A New-Year Check List
By Sean G. Todd, Esq., M. Tax, CFP©, CPA
Atlanta GA.
Just as the ball dropped after New Year’s Eve – here are a couple of things you might just want to consider to help you save more and pay the IRS less. These are guaranteed returns – for doctors and laymen alike – which can accumulate thousands of dollars in tax savings.
Tax Deductions
The numbers say approximately one-third of all taxpayers itemize their returns’; much more so for medical professionals. Those who itemize their returns typically know about the big deductions, mortgage interest, charitable giving, and qualified retirement related contributions. But, there are a number of other deductions falling into different categories that many self-preparers overlook.
Did you know an estimated 40 million people rely on tax software? Based on the following, I’m not sure if that is the best tax planning strategy. When working with clients, we make inquiries about our clients’ finances so to avoid paying the IRS too much. Here are some of the questions we pose to our clients so we don’t miss opportunities to reduce their 2008 tax bill:
• Did you refinance your mortgage last year?
Any “points” you paid to reduce your mortgage interest rate are deductible, along with your mortgage interest. Are they fully deductible or do you need to prorate the point over the new loan term? Did you pay a prepayment penalty to get out of your old mortgage? That may be deductible as well. If you purchased a new home we would want to review your closing statement to learn of other tax deductible items shown on the statement.
• A major medical problem in 2008?
The IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). That sounds like a lot; someone with an AGI of $50,000 could deduct any expenses beyond $3,750. We make sure to review the extensive list of what qualifies as medical expenses for each of our clients. Be sure to add up all the health insurance premiums you pay out of pocket, co-pays, prescriptions, and lodging for medical purposes (subject to limitations) are all deductible, as are therapies to stop smoking. In addition, don’t forget about all those miles you drove to the doctor’s office yourself, an X-ray facility, physical therapy, or a medical supply store to pick up crutches or a wheelchair, you get a deduction for this also. Be sure not to deduct the speeding ticket on the way to the doctor’s office. If you are paying long term care insurance premiums; are you entitled to a full or partial deduction for the premiums you pay?
• Do you have a home office?
A lot of individuals qualify to take a deduction but are afraid to. If you qualify and don’t take the deduction you are overpaying your taxes. If you have the home office, you can deduct a percentage of your rent or mortgage, utilities, homeowner’s insurance, and maintenance for the room. Just make sure it’s your primary office, and doesn’t double as a guest suite since the space has to be exclusive use for office functions. The rules are a bit tricky and I’m not convinced a software program asking you “yes” and “no” questions is going to provide you with the right answers.
• Did you pay for education for yourself or dependents?
You can deduct up to $2,500 of the interest on a student loan. Depending on your income, you can take advantage of the Hope Credit for qualified expenses for the first two years of undergraduate education or the Lifetime Learning Credit from sophomore year through graduate school. Are you allowed to claim both simultaneously?
• Did you pay for child care for a child under age 13 while you worked full-time?
You can deduct expenses up to $3,000 related to a babysitter, day care center and summer day camp for 1 child and up to $6,000 for 2 or more children. Does after-school care expense qualify?
• Did you purchase a car or boat in 2008?
You are allowed to deduct either state income tax or sales tax, whichever is higher. The big winners here are residents of the nine states that collect no income tax, such as Nevada and Florida. To figure out if the sales tax deduction makes more sense than deducting state income tax, you just have to run the numbers.
• Did you make energy efficient home improvements in 2008?
The IRS offers a $500 credit to property owners who upgraded windows, doors, roofs, insulation, HVAC equipment, and non-solar water heaters last year (2007). Can you still use this provision for 2008 or is it expired? In 2008, you can also get credit on your return for solar water heaters and panels installed in 2008.
Miscellaneous Deductions
The IRS also has what I call “cats and dogs” deductions which may include many work-related expenses that aren’t reimbursed by your employer or medical clinic – think laptop. You can claim only the amount of these expenses that total more than 2 percent of your adjusted gross income:
• Did you have job search expenses?
Even if you were unsuccessful in your quest, you can deduct expenses for the phone, travel, employment agency and job counseling, resume preparation, copies, and postage. Are you eligible to take this deduction if you’re searching for your first job out of college? What if you are changing careers?
• Did you have to travel or buy work-related clothing or supplies?
You are eligible to deduct work related travel expenses your employer does not reimburse. Are you eligible to take depreciation on a cell phone or home computer your employer requires for work-related needs? Subscriptions to industry publications and professional journals, and some qualifying legal fees are also deductible. Medical union dues, nursing uniforms, protective gear, tools, equipment, or other work-related clothing and supplies are also deductible. You need to know the ”work-related clothing” rules – this is an easy audit item for the IRS.
• Did you pay for job-related continuing education?
You can take this deduction if it helps you maintain your position, but not if it’s to get you a new position. That’s not always very clear. A law student who wants to take the Bar exam can’t deduct the cost of the review course. But, once he becomes an attorney, he can deduct the cost of continuing education required to maintain his law license; ditto for doctors and nurses!
• How long do I keep my documentation?
Be sure to hang onto the receipts related to tax deductions and your copy of your taxes for at least three years. If you already filed and missed a mentioned deduction, you have three years to file an amended return and receive your refund.
Assessment
After reading this post, you might begin to realize given the complexity of the Internal Revenue Code. So, a CPA, tax attorney or other professional is often needed to help you avoid making costly mistakes.
Conclusion
And so, your thoughts and comments on this Medical Executive-Post are appreciated. What did we miss?
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Filed under: Accounting, Taxation | Tagged: Accounting, deductions, tax
Sean,
Good article, but don’t forget medical practice cost accounting, too.
Why? Controlling healthcare organization costs is a function of internal controls and the decision-making process to purchase assets and make expenditures. This includes operations, processes, human resources, healthcare information technology [HIT], and purchasing.
Thus, while not strictly speaking a financial accounting strategy in past years, cost accounting is now considered by most healthcare executives as an important financial management function.
For example, in today’s competitive marketplace, managerial cost accounting is often used to set short-and long-term healthcare entity business policy. The information is used to increase profitability by decreasing costs, increasing revenues, or decreasing operating assets. More than ever, cost accounting can mean the difference between a successful healthcare entity, and a moribund one.
Managerial cost accounting consists of many goals, such as:
• providing vital costing information for internal entity use;
• developing pro-active future entity strategic plans information;
• accentuating the relevancy and flexibility of financial data;
• reviewing real-time medical service segments, rather than just total entity operations; and,
• acquiring non-financial healthcare business data.
Thanks for hearing-out my two cents.
Graham