Wednesday, July 3, 2013

A Look at How Marital Status Affects Your Tax Return in Light of the Recent DOMA Decision

Mark Steber for the HuffPo writes: If you are one of the many U.S. taxpayers impacted by the recent Supreme Court decision on the Defense of Marriage Act (DOMA), you may be owed money from the IRS. But there is still quite a bit of clarity needed before that can happen. For example -- WHO will the IRS consider married for federal tax purposes? What about State taxes? Can taxpayers go back and amend prior tax returns or only go forward? So before you start spending all of that new tax refund money, the rules need to get a lot clearer.
Getting married is a big life change and your marital status has a big impact financially when you file your taxes. Although there certainly seems to be the potential for new and improved tax filing positions, there also could be some possible pitfalls for many taxpayers. So, before we get to how it may work, let's look at some general considerations for how tax law applies to those taxpayers who are married versus those who are single.
Generally speaking under the old tax rules, and likely under the new rules as they get further clarified by the IRS as a result of the DOMA ruling, if you are legally married before midnight on Dec. 31, you are considered married for the entire year. On the flip side, if you are divorced or legally separated by midnight of Dec. 31, you are considered single. You don't have to live with your spouse during the year to be considered married, you just have to be married. The key will be the IRS definition of "married" and how it applies on the tax return -- a key point to be clarified soon by the IRS.
Having said that, once they're hitched, married taxpayers can no longer file as Single. Their new tax status becomes one of the following: Married Filing Jointly, Married Filing Separately, or if you meet certain strict qualifications, Head of Household (but that is a topic for another time). For now we will focus on Married versus Single tax considerations. It's worth noting that you may never claim your spouse as a dependent when you are married. Oftentimes taxpayers think that if only one spouse works, the other may be claimed as a dependent, but this is not the case. You can, however, file a joint return even when only one taxpayer worked.
Let's look at the tax differences of married filing jointly taxpayers versus two single taxpayers.
  • If your income is greater than or equal to $50,000 each, you may pay less tax on two returns for single taxpayers. The married filing jointly tax rates have the largest spread for each tax bracket. However, taxpayers with a similar income of $50,000 or more often pay more taxes because they will have more income in the higher tax bracket. So married taxpayers filing jointly may pay higher taxes than if single.
  • For those couples over age 62 who receive social security benefits, you may pay more taxes on more of the received Social Security benefits than on two single separate tax returns for single taxpayers. The "base" amount, the amount of income you have before Social Security benefits become taxable, is $25,000 for a single taxpayer, but only $32,000 for married taxpayers filing jointly, effectively lowering the threshold $18,000 when combining both incomes. In addition, eighty-five percent of benefits may be taxable when your income is $34,000 if Single and $44,000 when filing jointly. In summary, getting married and combining income may require you to pay taxes on more of your Social Security benefits.
  • Beginning in 2013, up to eighty percent of itemized deductions phase out or get denied from being deductible when adjusted gross income reaches $250,000 for single taxpayers, $275,000 for Head of Household taxpayers and $300,000 for Married Filing Jointly taxpayers. Two single high-earner taxpayers may preserve more of their itemized deductions than getting married and filing a joint return, or a married filing separate return.
  • When you combine your income, it may put you over the $250,000 income threshold forcing the additional Medicare taxes. Beginning with the 2013 tax return, high income taxpayers will be subject to an additional .9 percent Medicare surtax on earned income greater than $250,000 for joint taxpayers and $200,000 for single taxpayers. The 3.9 percent Medicare surtax on investment income is effective on excess investment income greater than the same thresholds as the additional Medicare tax for high earners.
  • Like the itemized deductions, personal exemptions will phase out and may not be used when Married Filing Jointly taxpayers' adjusted gross income exceeds $300,000. The phase-out range for taxpayers filing single is $250,000.
  • If you claim deductions or credits such as the child tax credits, earned income tax credit, the education credits, and the IRA, student loan interest and the tuition and fees deductions, that may be impacted by phase-out levels, you may be able to preserve some, or all of the benefits, on the lower income earner by remaining single.
  • Married taxpayers may be able to invest up to $5,500 ($6,500 if the spouse is age 50 or older) into an IRA for their non-working spouse. This allows a way to save money for both taxpayers in a tax-favored IRA.

These just name a few of the differences between the two filing statuses that can affect your refund amount or balance due. The rules for married taxpayers versus single have always been complex and this new ruling certainly adds to the tax law and rules complexity. But where there is complexity in the tax law, there is opportunity to understand the rules and if they apply to you, possibly lower your taxes. The benefit of tax complexity is in many cases greater fairness and equity under the law. Then again, if you do not pay attention to the rules, new or old, you may find yourself paying more taxes than are needed. Pay attention to the developments coming in the next weeks and months as a result of the new DOMA ruling and if they apply to you -- especially if the IRS allows retroactive treatment for prior year tax returns, get some professional tax help if you need it and consider going back and getting some refunded taxes. It is, after all, your money.
Posted on 5:33 AM | Categories:

The Donut Sandwich Is Here, So ... Are Weight-Loss Costs Tax Deductible?

