Medical and Dental Expenses

If you get to deduct much in the way of medical and dental expenses, odds are that you have one foot in the grave and the other on a banana peel. That’s because only those expenses that exceed 7½% of your adjusted gross income are deductible. So if you’ve got an adjusted gross income of $50,000, you’ll need to spend more than $3,750 on unreimbursed medical expenses before you see your first dollar of deduction.

Now that we know this, what can we do with this information to improve our situation? Well, here’s where timing comes in. Imagine that it’s mid-December. We’re watching football, and during commercials we’re going over what’s happened this year money-wise and what’s coming up next year. Hmmm.... due to an unusual year-end bonus this year, looks like the adjusted gross is going to be around 55 grand instead of the usual 50. That’s got us scrounging for some extra deductions. Can we find some help in the medical expense category? Let’s see. We know that we’re going to need more than 7½% of adjusted gross to get any help. Seven and a half percent of $55,000 is $4,125. Ok, let’s see what we’ve spent. We open our personal finance program and have a look. Our health insurance costs around $250 month, and that’s deductible, so there’s $3,000 right off the bat. In addition, because we don’t have a lot of bells and whistles on our health policy, we’re also out of pocket for co-payments, a couple of prescriptions, contact lenses, teeth cleaning...it adds up to about $700. In addition, mileage to and from doctor and dentist is deductible: we get to write off 13 cents for every medical-related mile driven. Still, unless we’re willing to claim that we drove a thousand miles to see the doctor and fifteen hundred to see the dentist, we’re not going to make it over the $4,125 threshold. Oh well...but wait! Son Billy is going to need braces next year. Wife Betty is thinking of laser surgery for her eyes. What if we prepaid part of Billy’s orthodontic treatments now? What if we give Betty a gift certificate for eye surgery for Christmas? (You romantic devil! By the way, in case you’re wondering, boob jobs aren’t deductible.) When we pile these expenses on top of everything else, we’re going to generate a deduction after all. Never mind that these deductible medical treatments haven’t occurred yet. If we pay for them this year, they’re deductible this year. We’ve harnessed the power of timing to offset part of our unexpected, albeit most welcome, year-end bonus.

Feel strangely compelled to find out more about the deductibility of medical expenses? Then you may have a mental problem. But at least the treatment for it is probably deductible, and while waiting for an appointment with a qualified professional you can indulge your bizarre compulsion free by logging onto irs.gov and downloading Publication 502, “Medical and Dental Expenses.”

Taxes

You don’t get to deduct the federal taxes that have been withheld all year from your paychecks, but you do the money withheld for state income taxes. You also get to deduct real estate taxes you’ve paid. Here again, we have an opportunity to time our payment and therefore reduce our tax liability if we so choose. Because there’s nothing that prevents us from whipping out the checkbook and pre-paying part of our property taxes for next year. Except, perhaps, the balance in our checking account.

Interest

As you probably know, pretty much the only interest you get to deduct is on your mortgage. (About the only other deductible interest is investment interest, meaning interest on margin loans. And it’s kind of like gambling losses: only deductible to the extent you’ve got investment interest income.) But here again, we’re presented with an opportunity to time our deduction. Because we can pay our January payment in December, capturing that extra interest deduction this year instead of next.

Gifts to Charity

Don’t forget money you give to your church. And don’t forget to deduct mileage you incurred while engaging in charitable activity. You can write off 14 cents per mile. (That doesn’t mean, however, you should hit the Goodwill box outside Disney World. The cost of out-of-town travel isn’t normally deductible.)

You don’t get to deduct political contributions, or the value of the time you donate. If you donate stuff instead of money, you get to deduct its fair market value at the time you donated it. And you get to specify its value. (In the middle ages, people believed that it was possible to turn lead into gold. Turns out they were right: happens every December at the Salvation Army!)

Casualty and Theft Losses

This deduction arises when you get burgled, lend money to a friend or otherwise get ripped off. It also applies to your insurance deductible if you have a wreck or otherwise suffer a loss. Too bad your total losses have to exceed 10% of your adjusted gross before you get to deduct them. So you have to be a real loser to get any deduction here. In any case, there’s not much you can do to plan around, or time, this particular deduction.

