With the high cost of medical care more people are now able to deduct on their tax return unreimbursed medical expenses. If you plan to claim a deduction for your medical and dental expenses you must be able to itemize your deductions on Schedule A and your medical and dental expenses must exceed 10 percent of your adjusted gross income (the threshold is 7.5% if you or your spouse is age 65 or older and this exception will apply through 2016.)
Even if your medical and dental expenses were incurred in a previous year and paid in the current year, you can still deduct them in the current year as long as you have accurate records of those expenses. Include medical and dental expenses you paid for yourself, your spouse and your dependents. There may be some exceptions that apply, such as, expenses reimbursed by insurance or other sources don’t qualify as a deduction.
Deductible medical and dental expenses must be mainly for diagnosing, treating, easing or preventing disease. Medical expenses include…
- Doctors and dentists
- Prescription medicines
- Qualified long-term care services
- Medical insurance premiums
- Eyeglasses, equipment and supplies
- Limited amounts for qualified long-term care insurance
- Transportation costs to and from medical care, the deduction is 24 cents per mile for 2014.
No double dipping. If you have paid your medical and dental expenses with monies from your Health Savings Account or Flexible Spending Arrangements, you can’t deduct the amounts paid from those plans.
In general, a portion of home improvement can be a medical expense deduction if the primary purpose of the improvement is medical care such as a wheelchair ramp for a handicapped individual or an elevator for someone with a heart condition.
Determining how much of the cost of such improvements is deductible depends on whether the improvement becomes a part of the house or whether it is something that can be detached from the house. If it’s detachable, the entire cost of the improvement is usually a deductible medical expense. But if the improvement becomes a part of the house, you can deduct only that portion of its cost which exceeds the increase in the value of the house because of the improvement.
For example, the cost of a room air conditioner installed on doctor’s orders would be fully deductible because it is detachable and it does not increase the value of the house. However, a central air conditioner installed on doctor’s orders would be deductible only to the extent that its cost exceeded the increase in the value of the house. Therefore, if the central air conditioning cost $12,000 but added $7,000 to the value of the house, only $5,000 would be a deductible medical expense.
In the case of a tenant who rents property, the entire cost of equipment installed for medical reasons would be deductible, since a tenant does not own the property and would gain nothing from an increase in its value.
Tax Loophole: Charge your charitable contributions by credit card and you can still take the deduction this year even if you do not pay the credit card company by December 31 of this year.
Taking time to review some of your previous tax returns could produce a tax refund if you find that you paid extra tax dollars because you overlooked something when you filed. Check the returns you filed in 2012 and thereafter because you can amend a return within three years of the date you filed it or within two years from the date you actually paid your taxes, whichever is later.
What to look for
There are several common oversights you should look for. Filing an amended return for any of them could result in a refund.
- Not taking all the deductions you deserved. One example that is often overlooked is the deduction for investment interest. You might find others that you should have taken in the past by comparing previous returns with your 2014 return. If you did omit a deduction, it might be worth amending an earlier return.
- Claiming the standard deduction instead of itemizing deductions. Some taxpayers claim the standard deduction because they wait until the last minute and don’t have the time to itemize their deductions. Others claim the standard deduction because they don’t have the necessary information to itemize their deductions when the filing deadline arrives. Regardless of your reason, if you claimed the standard deduction, you should check to see whether you would have saved money by itemizing your deductions. If you claimed the standard deduction in any of the previous years, reviewing it against a checklist of possible itemized deductions is a good way to see what you might have overlooked.
- Forgetting to take tax credits. It’s not unusual for taxpayers to overlook certain tax credits such as the child care credit, the earned income credit, adoption credit, and education credits. Make sure you took all the credits you deserved on your previous returns.
- Overlooking exemptions. The most commonly overlooked exemption is for parents who did not live with you during the year, but otherwise qualify as dependents because of contributions you make toward their support.
- Electing the wrong filing status. Married couples who file separately usually pay higher taxes than if they file jointly. You can amend your return if filing jointly would have lowered your taxes.
- Paying too much Social Security. If you had more than one employer in a particular year, you may have paid too much Social Security. The maximum you must pay varies from year to year, but your old returns will indicate the correct maximum amount.
- Omitting the home office deduction for the business use of a home. An individual’s trade or business must meet specific tests to take a deduction for the business use of a home.
Speed up the deduction for local taxes on business property. An accrual basis business taxpayer can deduct property taxes when assessed, which often is several months before the tax bill is received in the mail. Benefit: An increase in your deductions will decrease your tax and, consequently, increase your cash flow.
Miscellaneous deductions are those deductible items which are not medical expenses, taxes, interest, charitable contributions, or casualty losses.
When incurred by a business, legal fees are generally deductible as an ordinary business expense.