Tony Nitti for Forbes writes: Back in 1995, Homer Simpson discovered that one of his co-workers was placed on disability and as a result, allowed to work from home. Jealous of his co-worker’s sedentary lifestyle, Homer quickly reviewed his workplace manual and discovered that if he could gain 61 pounds, he too would qualify as disabled and be free to work from the comfort of his couch.  To help his cause, Homer visited resident weight-gain expert Dr. Nick Riviera, who recommended a slow, steady gorging process combined with assal horizontology:
Dr: Nick: You’ll want to focus on the neglected food groups such as the whipped group, the congealed group and the chocotastic!
Homer: What can I do to speed the whole thing up, Doctor?
Dr. Nick:  Be creative.  Instead of making sandwiches with bread, use pop tarts.  Instead of chewing gum, chew bacon…and remember, if you’re not sure about something, rub it against a piece of paper.  If the paper turns clear, it’s your window to weight gain!
If only Homer wanted to fatten up in 2013; things would have been so much simpler. For example, he could have started every day with the newest offering from Dunkin’ Donuts, an egg-and-bacon sandwich that has ingeniously — and deliciously —replaced English muffin or bagel halves with two glazed donuts.
You read that right. Dunkin’ Donuts dispatched their marketing team to find out what people wanted most from their snack treats and this tribute to decadence was the result. It’s as if the American public stood up and with one voice demanded “I’m tired of having to chew through the non-fried parts of my breakfast sandwich. Why can’t every ingredient be drowning in saturated fats?”
You’ve got to respect the decision makers at Dunkin’ Donuts for their contrarian thinking. With so many fast food chains now trying to offer healthier options to appeal to a more informed, more fat-conscious public, Dunkin’ Donuts stayed true to their core market by doubling down on the lard. It’s admirable, in a disgusting sort of way.
Of course, if you plan on indulging in the donut sandwich with any regularity, you may want to call your accountant for a primer on the tax treatment of weight loss expenses.  Or if you’re already a big fast food fan and your fingers have gotten too chubby to operate a standard phone keypad, simply read on.
In Revenue Ruling 2002-19, the IRS concluded that you can deduct the cost of participating in a weight-loss program provided the program is treatment for a specific disease or diseases diagnosed by a physician. The Service reasoned that because obesity is a disease, a diagnosis of obesity is sufficient to allow the deduction of the costs of the weight-loss program. Deductible expenses include the initial fee to join the weight-loss program and additional fees to attend meetings.
Example: A is diagnosed by a physician as obese. A doesn’t suffer from any other specific disease. A participates in a group weight-loss program. Since A has been diagnosed as suffering from a disease, obesity, the cost of A’s participation in the weight-loss program as treatment for A’s obesity is an amount paid for medical care (and is therefore deductible, if uncompensated, subject to the normal 7.5%-of-AGI floor).
The deduction for participation in a weight-loss program also applies where the participation is treatment for a specific disease or diseases, other than obesity, diagnosed by a physician, such as hypertension, heart disease, or hearing problems, any of which would likely result from frequently gorging oneself on a fried egg and bacon wedged between two glazed donuts.
In Revenue Ruling 79-151, however, the IRS ruled that costs of a weight-loss program undertaken to improve general health or appearance, rather than to alleviate a specific disease, aren’t deductible, even when recommended by a doctor. As a result, if you’ve booked a spot in a weight-loss clinic, you may want to first be examined by a doctor to see if there is a medical reason for participating. Ask the physician to provide a written diagnosis of obesity or another disease and a written recommendation to participate in the program, to help substantiate your deductions in case of an audit.
As similar line of thinking applies to the deductibility of gym memberships — if you get the membership primarily to improve your appearance or general health, the cost is not deductible. If, however, the membership is required by a doctor due to a diagnosis of obesity, the membership should be deductible as a medical expense.
Should Dunkin’s newest concoction prove irresistible, you may have to resort to more drastic measures. In this case, the tax treatment of either liposuction or lap-band surgery will come down to whether you have been diagnosed as obese by a doctor and the treatment prescribed to improve your health. While liposuction can be done on an elective basis, making this standard important, I believe lap-band surgery can only currently be prescribed in the U.S. if you are diagnosed as obese, rendering this requirement largely moot for gastric bypass patients.
Unfortunately, the IRS has determined that the cost of diet foods isn’t deductible, even if part of a weight-loss program prescribed by a doctor to treat obesity or other disease, because the diet food substitutes for the food the taxpayers normally eat and satisfies the taxpayers’ nutritional requirements.
Stunningly, Dunkin’ Donuts is claiming that the newest addition to its menu comes in it a mere 360 calories, so perhaps I’m simply overreacting, and a fried egg/bacon mix bordered by two donuts can be a part of a healthy, balanced breakfast.
But I doubt it.
Posted on 5:33 AM | Categories:

