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medical expense deductionsMost of us visit the doctor and/or dentist every year. Depending on one’s life circumstances, some people a lot more than others. Whatever the case, just about everyone will have some medical and dental expenses throughout any given year. For some of us these bills can really add up and be quite a burden. So wouldn’t it be great if there were some kind of tax credit or deduction to help offset all those bills for medical and dental expenses? Well, you’re in luck. You can deduct medical and dental expenses from your income, which can help reduce your tax bill. However, as with most tax policies, this is not a cut and dry issue. There are certain requirements that must be met.

What Does the Law Say About Medical Expense Deductions?

If you’re like most other taxpayers then at some point you’ve probably come across those questions about medical and dental bills when you file your tax return. Perhaps you’ve wondered if you qualify. Perhaps you just figure that it doesn’t apply to you so you skip it. Or maybe you’ve been really excited about the opportunity only to find out that you don’t qualify. There are many different aspects and rules when it comes to deducting these expenses, so let’s take a closer look at the tax laws regarding medical and dental expenses.

Medical & Dental Costs You Can Deduct

First off, what kinds of expenses can be deducted? There are actually quite a few that qualify, including:

  • Treatment
  • Preventative care
  • Prescriptions
  • Surgeries
  • Dental/vision
  • Medical appliances
  • Psychiatric/psychological sessions

The IRS even allows you to deduct additional expenses such as fees for traveling and parking, or even mileage you put on your vehicle to get to and from medical appointments.

Medical Expenses You Cannot Deduct

There are some other medical expenses that the IRS won’t allow, such as:

  • Reimbursed medical expenses
  • Cosmetic procedure expenses
  • Non-prescription drugs
  • Medical expenses paid in another year

Now to the biggest question when it comes to medical/dental expenses: just how much can you deduct? That is where things get a little less exciting for many taxpayers. Every year when I get to this section of my tax return I’m always hopeful it will benefit me and save me a little more money. However, when I do the math, we always come up short. On the one hand, it would be nice to get a deduction, but I can’t complain because by not qualifying for the deduction that means we haven’t had a lot of medical expenses. That is a plus in and of itself, but it also means we have been enjoying good health, and who can complain about that?

A Closer Look at the Numbers

So, let’s take a closer look at the numbers. According to the IRS, you can deduct qualified medical/dental expenses that surpass 10 percent of your adjusted gross income for that year. Therefore, if your AGI is $60,000, for example, and you spend $3,000 on qualified medical expenses for the year, then you cannot deduct any of those expenses as they only represent 5 percent of your AGI. However, if you were to have $8,500 in qualified medical expenses for the year then you could deduct the amount that exceeds 10 percent of your AGI. In this case, 10 percent would be $6,000, so you would be eligible for a $2,500 deduction. So depending on your circumstances you could be in for a nice little tax break.

Additional Break for Seniors

There is one other thing to keep in mind, if you are 65 or older. The IRS put in place a temporary exemption back in January of 2103, which lasts through the end of this year. This allows people age 65 and older, as well as their spouses to deduct qualified medical expenses that surpass 7.5 percent of their AGI. So if you turn 65 this year or have already reached that age then you can qualify for this added bonus if your medical expenses exceed 7.5 percent of your AGI. So, if you’ve had to spend more than usual on medical/dental expenses this year then keep detailed records of all your bills. All those extra doctor visits and health-related expenses could save you some decent money come tax time.

student tax debtSeven out of ten college graduates emerge from their undergraduate program with student loan debt, according to an analysis by the Institute for College Access & Success. While borrowing to fund higher education has become the norm for many families and students, student loan debt can present some unique tax implications. Here’s a look how student loans can work for, or against you, when you file your Federal tax return.

The interest you pay could lower your tax liability.  You may be able to reduce the interest you pay for student loans (either for yourself or a dependent) when you file annual taxes, but whether you can take the $2,500 deduction in full depends on your modified adjusted gross income, and how file.  Single filers are eligible to claim up to $2,500 in student loan interest paid in a tax year provided their MAGI is less than $80,000 in that tax year; joint filers can do the same provided their MAGI isn’t more than $160,000. The student loan must also have been taken out for the sole purpose of funding higher education costs to qualify for the deduction; employer-reimbursed student loans or those secured under employer plans aren’t eligible.

