Did you have more than one job during the year? Do you have a W2 from EACH of your jobs? You must report your total income from all taxable sources. What can you do if you don’t have this required for filing form? .. If you have not received your W2 by February 14th, you can call the IRS for assistance. When you dial 1-800-829-1040, be prepared to wait on hold. It could be a long wait. This is a toll-free number and they get a lot of callers. The assistor at the Internal Revenue Service will ask you for your name, your address with zip code and your social security number. (Remember YOU called them.  DO NOT (and I MEAN EVER!) give this confidential information to any one who calls you. Protect your identity.)  The IRS will also ask for your employer’s name, complete address, phone number and your dates of employment. IRS will contact your employer for you (if that is possible) and will request the missing form for you. Form 4852, Substitute for W2, was designed for just this purpose. When you call the IRS to request their help, they will send you this form. There are blanks for you to fill in your wages and withholdings. It will ask you how you determined the amounts you are entering. It will also ask you to describe what you did to try to obtain your W2. If you did receive a W2, was it correct? If you think it was not correct, contact your employer and request a corrected one, a W2-C.  If you filed your tax return using Form 4852 and then received a W2 or W2-C showing different amounts, then you must file Form 1040X to amend your return. This amendment may result in you owing more tax or it may result in you getting a refund. Consult your tax professional for help filing this more complicated form.
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padpaperThe tax industry is ever changing. Tax professionals are subject to various federal and state regulations. The Internal Revenue Service was sued to stop them from requiring all tax return preparers to take a test to prove their competence to properly apply the tax laws. Enrolled Agents (EAs), Certified Public Accountants (CPAs) and Attorneys have already demonstrated their competence by passing other comprehensive tests. Some in this group of un-enrolled preparers have been writing tax returns for many years. Some are brand new to the tax business. They all were to take a test to demonstrate their knowledge and level of competence. No one could use the designation RTRP, Registered Tax Return Preparer, until they passed this test. The IRS is appealing the lawsuit’s decision. I see nothing wrong with the IRS protecting their tax-paying public (YOU) by ensuring that all tax return preparers show some level of competence. No single person can know everything. There are many areas of specialty within the tax code and ever-growing procedures, regulations and rulings. I help individuals and small business owners. Big corporations and partnerships are outside my area of expertise. Anyone can make a mistake. Yes, we learn from our mistakes, but wouldn’t  you rather that I learn from someone else’s mistake?  The IRS does and they want EAs and CPAs to keep up with the ever-changing tax laws. We do this by taking required annual continuing professional education (CPE). I like the medical doctor’s Hippocratic Oath, “first do no harm.” I follow that in my tax business. I always want to do my best for you. These brief descriptions give you a glimpse of what these professionals can do. An EA, Enrolled Agent, is licensed by the Department of Treasury to represent taxpayers nationwide at all levels of the Internal Revenue Service. A CPA, Certified Public Accountant, is licensed by their State’s Board of Accountancy to perform accounting services in that state. Those same Boards of Accountancy limit the use of the word “accounting” to their recognized CPAs. Some CPAs also practice tax. Some EAs also offer bookkeeping services. Attorneys are admitted to their State’s Bar. Attorneys who are admitted to the Tax Court can represent taxpayers at that level of IRS Appeal. Here are 7 questions you can ask to help ensure you find an experienced, trustworthy tax advisor:
  1. How long have you been in the tax business?
  2. What licenses or designations do you have?
  3. What tax issues do you specialize in?
  4. Do you have the knowledge and experience to handle my tax situation?
  5. Do you outsource any of your work?
  6. What’s your privacy policy?
  7. How do you charge your fee; how much will it cost?
It is important that you establish a comfort level with your tax advisor. You want to feel safe (and you want to feel your information is safe) when you share your important and confidential tax return information with your trusted advisor.
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