Can I Deduct That? Your Tax Deduction Checklist for Entrepreneurs

Randy Myers for Entrepreneur writes: Tax deductions and credits are crucial to your company's bottom line. But with the federal tax code now stretching to more than 73,000 pages, figuring out what you can and can't claim can be challenging. These tips can help you minimize your tax bill without agitating the Internal Revenue Service.
Back to basics:
We'll start by reviewing the nuances of some basic deductions that small businesses routinely take but sometimes misuse:
 Travel and meals. You can deduct 100 percent of business travel expenses, such as hotel bills, air fare, taxi fares and all related tips. But you can deduct only 50 percent of the cost of business meals. Note that you can deduct meals taken solo while traveling for work outside the city or general area where your business is based, but not while you're in that area. So running across town to try the new sushi restaurant for lunch isn't deductible. 
An exception to the 50 percent rule, notes Adam Shay, a certified public accountant in Wilmington, North Carolina, is for meals served at annual company outings such as holiday parties. Their costs are 100 percent deductible.
Vehicle expenses. You can deduct the cost of using your vehicle for business, including ordinary and necessary expenses associated with its operation. But you must keep a current vehicle mileage log, and claim deductions only for use related to business activities. Unfortunately, commuting from your home to your place of business doesn't count as one of those activities.
Gifts. Gifts to clients are deductible, but only up to $25 per recipient annually.
Home office. If you work from home some or all of the time, you may be able to claim a tax deduction for a pro-rata percentage of home-related business expenses such as rent or mortgage, insurance and utilities. But the rules for claiming this deduction are strict.
First, your home office must be your principal place of business. If you run a machine shop several miles from your home and conduct a substantial portion of your duties from that shop, you probably can't claim your home office. By contrast, if you spend most of your time on the road but do the bulk of your administrative work in the room over your garage, you probably can. Just make sure you don't have the kids playing video games in there; your home office must be used regularly and exclusively for your trade or business, notes Dave Du Val, vice president of tax services for TaxAudit.com.
Internet, phone and cable services. Generally, these are all tax-deductible expenses when incurred at your place of business. If you want to claim them for a home office, you'll need to pro-rate them, claiming only the percentage related to business use, says CPA Scott Berger, a principal with Kaufman, Rossin & Co. in Boca Raton, Florida.
Deductions and credits you shouldn't overlook:
Among the tax benefits most often overlooked by small businesses are tax credits and deductions the government offers for what it considers beneficial behaviors -- providing certain employee benefits, for example, or hiring certain types of people. Here are some you might be able to take advantage of:
The health care tax credit. Created by the Patient Protection and Affordable Care Act of 2010 -- Obamacare -- this tax credit is generally available to your small business if you have fewer than 25 full-time equivalent employees who earn an average of less than $50,000 per year, excluding salaries paid to you or your family. You also must pay at least half of their health insurance premiums through a qualified plan or "arrangement."
Your ordinary tax deduction for health insurance premiums will be reduced by the amount of the credit, notes Steve Warren, a CPA with Lehrman, Flom & Co. in Minneapolis, but a credit is worth more than a deduction, so it still can be a good deal. For example, if you pay $40,000 a year toward 10 workers' health care premiums and qualify for a 35 percent credit, you would save $14,000 on your tax bill before considering the reduction to your health insurance deduction.
Work Opportunity Credit. This tax credit, which can range from $2,400 to $9,600, is available for each person hired from certain target groups that historically have faced barriers to employment. They include military veterans who meet certain unemployment, disability or financial-aid criteria, ex-felons, certain people living in federally designated Rural Renewal Counties or Empowerment Zones, and people who have been receiving various forms of federal financial assistance.
Fringe benefits. You can generally claim a tax deduction for fringe benefits provided to your employees, such as group term life insurance, parking and mass transit or van-pooling services, notes Mike Scholz, a partner in the Tax and Business Services group at Wegner CPAs in Madison, Wisconsin.
Retirement plans. Too many entrepreneurs don't bother to establish retirement plans, forgoing not only valuable tax breaks but also important retirement benefits down the road, says attorney Bruce Givner of Givner & Kaye in Los Angeles. He encourages older business owners in particular to consider starting a defined benefit pension plan, which can allow much bigger annual contributions -- up to $250,000 -- than other types of plans. That can be attractive for owners who postponed retirement saving and need to sock away as much as possible in their remaining work years.
Posted on 5:33 AM | Categories:

Cautionary Tale: $22,000 In Charitable Donations Disallowed By The IRS

Barbara J. McGuan for BerryDunn writes:  In a recent court case, the tax court disallowed approximately $22,000 in charitable contributions made by the Durden family to its church. The family provided bank records and two separate written acknowledgment letters from the church to substantiate the charitable giving, but none of the documentation satisfied IRS requirements.
This case serves as a stark reminder that taxpayers need to know when and what kind of documentation is required by the IRS. Likewise, not-for-profit organizations who accept charitable donations have an obligation to provide their donors with the proper documentation in a timely manner. This ensures that donors receive the full benefit of their charitable giving.
Part of why the tax court disallowed the $22,000 in donations is that the acknowledgements that the family received from the church fell short. Specifically, the church did not include a statement of whether goods or services were provided in exchange for the payment. The family was unable to prove that the payments made were not in exchange for meals or other goods and services. The family also did not obtain the proper written acknowledgement from the church until after it had filed its tax return.

Taxpayers: Keep your donation documentation

The IRS requires proper documentation of any cash or non-cash gift to a qualified charitable organization in order for the deduction to be available to taxpayers. Deductions of cash contributions, regardless of the amount, must be substantiated by a written statement from the organization.
For gifts less than $250, the IRS also allows records that confirm a taxpayer's payment to a charitable organization such as a cancelled check, bank record, or payroll deduction record. For example, when you make a charitable donation via text message, such as when the Red Cross runs a text message donation plea for the storm victims, your telephone bill will satisfy the documentation requirement in the case of an IRS exam if the amount donated is less than $250.

Pay attention to due dates

As a taxpayer, you must obtain written acknowledgement for your charitable contributions on or before the earlier of: (1) the date you file your tax return for the year of the contribution; or (2) the due date of your tax return (including extensions). You must retain this statement in order to substantiate a tax deduction.

What about contributed land, cars, boats, and other high-value items?

If a taxpayer donates a motor vehicle, boat, or airplane to a charity with a value of more than $500, the donor must obtain a Form 1098-C from the charity. Copy B of the Form 1098-C needs to be attached to the donor's tax return in order to take the tax deduction.
Most non-cash gifts valued at more than $5,000 must be substantiated with extra documentation. These gifts have to be appraised by a qualified appraiser, and a taxpayer must attach the qualified appraiser's statement to the proper tax return along with Form 8283. The charity must also sign the Form 8283. For example, an appraisal is required to determine the donation amount of a tract of land to a charity. This appraisal must be attached to the tax return in order to substantiate the donation.

What can charities do to assist their donors?

