Posts Tagged Deduction
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.
Standard Mileage Deduction Rate Alterations
Posted on June 3, 2011 | Tax Studies.
Various driving related expenses, such as business car mileage and medical travel, are deductible expenses subject to various IRS rules. The IRS adjusts the Standard Mileage Deduction Rate to reflect inflation and to protect taxpayers from the pitfalls of rising gas costs. Currently, the IRS has set a rate of 51 cents for every business mile covered. However, for non-profit organizations, the IRS does not adjust the rate as the Law has already set a fixed 14 cents per mile tax deduction. The IRS reviews the rates deductible per mileage every year to reflect the overall impact of fuel costs, especially for businesses. However, if the gas rates significantly rise within a given tax year, the IRS can adjust the rate mid-year.
In 2008, the gas pump price rose drastically to over $4 per gallon and this had a significant impact on consumers. Surveys conducted then revealed that many households would be significantly affected, with some even going into financial hardship because of the fuel hikes. Following the increases in gas costs, the IRS made a mid-year adjustment for the Standard Mileage Deduction in 2008. The rate of deduction was increased to allow taxpayers to reduce their tax debt with the gas deduction rate and thereby, cushion the effect of the increase in gas rates somewhat. The increased rate was welcomed by many taxpayers as a cost-savings relief. However, according to the IRS, many employers complained that introducing a mid-year deduction rate amendment had huge administrative implications on payroll and other tax documentation.
In 2011, many taxpayers and tax analysts were hoping and petitioning for a repeat mid-year mileage rate deduction as was experienced in 2008. Many hoped that the rise in gas prices witnessed in the earlier part of 2010 would prompt the IRS to increase the rate of deduction for car usage. Some U.S. Representatives have also formally requested the IRS to consider making a mid-year adjustment. However, there are many indications that suggest that the IRS is reluctant to or will refuse to take action in regards to the adjusting the current rates. During an industry conference Ligeia Donis, the Assistant Branch Chief with the IRS’s Office of Chief Counsel, stated that the IRS is not envisaging an increase of the mileage rate deduction. She also said that various factors are behind the decision to keep the rates standard throughout the year, claiming that the IRS expects prices of gas to decline later within the year. Furthermore, Donis also made references to the complaints of employers in the 2008 mid-year rate deduction adjustment, and said that the IRS did not want to force employers through the same ordeal they experienced in 2008.
However, even with this firm stand that the IRS seems to have made, various factors can still stir the IRS to reconsider their stand. If the current prices are to be maintained or go higher to an extent that the price of gas causes financial hardship to many taxpayers, then the IRS may be forced to reconsider its stance. In fact, a survey conducted in May 2011 by the Associated Press-GFK showed that 40% of U.S citizens believe that an increase in gas costs could push them into a financial hardship and 71% would be financially impacted in one way or another by the rise in fuel fees. These statistics were significantly higher than a similar survey performed in March 2011. The rising concern of U.S. citizens on the tremendous impact of mounting gas costs could lead the IRS to change its seemingly unwavering position.