It’s that time of year to dig through the files and prepare your tax return for 2015. As I prepare tax returns and talk with clients I realize there are some tidbits of the tax code that aren’t obvious that could save you money or problems down the road. I thought I’d share them.
When deducting “medical insurance premiums” the IRS includes dental and qualified long term care. It does not include life insurance, disability, and other types of insurance. And do remember to provide premium payments, along with any “out of pocket” expenses for dentist, doctors, labs, prescriptions, to your tax preparer. You may not be able to use them, but you might be surprised. They have to add up to more than 10% of your Adjusted Gross Income (AGI) or 7.5% of AGI if you were born before 1951.
Did you know you can deduct acupuncture treatments as a “medical expense”? You can also deduct much of your travel expenses for medical treatment, even if that includes a plane trip. You cannot deduct nonprescription drugs, supplements, or health clubs. You can deduct the cost of weight loss programs, if it’s in response to a disease, like diabetes or high blood pressure. The cost of the program is deductible, the cost of food or other items is not.
When you donate to a charity, you should make sure it’s really a 501(c)3. This is the tax code the IRS uses to determine that an organization is a non-profit charity. If it’s not a 501(c)3, you cannot deduct a contribution to the organization. You may still choose to donate, it just doesn’t affect your taxes. Any organization that is political in nature (a candidate or a political party would be included here) would not be a 501(c)3. Churches, schools, and other government organizations are automatically 501(c)3s.
Taxes paid for your car registration may or may not be deductible. In some states, like California, your car registration is based on the value of your car, that registration fee is deductible. In some states, like Illinois, the fee is based on the type of vehicle (car, truck, motorcycle, etc.) that is not deductible.
Real Estate Taxes
When you deduct your real estate taxes for itemized deductions, all real estate tax can be deducted. That includes second homes, extra lots that might be associated with your property, and in cities, if you “own” your parking spot, the property taxes on those can be deducted too.
Calculating the Cost Basis of Your Home
When calculating the cost basis for your home, vacation home, or rental (easiest if done as you live in your house and not left to when you sell the house), you can add improvements that increase the value of the house to the basis, but you can NOT include repairs. So fixing a leaky faucet doesn’t get added to your basis while repiping your house does. You also cannot add paint, wallpaper, and carpet to your cost basis EXCEPT if you are doing a major remodel or renovation, in which case you can include all the repairs and remodeling as well as actual improvements to the structure. You can find more information about cost basis in another posted article.
When you sell your house, if you meet certain criteria, you are exempt from paying taxes on $250,000 of gain for one person and $500,000 for a couple. You can take this exemption more than once, as long as you meet the criteria each time. You do not need to buy another home to take advantage of this exemption. If you end up selling at a loss, you do not get to realize the loss unless it is a business property. You can also take the loss on a home if it’s sold by an estate after death, even if it was a personal home, not a business property.
Is Your Child Really a Dependent?
You can take a child as a dependent if they live in your house and you pay most of their living expenses. If they move out of the house, and they have income, even as little as $4,000 of gross income (i.e. what they were paid or investment income), you won’t be able to declare them as a dependent. If you pay for more than half of the support of any relative, whether they live with you or not, you may be able to declare them as a dependent. That includes stepchildren, step-nieces & nephews, half-siblings, children-in-laws, parent-in-laws, aunts, uncles, adopted children. But if they have gross income you may not, even if they have no taxable income.
The tax code is vast and complex. Many people think they can deduct things that they can’t and they also miss deductions that can reduce their taxes. If in doubt, you can look at the publications on irs.gov. Publication 17 is often a great place to start and will refer you to other publications that have more details on particular topics. Or ask your tax preparer.
If there’s a tax topic that you’d like me to explore or a question answered, you can contact me at www.southbayfinancialpartners.com.