In addition to a signed Form 8283 discussed above, for gifts of cash or property worth $250 or more, taxpayers must obtain a contemporaneous written acknowledgement from the charitable organization. The acknowledgement must include:
  1. The amount of the cash gift, and/or
  2. A description of any property donated, and
  3. A statement of whether the organization provided any goods or services to the donor in exchange for the gift.
Perhaps one of the most important pieces of information that the written acknowledgement contains is the statement of whether the organization provided any goods or services in exchange for the gift. It is very common to receive a good or service in exchange for a donation. For example, a donation to the local public broadcasting network often includes a gift of thanks. If the value of this gift is more than a nominal amount, the value must be subtracted from the total amount given to arrive at the tax deductible donation.
Qualified charitable organizations can help their donors meet these requirements by providing them with the proper the documentation in a timely manner. This written acknowledgement must include all of the requirements listed above. By helping your donors receive the full tax benefit of their charitable giving, you can help the donors who want to help your organization.
Posted on 5:33 AM | Categories:

A 'Perfect Solution' When Gifting a Home / Avoiding Estate Tax

Austin Kilham for the Wall St Journal writes: The husband and wife, both 60, had bought a $2 million vacation home in Colorado after the market bottomed in 2008. The home was a foreclosure, and the couple was able to buy the property for less than market value.
But in early 2012 the couple saw signs of recovery in the Colorado real-estate market and turned to their adviser, John K. Howk, for help. They were concerned about a potential increase in the estate-tax rate, as well as the rebounding value of their home. They wanted to gift the house to their children as soon as possible to minimize gift taxes--but they also wanted to retain the right to use the home for several more years.
"This client was focused on avoiding estate tax to the nth degree," says Mr. Howk, senior vice president of the Client Advisor Group at the Private Bank atBOK Financial BOKF +0.29% in Tulsa, Okla., which manages $50.4 billion for 3,000 clients.
Complicating matters, the couple planned on making use of their lifetime gift-tax exemption for future gifts. So Mr. Howk suggested that the clients use a qualified personal residence trust (QPRT) to gift the home. Under this plan, the couple would owe gift taxes on the depressed value of the home, but the trust allowed any future appreciation of the home to be passed tax free to the children.
Because the couple wanted to continue using the home, Mr. Howk suggested they set the term of the trust for 10 years. The couple could use the home during the term, and then transfer it to their children when it ended.
However, Internal Revenue Service rules required the couple to subtract the value of the home's use from its current value. Using an IRS formula, the couple and their adviser calculated the use value to be $300,000 for a decade of use, which they subtracted from the $2 million value of the home. The result: The couple paid about $510,000 in gift taxes on the remaining $1.7 million value of the home.
At the end of the 10-year term, the house will be transferred at its appreciated value to the children with no additional taxes. Based on housing market trends in the area, the couple estimated that the house would appreciate at 7% per year--meaning its value could increase to $3.9 million at the end of the term. Were that to happen, locking in the value of the house at $1.7 million would save the couple more than $780,000 in gift taxes, says Mr. Howk.
Although the solution worked well for his clients, Mr. Howk notes a QPRT isn't a perfect fit for everyone. Clients should live in an area where real-estate prices are likely to see a lot of appreciation. Age is also a factor, because if the client dies before the end of a trust's term, the property passes immediately to the beneficiaries, which can reduce the amount of time to build value.
However, Mr. Howk's clients are young enough that surviving the 10-year term is less of concern for them, he says. "This was the perfect solution," says Mr. Howk. "Not only could the clients give a generous gift, but they were able to do so at the distressed price so all future appreciation will go to the children."
Posted on 5:33 AM | Categories:

Potential income tax benefits for families with special needs children / Disabled children can qualify for dependency exemption and other benefits regardless of age.

THOMAS M. BRINKER JR., CPA/PFS, J.D. AND W. RICHARD SHERMAN, CPA, J.D. for Journal of accountancy write:   As the number of children diagnosed with autism, Asperger’s syndrome, and other neurological disorders continues to skyrocket, the disruption it causes in the lives of all those concerned is unmistakable—as are the costs of providing care for the special needs child. As reported by the Autism and Developmental Disabilities Monitoring (ADDM) Network in March 2012, as many as 1 out of 88 children born today has an autism spectrum disorder or ASD. And a report by the Centers for Disease Control and Prevention (CDC) has estimated that rate is as high as 1 in 50. Other disabilities are also becoming more prevalent, according to the CDC. Between 1997–1999 and 2006–2008, there was an 18.2% increase in blindness/sight impairment among children age 3 to 17, a 9.1% increase in seizures, and a 24.7% increase in “other developmental delay” (which excludes autism, attention deficit hyperactivity disorder, and learning disabilities).


Further complicating the situation, parents with special needs children are often unaware of possible tax benefits that are available and forgo hundreds, if not thousands, of dollars in potential tax deductions and credits. Michael A. O’Connor, an attorney who has written extensively on this topic, believes that 15% to 30% of families with a disabled child have one or more unclaimed tax benefits. Among these potential tax benefits are deductions or credits for the dependency exemption, medical expenses, special instruction, capital expenditures for medically required home improvements, impairment-related work expenditures, and the earned income tax credit.