If you paid more than $600 student loan interest in the tax year, your lender(s) will send an official Form 1098-E reflecting the total interest paid that year in “Box 1.” If you don’t receive a form from a lender, you may not have paid more than $600 in interest that tax year, on that particular loan but you may still be eligible to claim whatever interest you paid. (Check your monthly loan statements).

If you secured the student loans before 2004, you may be able to deduct a portion of any origination fees or capitalized interest, too. (Box 2 on your 1098-E form will be checked in this case). Divide the total number (of each) by the number of years left on the loan to determine how much may be considered deductible for the tax year.

Claiming expenses for education-related tuition and fees could help you owe less tax.  The Federal government offers students the opportunity to claim several education-related credits like the American Opportunity Credit, the Lifetime Learning Credit, and the ability to deduct some course fees and tuition expenses. Yet, who qualifies for these credits (and much value it ultimately delivers) depends on variables including the student, the loan type, expenses, the education being pursued, and by whom. The IRS offers an interactive calculator to help taxpayers determine what education-related credits and deductions they may be able to claim.

Not paying Federal student loans could lead you to lose your tax refund.  Federal student loans may offer lower interest rates than those typically offered by private student lenders, and allow for income-based repayment plans and even some debt forgiveness options for borrowers who secure jobs in public service, teaching, healthcare, or at charitable organizations. (If you qualify for a reduced repayment, you may still deduct the interest up to $2,500, assuming you meet the criterion noted above).

But Federal student loans aren’t entirely beneficial to the borrower. Though there are some rare cases where filing bankruptcy can reduce or eliminate amounts owed on Federal student loans, the process isn’t simple, and usually requires proof of financial hardship. Further, any tax refund owed by a borrower could be intercepted by the U.S. Department of Education and applied to Federal student loans that have gone unpaid for 270 days.  Though you will receive a official letter of notification before that happens, you cannot stop the process unless you agree to establish a repayment plan, and start making the newly agreed to payments before the deadline stated on the letter.

Forgiven student loans can be considered taxable income. Securing student loan debt forgiveness can eliminate education debt that would otherwise take years to pay off, but it could be taxed like income you were paid, based on the terms of the loan forgiveness. If you qualify for public service loan forgiveness, teacher loan forgiveness, or law school loan repayment assistance forgiven debt is likely not taxable, but student loans discharged because a school closed, or due to death and disability may be treated as taxable income. Student loan forgiveness related to some income-contingent repayment and income-based repayment plans may be considered taxable, too. If that’s the case, you’ll receive a 1099-C (Cancellation of Debt) form, which you will then report it when you file taxes. If you cannot pay the taxes owed as a result, you’ll need to arrange for an installment plan with the IRS until your tax bill is paid in full.

IRS Scam Warning Sign A yellow sign with the words IRS Scam on a keyboard

Tax scams and the criminals behind them don’t take a break just because the annual tax season has officially ended.  Here are five of the most popular tax scams that continue to victimize otherwise honest taxpayers, and how to avoid them.

Fake tax returns filed under a legitimate name. The practice of filing a fake Federal tax return under a legitimate taxpayer identity to fraudulently collect a tax refund began way back in 2008, according to a report by CBS News and 60 Minutes; it has cost taxpayers more than $5 billion to date.

Despite pre-emptive measures that the Internal Revenue Service (IRS) put into place in 2015–like limiting the number of direct deposits to one account, various PIN-based and password security enhancement programs, and a pilot program that assigned a unique code to W-2 records–the scam persists. In fact, in March 2016 The Washington Post reported that the very system designed to stop hacks was hacked.

Tax preparation fraud.  When you pay someone to prepare your taxes, you entrust them with your most sensitive information, including your social security number, and bank account information.  But the IRS explains that not all tax preparers are created equal in their level of training, knowledge, or ethical code of conduct they follow.  A dishonest tax preparer can take advantage of their access in any number of ways, including changing numbers on your tax return (like income, expenses, deductions and tax credits) to prepare a return that claims a bigger refund than you’re owed, after you’ve signed off on the legitimate one. They then direct the refund to their account to skim a portion of the funds off the top without your knowledge. That’s just one of the suspected scams that Forbes reports took place at several Liberty Tax Service franchises, 23 of which are currently under investigation for tax preparation fraud.

