Claiming Qualified Long Term Care Expenses As Medical Tax Relief and Deduction
Posted on July 22, 2011 | Tax Studies.
Under the Federal tax code, long-term care services provided for medical reasons are an allowable expense to deduct. However, according to Sec. 7702B(c)(1) of the Federal law, a licensed physician must prescribe such care as being fundamental for the well-being of the patient. Long-term care deductions allows for people who have chronic diseases and conditions of incapacitation to receive long-term care, including an attending nurse or caretaker, without paying taxes for such services. There are various rules and qualification guidelines that govern the application of this tax deduction.
Qualification Requirements
The long-term medical care can only be claimed by taxpayers who itemize their tax deductions as opposed to using standard deductions. You therefore, need to use the right Form 1040 to benefit from these long-term care expenses and have them deducted. The expenses also need to have support documentation. The person claiming the deduction must maintain the doctor’s statement that prescribed the care, including the diagnosis of the medical condition. Besides the doctor’s statement, one also needs to keep the receipts or payment vouchers for such medical care. All other tax requirements, including withholding of taxes for any employees involved in the long-term care, need to be adhered to.
Itemized Deduction
Itemizing of tax deductions is more complex than taking the standard deductions route. A taxpayer itemizing deductions needs to schedule all the tax-deductible medical expenses that need to be itemized and determine if the expenses exceed 7.5% of his or her Adjusted Gross Income (AGI). Therefore, for itemized expenses to qualify for deduction, a taxpayer must have above this 7.5% threshold in total medical expenses. There is however, no cap or maximum for these itemized deductions.
Case in Point – IRS vs. Estate of Baral
In some instances, the IRS has differed views with taxpayers on what qualifies as long-term care as prescribed by a physician. This was the case for Lillian Baral, who had been diagnosed with dementia. The doctor recommended long-term care and Baral’s brother, who was her financial trustee, employed two caretakers to attend to her. The condition of her illness deteriorated her mental and physical capacity and she finally succumbed to her infirmity in 2008. Due to her condition, she did not manage to file a return in 2008 for the 2007 tax year. Since no tax return was filed, the IRS decided to use their estimate and determined that she had earned incomes of $94,229.00 and had underpaid taxes by $17,681.00. However, in their calculations, the IRS did not allow for the inclusion of her long-term care expense – Baral’s brother had paid $49,580.00 to the caretakers and had also reimbursed expenses of $5,566.00.
The issue was referred to a tax court to determine if the IRS was just in their actions. In the ruling, the court held that the wage payments to the caretakers qualified as long-term care for tax purposes and that the IRS was out of order to have these expenses excluded for tax deductions. The court however, held that the reimbursed expenses could not pass for the deductible of long-term care expenses as there were no receipts (support documentation) to support these expenses.
Tax Requirements for a Business Start-Up
Posted on July 18, 2011 | Tax Studies.
Are you planning to start a business? Well, there are several State and Federal requirements that you will need to meet in order to operate legally. These requirements depend a lot on the type of business entity you settle on for your business. These start-up requirements include both State and Federal tax registration requirements. Below is a list of some tax requirements for various business entities.
Employee Identification Number (EIN)
The Employee Identification Number (EIN) is a tax registration number that identifies employers and tax agents who withhold various taxes on behalf of the IRS. Most businesses require an EIN, especially if they have employees or if they withhold sales taxes. However, sole proprietors that do not employ may operate without an EIN. You can register for an EIN by filling out an online registration form available on the IRS website. You are also required to send an SS-4 to the IRS to accompany the registration form. You will then receive your EIN and you will use it when submitting any withheld taxes to the IRS.
State Business Registration
Various business entities will have different state registration requirements. You can get the details of these requirements by contacting your respective state business registration office or by consulting with a business attorney. In most cases, your business registration will award you a business number that you will be required to provide when filing various State and Federal taxes.
Books of Accounts
The tax authority requires various business entities to maintain various books of accounts as their primary support documentation for their taxes. It is therefore, important to ensure that you set the right books of accounts according to your business entity at the start of your business. This will enable you to be prepared for your tax returns. Generally, sole proprietors will not require detailed accounts but must maintain consistent schedules and records of business transactions. Partnerships, corporations, and limited liability companies will however, require proper double entry books of accounts and clearly indicate partners’ share of profits or dividend distributions to shareholders. The C-Corporation has more complicated books of accounts to keep. You may require the help of an accountant to set up the right account bookkeeping for your business. You can also purchase and install various accounting software that will assist you maintain proper bookkeeping and assist in preparing the taxes for your business.
State Tax Requirements
Various states will have different tax requirements for State taxes. If your business will be a withholding tax agent for sales taxes for example, you will need some tax registration from your State. Various business entities will also have different tax requirements. This is especially so for the business entities created and governed under the State law. These business entities include S-Corporations, C-Corporations and Limited Liability Companies. S-Corporations, for example, require the owner or owners to elect the option in which they will want to file their taxes. They can file their taxes as a sole proprietor, partnership, tax entity, or a Limited Liability Company.