THE DEPENDENCY EXEMPTION
A taxpayer may claim a dependency exemption ($3,900 for 2013), for a “qualifying child” or a “qualifying relative.” With passage of the Working Families Tax Relief Act of 2004, P.L. 108-311 (effective 2005), the definition of a “qualifying child” and “qualifying relative” in Sec. 152(a) was amended to provide a uniform definition for purposes of the dependency exemption and for the child tax, dependent care, and earned income tax credits.
Under the definition, to be a qualifying child, in addition to meeting the relationship test (taxpayer’s child, stepchild, eligible foster child, adopted child, or descendant (e.g., grandchild), or taxpayer’s brother, sister, stepbrother, stepsister, or their descendant (e.g., niece, nephew)), an individual (Sec. 152(c)) must meet any one of the following three requirements (the so-called age test). Either the individual must be under the age of 19 at year end; the individual must be a student under the age of 24 at the end of the year (to be a student the individual must be enrolled as a full-time student during some part of five calendar months during the year); or the individual must be totally and permanently disabled at any time during the year (Sec. 152(c)(3)(B)). Furthermore, while Sec. 152(c)(3) was amended for tax years beginning in 2009 to require that the qualifying child be younger than the individual claiming the dependency exemption, this rule does not apply to a child who is permanently and totally disabled. Age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled.

An individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months (Sec. 22(e)(3)). A physician must certify in writing that the individual is permanently and totally disabled.
When considering whether an individual is a taxpayer’s qualifying child, it is important to remember that grandparents, uncles, aunts, brothers, and sisters can satisfy the relationship test and, therefore, may be allowed to claim the dependency exemption for an individual who is permanently and totally disabled, regardless of the child’s age.

SPECIAL SCHOOL INSTRUCTION
In general, to the extent they exceed the 10%-of-adjusted-gross-income (AGI) floor in 2013 (7.5% of AGI for 2012), a taxpayer can deduct qualifying medical expenses, including those of his or her spouse and dependent children. In most cases, costs related to providing a child’s education are not considered medical care and, therefore, are not deductible as a medical expense. However, according to Regs. Sec. 1.213-1(e)(1)(v), the unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources.

The expenses of a special school that are deductible as medical expenses include amounts paid for lodging, meals, transportation, and the cost of ordinary education that is incidental to the special services the school provides. Also, any costs incurred for the supervision, care, treatment, and training of a physically and/or neurologically handicapped individual are deductible if the institution provides the services. Alternatively, taxpayers participating in tax-advantaged plans through work for funding medical expenses, such as flexible spending accounts (FSAs) or health savings accounts (HSAs), can set aside limited amounts of money to finance medical care expenses on a pretax basis, thereby avoiding the 10%-of-AGI limitation. The definition of medical care expenses for this purpose is the same as it is for the medical expense deduction. Amounts that can be set aside pretax under an HSA in 2013 are $3,250 for employees with single coverage and $6,450 for employees with family coverage. The maximum pretax contribution to a health FSA for all taxpayers is $2,500 beginning in 2013.

A special school is distinguishable from a regular school by the substantive content of its curriculum, and its status is not determined by the institution as a whole but by the nature of the services received by the individual for whom a medical care deduction is sought. The IRS considers the medical facilities and therapeutic orientation of a school as critical factors in determining whether a school qualifies for a medical care deduction.
Through case law, regulations, and rulings (see, e.g., Regs. Sec. 1.213-1(e)(1)(v)(a); Letter Ruling 200729019; Sims, T.C. Memo. 1979-499; and Rev. Rul. 70-285), the IRS has recognized several types of schools that qualify as “special schools” for purposes of the medical expense deduction. These include schools that:

  • Teach Braille to the blind and lip reading to the deaf;
  • Train the intellectually disabled;
  • Give personal daily attention to the student to improve the student’s low attention span;
  • Provide an environment in which intellectually or physically handicapped students can adjust to a normal competitive classroom situation; or
  • Design a special curriculum to accommodate the needs of handicapped children with IQ scores ranging from 50 to 75.

A regular school with special curricula can also be classified as a special school for those individuals benefiting from a special curriculum. For example, in Rev. Rul. 70-285, a child attended a regular school that had a special curriculum for intellectually disabled children. Since the school’s special education curriculum was a severable aspect of the school’s activities, the IRS ruled that the special curriculum qualified the school as a special school with respect to the child.

In Rev. Rul. 78-340, the IRS concluded that a taxpayer whose child had severe learning disabilities caused by a neurological disorder (e.g., an ASD) could deduct as a medical expense amounts paid for tuition and related fees for the child’s education at a special school that has a program designed to “mainstream” these children so they can ultimately return to a regular school. The ruling further held that amounts paid for private tutoring by a specially trained teacher qualified to deal with severe learning disabilities are also deductible. However, the ruling stated that for the costs to be deductible, a physician must recommend both the special school and the tutoring.
In Letter Ruling 200521003, the IRS expanded the definition of special schooling to include tuition for programs enabling children with dyslexia to deal with their condition. The IRS determined that the children were attending the school for the principal purpose of obtaining medical care in the form of special education required for the years in which the children were diagnosed as having a medical condition (including dyslexia) that impaired their ability to learn. As a result, the IRS ruled in favor of a medical expense deduction for the tuition paid to the school.

More recently, in Letter Ruling 200729019, the IRS ruled that a school that provides nonacademic training and support services designed to help an individual be successful in another academic or vocational school may be deemed a “special school.” The school included a student population with IQs ranging from low average to gifted and with various learning disorders and ASDs. It designed a self-contained program for the child (who had severe developmental disorders due to a medical condition) as prescribed by her neuropsychological report to enable her to compensate and overcome her diagnosed medical condition and help her succeed in transitioning to college.
Costs of additional services provided by schools that do not otherwise qualify as special schools can also be considered deductible medical expenses if the additional services provide therapeutic value. However, while a separate payment is not required, the amount paid must be in excess of the normal tuition charged for regular students, with the premium incurred over and above normal tuition representing the qualifying medical expense. An allocation may be permitted even if the school does not distinguish between normal educational tuition and medical care in its billing (Fischer, 50 T.C. 164 (1968)).