Though you can file a formal complaint with the IRS if you suspect tax preparation fraud, the onus is ultimately on you to file an accurate return—and pay any amounts owed to the IRS. Minimize the likelihood of tax preparation fraud by confirming the legitimacy of your tax preparer with the IRS searchable database of tax preparers who have current preparer tax identification numbers.

Phone calls from the IRS.  Phone calls claiming to be from the IRS continue to among the most common tax scams, and have resulted in tax fraud upwards of $26 million, according to an IRS warning issued in April 2016. Though the tone and content of the tax scam calls vary (some are threatening, and some promise a significant refund) any call that supposedly comes from the IRS is one to dismiss:  You can call the IRS by phone but they will not call you for information.

Phishing emails.  Emails from the IRS are another scam tactic used to coerce recipients into providing sensitive data that can be used to further compromise bank accounts, or identity. Much like a phone call, the IRS will not make contact by email with requests for information—no matter how legitimate the message appears. Do not click on any links or attachments from an email supposedly sent by the IRS, which can introduce malware to your computer.

Cyber thieves redirecting tax refunds.  If you haven’t yet received your Federal tax refund and you filed taxes on time, it may be time to use the IRS “Where’s My Refund” software to investigate its whereabouts. As the Detroit Free Press reported in April, cyber thieves took a new approach in the 2015 tax filing season. By targeting the software systems of some tax preparer offices, specifically those that allowed remote access, cyber thieves were able to divert direct deposit of client’s tax refunds into their own accounts.

irs-audits-easier2What’s the worst thing that can happen to you at tax time? Maybe you’re expecting a big tax return but after crunching all the numbers and entering all the necessary information you end up owing a big chunk of money to the IRS. That is definitely a lousy outcome. Perhaps you are due a big return but it ends up getting lost or delayed for weeks, or even months, until the IRS finally figures it out and sends you a return. That is no fun either. Having you identity stolen could be one of the worst results of tax season as well. However, perhaps the most likely answer taxpayers would give to this question is to be audited by the IRS. Few things can cause as much fear and anxiety as being selected for an audit.

Overwhelming Pressure

I have a good friend that was chosen for an audit several years ago. He and his wife paid all their taxes and they certainly weren’t trying to hide anything from the IRS. There were no hidden offshore accounts and their income wasn’t even in the six figures. The only thing they were guilty of was being too giving. The IRS took issue with the amount of money they were claiming in charitable donations. Apparently the IRS thought the amount they reportedly gave to their church was too much for their income level so it triggered an audit. I remember talking to my friends about the ordeal as they shared the sheer terror that they felt. Needless to say they were stressed out and the pressure of the situation really weighed them down.

Be Prepared, Not Afraid

However, this story had a happy ending, because my friend and his wife were prepared. They had detailed records of all their donations, their receipts, their checks and everything else the IRS wanted. Because they still possessed those records and they had done nothing wrong, the audit went well and they were exonerated of any wrongdoing. The moral of the story is to be prepared. No one wants to be chosen for an audit, but if you have nothing to hide and you have kept detailed records then an audit doesn’t have to bring you down to the depths of fear and anxiety. So then, what if you are chosen for a tax audit; what should you do to get prepared so it can be as stress-free as possible?

Seek Professional Help

One option is to immediately seek the help of a good tax attorney or an experienced accountant. You can turn everything over to a professional and let them handle it for you. This not only helps ensure that the process is handled correctly, but it can also help relieve you of a lot of unnecessary stress. In the event that you would rather not seek professional help there are some steps you need to take in order to be prepared. Remember, preparation is the key to successfully navigate through any tax audit.

Record Keeping

As I mentioned, my friend and his wife were able to get through their audit because they were prepared. The first thing you should do is keep good records. If you haven’t kept detailed records then you will need to do whatever it takes to collect, gather and organize your records. Remember though; only give the IRS exactly what they ask for. Don’t give the agency any additional info, which could trigger an even deeper look into your financial records. Go ahead and gather any records you can get your hands on, including all bills and receipts, in the event they end up asking for more. By having that information ready you can help expedite the process, but only offer up what they ask for. Make sure you also track all of your expenses, interest payments, donations and any other tax records that could be relevant and hold on to that information.