(Note: Casualty losses are a perfect example of how the government can appear to lower your taxes while actually raising them. It used to be that casualty losses didn’t have a 10%-of-adjusted-gross-income limitation. Likewise, the threshold for medical expenses used to be five percent instead of 7½%. But these are the types of changes that can be made without citizens really noticing. So when it’s time to make headlines, the politicians lower tax rates, then simply go in and fiddle around with deductions like these to keep those lower rates from costing too much.)

Job Expenses and Most Other Miscellaneous Expenses

Here you get to write off money you spent related to your job, along with some other stuff. However, if the total of these things is less than two percent of your adjusted gross income, you’re toast.

Want to try to beat the two-percent threshold? The work-related expenses you’re looking for include things like tools, uniforms, protective equipment, subscriptions to professional journals, dues to professional organizations...anything work-related that your employer doesn’t pay or reimburse you for.

Far and away the most common income tax question I’ve been asked over the years is the following: “I only wear suits to work. That makes them deductible, right?”

Nice try, but no dice. Uniforms, yes. Suits, no. While you may only wear your suits to work, you could theoretically wear them elsewhere. Rule of thumb? If you want to deduct your work clothes, make sure your name is sewn on the outside.

You might also get to deduct some work-related educational expenses, but this is a potential minefield, so be careful. To be deductible, the education you’re getting has to either be required by your employer (or the law) or serve to increase your job skills. But if it qualifies you for another job, or is required to meet the educational requirements of your current job, it’s not deductible. For example, say you’re a teacher with a degree in education, but your employer requires you to take a college course every other year. Fine...your tuition is deductible. But if you end up graduating from medical school as a result, those costs may not be deductible after all. Your employer required you to take courses, but you chose courses that qualified you for an entirely different job. No deduction.

If that sounds complicated, it just shows you’re paying attention, because of course it is.

Despite being a bit on the confusing side, employee-related expenses are an area where you might increase your deductions with timing your cash outlays. Just make sure the purchases meet the requirements. If you’re interested, or are having trouble sleeping, the handbook is called Publication 508, and it’s waiting for you at irs.gov.

Once you’ve educated yourself on educational expenses, in the same box of Schedule A you’ll find miscellaneous expenses. This category of potential write-offs appears encouraging, but it’s not as flexible as it sounds. You can write off the cost of tax-preparation, including the cost of the software you bought and the cost of filing electronically. You can also write off the cost of your safe-deposit box (whoopee!) as well as a few other expenses too rare to bother mentioning. Besides, your tax-preparation software will find out if you have them anyway.

Other Miscellaneous Expenses

This is where you get to deduct your gambling losses, but only to the extent of winnings you’ve reported. It’s also the place to deduct other common expenses we all wonder about, such as amortizable bond premium on bonds acquired before October 23, 1986.

In other words, this isn’t the mother lode for additional deductions.

Self Employment

As you can see from our cursory glimpse at the itemized deductions found on Schedule A, expenses that easily convert into tax write-offs are as common as nuns in Vegas. So where are all the tax loopholes we read so much about? Well, many are found along the path to self-employment. Actually, “loopholes” is a pretty strong word... “advantages” is probably better terminology.

Businesses get to deduct everything they spend to create a profit: the parts they use to make their products, the machines they buy to assemble them, the wages they pay to their employees and the building that houses it all. So if you want to create loads of tax deductions, be a business. And that doesn’t mean you have to be General Motors. You’re witnessing a business in action right now: I’m in the business of writing this book. That makes my computer a tax deduction, along with the electricity that powers it. So are my desk, my chair, my phone, my paperclips, my files, my Internet access, yada, yada, yada. Everything remotely related to producing the tidal waves of income I’m going to be making with this book is deductible. If I had an office, I could write off the rent, but since I’m working at home, what I could do instead is depreciate a portion of my house.

So owning your own business is a huge generator of tax deductions, with the consequence to the IRS of creating irritatingly low tax bills. Which is why they’re constantly on the lookout for abuse in this area. So while it’s great to generate tax deductions with a home-based business, be sure you ultimately have some income to offset them. In other words, a business that doesn’t make money isn’t a business: it’s a hobby. And hobby expenses aren’t deductible.

Bottom line? If you work at home, whether full-timer or part time, make your business business-like. Keep your accounting as separate as possible. Likewise with your workspace. (My office is used only as my office...it doesn’t double as a den.) If you have only one computer and want to fully deduct its cost, don’t think you’ll convince the IRS that you use it strictly for business. They won’t bite. But when properly governed and fairly reported, self-employment is wonderful in terms of both personal freedom and tax deductions.