The medical care determination does not depend on the title of the person rendering the service, the nature of the institution, or whether it is considered medical care to other individuals. Instead, the final determination depends on whether the care qualifies as medical care under Sec. 213. Examples of deductible medical expenses include the additional cost incurred for special programs assisting psychologically, physically, or neurologically impaired students; note takers for deaf students; or psychotherapy services to assist students in adjusting to a normal school setting (see Rev. Rul. 69-607; Fischer, 50 T.C. 164 (1968); and Fay, 76 T.C. 408 (1981)).

CAPITAL EXPENDITURES
As a general rule, capital expenditures are not permitted as a medical expense deduction. However, a medical expense deduction is available when the capital expenditure is made primarily for the medical care of the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care.

Qualifying capital expenditures for medical expense deductions fall into two categories: (1) expenditures improving the taxpayer’s residence while also providing medical care (e.g., a central air conditioning system for an individual suffering from a chronic respiratory illness), and (2) expenditures removing structural barriers in the home of an individual with physical limitations (e.g., construction costs incurred for an entrance ramp, widening doorways and halls, customizing bathing facilities, lowering kitchen cabinets, and adding railings).

Capital expenditures in the first category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. For example, after a physician recommends installing an elevator for an individual suffering from a chronic and disabling arthritic condition limiting the individual’s mobility, an elevator costing $20,000 is installed in the taxpayer’s home. As a result of the expenditure, the home increases in value by $5,000. Therefore, $15,000 may be deducted as a medical expense. Expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier.
Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility and maintenance costs to operate the elevator) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

CONFERENCES AND SEMINARS
Parents and guardians of special needs children often attend medical conferences and seminars to learn more about their child’s disability. Under Rev. Rul. 2000-24, amounts paid for the registration fees and travel expenses are deductible as medical expenses if the costs are primarily for and essential to the dependent’s medical care. Parents should obtain a recommendation from their child’s doctor to ensure the medical deduction is not disallowed. The conference or seminar must deal specifically with the medical condition the child has, not just general health and well-being issues. Moreover, the ruling does not permit deductions for meals and/or lodging costs incurred while attending the conference.

IMPAIRMENT-RELATED WORK EXPENDITURES
As special needs individuals mature and enter the workplace, many are entitled to claim itemized deductions for their unreimbursed impairment-related work expenses under Sec. 67(d). Impairment-related work expenses refer to expenses that a handicapped individual incurs for attendant care services at the place of employment enabling the individual to maintain employment, and that qualify as trade or business expenses. Handicapped individuals for this purpose are defined as those having a physical or mental disability (including but not limited to blindness or deafness) that is a functional limitation to employment or a physical or mental impairment (including but not limited to impaired sight or hearing) that substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.

According to the IRS instructions in Publication 502, Medical and Dental Expenses, an employee should include impairment-related work expenses on his or her Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. These expenditures are then transferred to Form 1040’s Schedule A, Itemized Deductions, as an unreimbursed business expenses that are not subject to the 2%-of-AGI limitation on miscellaneous itemized deductions (Publication 529, Miscellaneous Deductions).

EARNED INCOME TAX CREDIT
The idea behind the Sec. 32 earned income tax credit (EITC) is to encourage the economically disadvantaged to work by partially offsetting the Social Security taxes on wages. Appropriately, the EITC is not available to taxpayers who have unearned income (i.e., dividends, interest, gains on sales of securities) above a specified threshold ($3,300 for 2013). Families with AGI in 2013 under $51,567 who file a married joint return and have three qualifying children (with two qualifying children, AGI under $48,378, and with one qualifying child, AGI under $43,210) may qualify for the EITC, which is a refundable credit.

For EITC purposes, a “qualifying child” has the same definition as for the dependency exemption—an individual who has the requisite relationship with the taxpayer, who resided with the taxpayer for more than six months during the calendar year, and who is under age 19 at the end of the year, under the age 24 and a full-time student, or is permanently and totally disabled (Sec. 32(c)(3)). Thus, as noted previously, a severely disabled child is a “qualifying child” regardless of age, even into adulthood, as long as the child continues to live with his or her parent(s) or another person who meets the relationship test with respect to the child. The maximum EITC for 2013 is $6,044 for families with three or more qualifying children; $5,372 for families with two qualifying children; and $3,250 for families with one qualifying child.

CONCLUSION
The number of individuals with special needs is escalating at unprecedented rates. Some experts argue that this may simply be a matter of better recognition of special needs, as changes in autism diagnostic criteria have evolved over the years. Now, autism is the sixth most commonly classified disability in the United States. Whether due to diagnostic changes or not, these increased numbers are affecting state and local government programs as they face shortfalls because of increasing demand for services, forcing parents to absorb more of their children’s medical care and other related expenses.

This article provided a brief overview of some of the more common deductions and credits that may be available under current tax law. However, practitioners with clients who are parents of special needs children should be aware that specific rules apply to each benefit and the determination of whether a benefit applies is often fact-specific. For example, to claim a child’s educational expenses as medical expense deductions when the child attends facilities that are primarily educational and not special schools, the particular services provided to the child must be considered. Similarly, deductions for medical conference expenses are case-specific. Even the generally available EITC has multiple requirements and limitations. In the end, it is important for practitioners to understand that substantial tax benefits are available to those caring for children with special needs and to make clients who have special needs children aware of them.

Tax Benefit Checklist for Families Caring for Special Needs Children
  Deducting the cost of a special school or institution
What is a special school?
A school is a special school if the ordinary education it furnishes is incidental to the special services it furnishes. Thus, the curriculum of a special school may include some ordinary education, but this must be incidental to the school’s primary purpose to enable the student to compensate for or overcome a handicap, to prepare him or her for future normal education and living.
What are some examples of a special school?
Schools with programs to “mainstream” children with neurological disabilities (e.g., autism spectrum disorders) and schools that teach Braille, lip reading, or sign language.
What costs of a special school are deductible?
  • Lodging;
  • Meals;
  • Transportation;
  • Incidental educational costs provided by the institution; and
  • Costs of supervision, care, treatment, and training.