Know Before You Go

It is also a good idea to do your homework. In other words, research everything you can about the audit process and talk with others who have already been through the experience. This can also better prepare you because you will have a greater understanding of some of the questions the IRS might ask you, and how you should answer them. Also, keep in mind that your behavior is an important part of the process. Be professional, polite and prompt and do your best to stay calm and collected. Lastly, remember that the auditor is there to do a job. Although you are innocent until proven guilty, the IRS already suspects that you have done something wrong. Be respectful and cooperate with the process but don’t volunteer more information than necessary.

You Can Get Through This

While a tax audit can certainly be stressful, it doesn’t have to add 10 years to your life. By following these simple tips you can be fully prepared for an IRS audit and you can come out on top, as long as you have filed your return correctly and you have the records to prove it. So if “that” letter does ever arrive in your mailbox, don’t panic. With the right preparation you can survive an audit.

questions to simplify 2016 tax filingYou may be ready to put taxes out of your mind until next April, but taking stock of what worked (and didn’t) in the 2015 tax filing process can help you make improvements you’ll appreciate in tax seasons to come.

Here are a few questions to help you identify your biggest pain points in tax filing, and subtle changes that could make for a smoother tax filing in 2016 and beyond.

  1. Did I owe more money than expected? Getting hit with an unexpected tax bill can wreak havoc on your finances, particularly if you’re forced to put the debt on a credit card you can’t pay off for several months, or pay additional fees through a tax payment installment plan. Apply these questions to your tax return to spot possible opportunities to avoid owing unexpected tax in the future:
  • Did you max out your tax-advantaged retirement contributions? Maxing out employer-sponsored or self-employed retirement plans allowable limits are one of the most beneficial ways to lower your tax bill, and leverage the value of your hard-earned cash through investing. If you didn’t max out your allowable retirement contributions, establish an automatic transfer for the amount you need to invest into your tax advantaged retirement account(s) each month. Breaking your total annual contribution into smaller amounts can ensure that you make the necessary budgeting adjustments that make it easier to reach your maximum contributions going forward. Once you’ve done that, remember that annual contributions to a traditional IRA could also lead to a lower tax bill, depending on your income.
  • Did you balance capital gains with losses? If you made a profit from the sale of an investment or property, your tax bill could have been driven higher by capital gains. In the future, strategize how to offset taxable gains before you sell. A person who is in the 28% tax bracket, for example, will pay 28% capital gains on that sale of a stock held for less than one year, compared to 15% on gains from investments held a year or more. Selling losing investments along with a winner can also help minimize your capital gains taxes owed.
  • Did you pay enough tax throughout the year? If you owe the government more than 10% of your total tax when you file because you underpaid throughout the year you could have to pay penalties.  Mark your calendar for December 2016 to take note of how much you’ve paid in tax so far, compared to what you expect to earn before year-end.  If you’ll report more income than you expected when you calculated taxes earlier in the year, you can make a larger estimated payment by January 2016.
  1. Could I find the information I needed to file easily? If you spent considerable time sorting through paper receipts, email and online banking statements to prepare your tax return, change the game for the 2016 tax year. OneReceipt is a free service that compiles all the receipts housed in your email (you can sync multiple accounts). It also allows you to snap photos of hard copy documents so all your records are in one place. If you want to be hands off about record-keeping, Shoeboxed allows you to stuff your receipts and expense-related paperwork into an prepaid envelope, mail it, and outsource categorizing and documenting the files you need for next year’s taxes, for a small fee.
  1. Did I spend too much time on data entry? Though TurboTax and H&R Block make the process of filing tax deductions far simpler than going it alone and less expensive than handing off your tax return to an account, it still requires data entry. Tax Act has simplified the process further. Its TaxAct Express app allows you to file taxes from your smartphone, and automatically inputs data information from tax forms like a W-2 once you snap an image of the document and upload it to the secure app.