News & Resources

Strange but True: Deduct Expenses That Others Paid

In a 2010 decision that is worth reviewing this tax season, the U.S. Tax Court concluded that a daughter could deduct medical expenses and real-estate taxes on her Form 1040 even though they were covered by gifts from her mother. The gifts were in the form of direct payments by the mother to the medical service providers and local government entities.

The Tax Court’s decision (Judith Lang, TC Memo 2008-286) may surprise you, because you probably think a taxpayer can never deduct expenses that were paid by someone else. Not necessarily true!

Since it is now tax-return time, let’s put this in the context of how it might affect your 2014 Form 1040.

Medical Expenses

For the 2014 tax year, you can generally deduct medical expenses to the extent they exceed 10% of your adjusted gross income (AGI), or 7.5% of AGI if either you or your spouse was age 65 or older as of Dec. 31, 2014. AGI is the number at the bottom of the first page of your Form 1040; it includes all taxable income items and selected deductions such as the ones for alimony paid, self-employed health-insurance premiums and moving expenses.

In this Tax Court case, the Internal Revenue Service argued that the daughter couldn’t deduct the medical expenses because she didn’t pay for them with her own money. The Tax Court disagreed. The facts of the case demonstrated that the mother intended the medical-expense payments to be gifts to her daughter. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the medical expenses by the daughter with the gifted funds. So the daughter was allowed to count $24,559 of medical expenses that were actually paid by the mother plus some expenses the daughter paid with her own funds in calculating her medical-expense deduction. Read more

2014 Tax Provisions for Individuals: A Review

From tax credits and educational expenses to the AMT, many of the tax changes affecting individuals for 2014 were related to the signing of the American Taxpayer Relief Act (ATRA) in 2013–tax provisions that were modified, made permanent, or extended. With that in mind, here’s what individuals and families need to know about tax provisions for 2014.

Personal Exemptions 
The personal and dependent exemption for tax year 2014 is $3,950.

Standard Deductions
The standard deduction for married couples filing a joint return in 2014 is $12,400. For singles and married individuals filing separately, it is $6,200, and for heads of household the deduction is $9,100.

The additional standard deduction for blind people and senior citizens in 2014 is $1,200 for married individuals and $1,550 for singles and heads of household.

Income Tax Rates 
In 2014 the top tax rate of 39.6 percent affects individuals whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return). Marginal tax rates for 2014–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.

Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $73,800 for a married couple filing a joint return. Read more

2014 Tax Provisions for Businesses: A Review

Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax change for 2014.

Standard Mileage Rates 
The standard mileage rates in 2014 are as follows: 56 cents per business mile driven, 23.5 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses 
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $51,000 (adjusted for inflation).

Starting in 2014, the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.

Section 179 Expensing 
In 2014 the maximum Section 179 expense deduction for equipment purchases is $25,000 of the first $200,000 of certain business property placed in service during the year. The bonus depreciation of 50 percent for qualified property that exceeds the threshold amount is no longer available. Read more

What to Do With Your Income Tax Records – Record Retention Guidelines

Are you ready for a major housecleaning but not sure how long you need to keep old income tax records? Before throwing away important income tax records, consider the following general guidelines.

The general rule under federal income tax regulations requires you to keep your records as long as the contents may be material to the administration of the tax law.

The retention periods apply to records needed to substantiate your federal income tax return and are generally based on the federal statute of limitations, which is normally three years. This means the IRS could audit your return up to three years from the due date of the tax return or the date of filing, whichever is later. However, if you substantially underreport income, fail to file a return or file a fraudulent return, the statute of limitations could be much longer.

In addition, the statute of limitations in some states exceeds the federal statute, or the states have laws or regulations that require taxpayers to maintain records beyond the state’s statute of limitations, often to verify carryovers, etc.  The state of California has a 4 year statute.

Tailor your years of retention to the longer of the federal or state requirements. In deciding your own record retention schedule, consider indefinitely keeping those records that cannot be recreated by any other office, institution or governmental unit. Also, keep in mind your own financial concerns that may affect the length of time you keep your records. Most importantly, consult with your attorney for approval of any record retention policy. Read more

2014 Client Organizer

The attached client organizer is designed to help you gather tax information needed to prepare your 2013 personal income tax return.  Click on the link below to access the client organizer.

Blank Organizer