When can regular schools be classified as a “special school” for an individual?
A school that has a special curriculum for the disabled individual can be classified as a special school for that individual (Rev. Rul. 70-285).
What private tutoring by a specially trained teacher is deductible?
The costs for tutoring by a teacher who is specially trained and qualified to deal with severe learning disabilities are deductible, provided the child’s doctor recommended such tutoring (Rev. Rul. 78-340).
When is special education for dyslexic children deductible?
Dyslexia is a medical condition that handicaps the child’s ability to learn. Therefore, if a child is diagnosed with dyslexia, the costs of special education to overcome dyslexia are deductible medical care expenses (Letter Ruling 200521003).
  Deduction for medical conferences and seminars
Both transportation and admission fees to qualifying medical conferences or seminars are deductible, but lodging and meals are not (Rev. Rul. 2000-24).

  Prescribed vitamin therapy; hyperbaric oxygen therapy; chelation therapy; equestrian therapy; individualized or group art, dance, music, and play therapies; summer camps, etc.
  Medical travel and transportation
  • For 2013 tax returns: 24 cents per mile.
  • For 2012 tax returns: 23 cents per mile.
  • Lodging costs (but not meals) up to $50 per day are deductible for the taxpayer and one additional person if an overnight stay is necessary.

  Consider FSA health care plan if ineligible for medical expense deduction
  Impairment-related work expenses
  • Business deduction for attendant care services at place of employment (ordinary and necessary expense to help in performing job).
  • Not subject to 2%-of-AGI limitation imposed on unreimbursed employee business expenses.

  Qualifying child
  • Special needs individual can be any age and claimed as a dependent.
  • No gross income limitation for a “qualifying child.”
  • Prior to 2009, a taxpayer could claim a dependency exemption for an older sibling. This option is not available for tax years beginning in 2009 and later unless the older sibling is permanently and totally disabled (Fostering Connections to Success and Increasing Adoptions Act of 2008, P.L. 110-351).

  Credit for special needs adoption expenses
  • $12,970 for a special needs child ($12,650 in 2012), regardless of adoption expenses.
  • Must be a U.S. citizen or resident who requires adoption assistance.
  • Qualifying expenses include legal fees, court costs, and other adoption-related costs.
  • The limit is per child, not per year (the credit was refundable for 2010 and 2011 only; for pre-2010 credits and post-2011 credits, the credit is nonrefundable with a carryover of five years).
  • Credit phases out for taxpayers with AGI exceeding $194,850 ($189,710 in 2012); the credit is phased out completely at $40,000 above the threshold.
Posted on 5:32 AM | Categories:

Intuit Realigns Accounting Professionals Division

MICHAEL COHN FOR ACCOUNTING TODAY WRITES:  Intuit is reorganizing its Accounting Professionals Division as part of a larger corporate reorganization that includes the divestiture of the Intuit Financial Services division and a plan to sell the Intuit Health Group.
Intuit said Monday that the realignment of its Accounting Professionals Division builds upon organizational changes originally announced in May to capitalize on global opportunities and sharpen its focus on its core businesses (see Intuit Undergoes Reorg Behind Global Initiative).
The new lineup includes two small business divisions pursuing opportunities around the world; two organizations focused on consumers—Consumer Tax, overseeing the tax preparation business in the U.S. and Canada; and the newly formed Consumer Ecosystem, focused on solving additional important consumer problems beyond tax.
Two organizations will also be dedicated to accountants. The first accounting organization, the Accountant and Advisor Group, will focus exclusively on building a loyal base of accountants around the globe who use and recommend Intuit’s small business solutions.
“The role that accountants and advisors play in small businesses’ success has never been more important,” said Intuit president and CEO Brad Smith in a statement. “It will be a critical component as we pursue our goal to be the world’s small business operating system.”
The second accountant organization, ProTax, will focus on winning the professional tax category in North America, capitalizing on the shift to cloud and mobile-based solutions.
“This strengthens our opportunity to work directly with accountants as they purchase our Lacerte and ProSeries software to help them prepare their clients’ taxes,” Smith added. “And we have opportunities to accelerate growth as accountants shift online and we expand our “right for my firm” tax software and services lineup.”
These changes, combined with the May realignment, become effective Aug. 1 in conjunction with the company’s new fiscal year.
Sales of Intuit Financial Services and Health Group
To focus more sharply on its core businesses, Intuit also said Monday that it is divesting its Intuit Financial Services business, selling it to the private equity firm Thoma Bravo, and announced plans to sell the Intuit Health Group.
“These decisions are the remaining foundational pieces that focus our organization on our biggest opportunities as we execute our global connected services strategy,” Smith explained. “We’ve evolved from a portfolio of business units to an ecosystem of products and services with unique interdependencies. Working together, these assets create amazing opportunities to solve important customer problems while building durable competitive advantage.”
The divestiture of Intuit Financial Services reflects Intuit’s commitment to intensify its focus on small business and consumer tax. As a result, the company signed a definitive agreement to sell IFS to Thoma Bravo for $1.025 billion, pending regulatory review.
As part of Thoma Bravo, Intuit said IFS would be better supported to reach its full potential in the growing digital banking channel. Intuit intends to use existing cash and the proceeds of this transaction to accelerate repurchase of its shares.
“Thoma Bravo is gaining a richly talented team that has created an enviable integrated digital banking platform and innovative mobile solution, recognized as the best in the market,” said Smith. “Intuit will sharpen its focus on directly serving consumers and small businesses, and continuing to build our durable competitive advantage in those segments.”
Mint.com, which is currently part of IFS, will remain with Intuit and become part of the Consumer Ecosystem business unit that includes other consumer products such as Quicken.
Intuit also plans to sell the Intuit Health Group. While Intuit had considered health care a potential growth opportunity, structural shifts in the market have evolved in such a way that the business no longer fits within the refocused strategy, Smith said. The Intuit Health Group assets will be a better fit for an organization with a stronger focus on the health care industry, according to the company.
The company expects to classify IFS and Intuit Health Group as discontinued operations. In fiscal 2012, the two planned divestitures contributed combined revenue of approximately $320 million. In fiscal 2013, the two planned divestitures are expected to contribute revenue of approximately $340 million.
Based in Westlake Village, Calif., IFS has 730 employees in several offices in the United States and India.
“Thoma Bravo’s acquisition of IFS is consistent with our strategy of buying great technology franchises with significant recurring revenue,” said Thoma Bravo Orlando Bravo in a statement. “We look forward to accelerating the company’s growth as an independent business through our buy-and-build principles.”
Once the transaction closes, Thoma Bravo will provide IFS with leadership and resources to meet the needs of customers in the growing digital banking channel across the financial services industry.
“IFS is the premier provider of online and mobile banking software to financial institutions, markets which should continue to see secular growth and further end-user adoption,” said Thoma Bravo partner Holden Spaht in a statement. ”Thoma Bravo will continue to support the company’s mission of providing best-in-class products to support its large base of customers and end users.”
The transaction will result in a stand-alone company focused on providing a digital banking platform and market-leading mobile solutions to financial institutions. The transaction includes an Internet banking platform, digital payments, mobile banking, Purchase Rewards, FinanceWorks, and digital banking add-on solutions as well as third-party solutions. But certain assets that are currently included in the IFS division, including OFX connectivity and Mint.com, will remain with Intuit.

