Tax Matters

Tax Matters

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Where Did All the Deductions Go?

Over the years, the deductibility of medical and miscellaneous deductions on Federal Schedule A has seemed to vanish, despite your diligence in saving all those receipts.  In 2003 . . .

Medical deductions are still permitted by the IRS and include your unreimbursed expenses for insurance, prescriptions, doctors, dentists, and long-term care premiums. The list of allowable deductions is long and varied, so be sure to call Tax Matters if you have specific questions about your medical expenses. However, once you have gathered all the receipts and canceled checks and reviewed your credit card statements for current year charges, the resulting number is not your actual medical deduction.  IRS requires a reduction of medical expenses by an amount equal to 7.5% of your Adjusted Gross Income (AGI).  This is the amount on the bottom of Page 1 of your Federal Tax Form 1040.  For instance, if your AGI is $50,000, 7.5% X $50,000 = $3,750. You must reduce your medical expenses by this adjustment and the resulting amount is your medical deduction.

$50,000 . . . your AGI on Form 1040

$6,325 . . . . your total unreimbursed medical expenses
-3,750 . . . . 7.5% of AGI
$2,575 . . . . Net Medical Deduction

In many cases, the 7.5% downward adjustment eliminates the medical deduction from the tax return.  So, saving the receipts from the drug store and having all the cancelled checks from the doctor and eyeglasses may not result in a tax savings deduction on your Federal return.

Another category of deductions that has a downward adjustment based on your AGI is Miscellaneous Deductions reported in the lower section of Schedule A. These deductions include (but are not limited to): unreimbursed employee business expenses, including travel and entertainment; professional books and journals and home-office deductions; IRA fees; job-hunting expenses; job-related education expenses; professional and union dues; work clothes and uniform expense; safe deposit box rental fees; and the cost of income tax preparation. The total of all of these expenses must be reduced by 2% of your AGI, with the net amount available as a deduction.

$1,239 . . home-office deduction for W-2 employee
$100 . . . IRA fees paid for you and your spouse
$250 . . . tax preparation fees
$1,589 . . total miscellaneous deductions
-$1,000 . your AGI ($50,000) times 2%
$589 . . . Net Miscellaneous Deduction

Once again, it is possible that the AGI downward adjustment can reduce your deductions to zero. So, when you review your tax return and notice your medical and miscellaneous deductions aren't exactly the amounts you reported to the office when your return was prepared, it's because IRS has restricted their deductibility.  If you have any other questions about these items, please call Tax Matters to discuss your situation.

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