1 Comment

I have two comments.
The first deals with turbotax. I have used it for about 10 consecutive years. Generally, the "new" version was and improvement over the prior year. The 2012 tax year version is a disaster. Unless there is overwhelming proof that the 2013 tax year turbotax is a clean easy to use, I will not use it nor will I recommend it.
I'll bet the newly split off IFS as a discontinued operation will give its new owner (Thoma Bravo) fits. But on the other hand if there were values in Health systems and or existing clients TB should consider that unit too.
I hope IFS and Health Systems development haven't gone the way of turbotax.
Posted by: pddurant31 | July 2, 2013 12:06 PM

Posted on 5:32 AM | Categories:

Physicians: Maximize Equipment Tax Deductions / Make sure your medical - health practice is taking advantage of one of the best tax breaks available to medical businesses today.

Jeff Jackson for MD News writes: Your practice doesn’t have to settle for depreciating equipment over several years. With the Section 179 deduction, you can generally elect to deduct machinery and equipment in the first year the equipment is placed in service. Due to the extension of Section 179 under the American Taxpayer Relief Act of 2012, you can basically write off 100 percent of the equipment and software your business needs. The maximum Section 179 allowance for 2013 (and 2012) is $500,000.
For many medical practices, this is one of the best tax breaks available today, yet many fail to take full advantage of it. Let’s say you spend $150,000 on equipment this year. What are your options regarding taking deductions?
With the Section 179 election, you can write off the entire $150,000 this year, rather than depreciating it over several years. This includes medical equipment, machines, computers, copiers, fax machines, telephone systems and office furniture. Without electing Section 179, money spent to purchase business equipment is treated as a capital expense and will have to be recovered over a period of years through depreciation.
Did you know that your company can lease equipment and still take full advantage of the Section 179 deduction? In fact, leasing equipment and/or software with the deduction in mind is a preferred financial strategy for many businesses, as it can help with bottom-line profits and cash flow. The obvious advantage to leasing or financing equipment and/or software and then taking the Section 179 deduction is the fact that you can elect to deduct the full amount of the equipment and/or software without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction.
Section 179 limits for the year 2013 were increased by the American Taxpayer Relief Act, which allows businesses to write off up to $500,000 of qualified capital expenditures, subject to a dollar-for-dollar phase-out once these expenditures exceed $2,000,000 in the 2013 tax year.
To get the deduction for tax year 2013, you have to place the equipment in service this year, as once the clock strikes midnight on Dec. 31, 2013, Section 179 can’t decrease your 2013 taxable income.
In order to qualify for the tax break, you must use the equipment more than 50 percent of the time for business. If you use it for personal purposes, you must maintain records, as you can only write off the business-related percentage. In addition, the amount you write off for Section 179 can’t exceed the taxable income from your business. That may be a problem for C corporations if the business zeroes out its income by paying everything in salaries, because there won’t be enough income to cover the Section 179 election.
It might be better if the corporation pays less compensation and keeps enough taxable income to cover a Section 179 election. You can also carry over any excess to future years if you run up against the income limitation.
If your C corporation operates at a loss this year but expects to turn a profit next year, you might still be better off making the Section 179 election this year and carrying it forward, rather than depreciating equipment purchased this year over several years. As long as you “place it in service” by Dec. 31, you can deduct the equipment with Section 179.
With some careful timing, you can fully utilize the tax break this year. Look around your practice toward year-end, and buy any equipment you need.
Many physicians are involved in more than one venture and often involve differing ownership of the ventures. In the case of pass-through entities (partnerships, LLCs and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Consult your tax advisor for details.
Posted on 5:32 AM | Categories: