Medical tax deductions

amother

Sun, Jan 25 2015, 2:38 pm

Any accountants here?

What are the rules for itemizing medical expenses?

I have a combined income of around $50,000, medical expenses of around $14,000, donations of around $10,000.
Married, filing jointly, zero dependants.

1- is it worth it for me to itemize?
2- if I don't have receipts for expenses, can I use copies of cleared checks and copies of credit card statements as proof?
3- are travel expenses to medical appointments included? And if yes, do MTA subway receipts count as proof that my husband and I used public transportation to arrive to all our million appts?
4- what are the chances of me being audited an the IRS not accepting some of our receipts as good enough?

Any advice or answers appreciated!!!

amother

Sun, Jan 25 2015, 4:06 pm

Apologize for being anon.

Standard deduction for 2014 is $12,400 for married filing joint. It is worth itemizing if you have more itemized expenses than the standard deduction. You can only itemize medical expenses once they exceed 10% of your adjusted income. If that is a straight $50,000, everything over $5,000 can be itemized ($9,000 deduction-edited for clarity). You should have a folder showing all your payments and some backup documentation. Checks and credit cards receipts are normally acceptable, but you should get get some receipts. Transportation can also be included, tolls, miles, or public transportation.

You could be flagged for $10,000 of charitable donations with a $50,000 income. That is 20% of income. Be prepared for an audit. That is extraordinarily high. Make sure you have cancelled checks and receipts for any donation $250 or over showing that no goods or services exchanged hands. Get everything on hand and organized before you submit your tax return. You might be limited on how much charitable you can donate this year, but I'm not 100% true because I think there is a 50% limitation. But I have never seen a return like yours. If you have the proof, don't let the possibility of being flagged deter you for deducting what you are legally allowed to deduct. But don't submit your taxes before you have everything ready to fax when you get the letter from the IRS or from your state. I think you will get a letter. Also make sure that you are only deducting for US charitable organizations and not gifts to meshulachim. And cash requires a receipt.

You can also itemize state income taxes you paid, real estate taxes you paid if you are a homeowner, and certain other expenses.

amother

Sun, Jan 25 2015, 4:57 pm

OP here.

Thank you for your detailed response!!

Ok so I understand that I'll be flagged and that's exactly why I want to make sure that what I'm doing is correct.

I typed up an excel list with all donations to confirm and I came up with over $7,000 that can file. All others wont count as they were cash donations.
Yes they are all legitimate. We give more than 10% for maaser...I have receipts for more than half. For the rest I have credit card statements as proof.

Some donations did go to Israeli places but we have a tax ID number and receipts.
Can medical and donation be lumped together? I think I saw this on the IRS site but may be wrong.

Unfortunatly, I've had big medical expenses so I do have receipts. Yet I'm nervous to be under IRS scrutiny regardless.

So is it worth it or should I just pay another $2500 in taxes rather?

amother

Sun, Jan 25 2015, 5:03 pm

Anon because of my profession. I want to clarify/correct one point from the great post above. Only medical expenses that EXCEED 10% of your Adjusted Gross Income (AGI) can be deducted, so if you have an AGI of $50,000 only the medical expenses over $5,000 would be allowed to be deducted. In your example, assuming you have adjusted gross income of $50,000 and $14,000 of medical expenses, you would multiply $50,000 by 0.10 (10 percent) to find that only expenses exceeding $5,000 can be deducted. This leaves you with a medical expense deduction of $9,000 not the full 14.

One other thing I would like to add, if you are indeed audited you will not just need to provide substantiation for the medical expenses and charitable contributions but the IRS will also question how you can afford to live off $26,000. ($50000-14000medical-10000contributions). They will look through your bank statements and question all the deposits, if they are not satisfied with what they find they will interview you extensively on your day to day expenses and in some cases use an indirect method to calculate income. I assume that you are an honest person and if you are reporting your income and expenses 100% accurately than by all means you should definitely take the deductions, on the tiny tiny off chance my assumptions are wrong just be aware of the can of worms that would potentially be opening if you are audited and misrepresenting your income and expenses.

amother

Sun, Jan 25 2015, 5:35 pm

amother wrote:

Anon because of my profession.

Above post is great and I edited mine for clarification. To further answer questions, itemized expenses are all calculated separately and are summed for an allowable itemization. Medical is separate from state taxes which is separate from charitable. Each have a different level of substantiation. The rule of thumb is that any one expense over $75 should have more than a cancelled check or credit card verification. For charitable any one donation $250 or more must be backed up by a receipt from the organization substantiating that no goods or services were received. A cancelled check will substantiate $180, but not $250. You might want to visit Guidestar and make sure the organizations are in good standing since you are at an audit risk. But you are already down to $7000 which isn't nearly the risk as claiming $10,000.

Is this a pattern you plan to keep or a one time year with large donations? It is a technique that people have to double up on donations every other year. If this is a one time thing and you are flagged, you can point out that it is not a pattern. I know people who have successfully demonstrated to the IRS deviation from the normal pattern by leading them to prior and more recent tax returns after a flag.

Also an audit could be full and include looking at how you survive and going through bank statements and looking at deposits and looking if deposits into the account are income. If you are receiving gifts from family or non-income money from outside sources, you might want some documentation that these are gifts. I know sometimes people tithe from gifts and can get flagged because the income doesn't match to the tithe since gifts aren't income. You may also only be asked to substantiate a single line item while everything else is ignored. Make sure that if you have any other income it is included. Not doubting your honesty, but you don't want to forget about a few hundred dollars of random income and create a mess. I believe high charitable is an auto flag and high medical is not.

amother

Sun, Jan 25 2015, 8:42 pm

To the above accountants:
First of all, thank you tremendously for your invaluable free advice!

As honset as I am, I'm still not looking to open a can of worms.

I've swiped my credit card for other people more than once, received reimbursments, deposited cash from tips etc etc. As straight and honest as anyone can try to be, there will always be something that the IRS will get you at.

So I'm thinking of skipping itemizing donations and just focusing on itemizing medical.

So now my question is:
Is $14,000 (not exact) in itemized deductions on a 50k income worth it?
And will this alone also open a can of worms?
I mean, its sad that yes, I did have less than 50k income, 7000+ in dinations and $14000 in medical expenses. Plus annual rent of $15000 and no parental help. One small gift from a relative to help pay my medical expenses.

So do you understand why I'm so desperate for some tax reprieve?

amother

Sun, Jan 25 2015, 8:53 pm

The amount of medical expenses you would be allowed to deduct is $9,000 which is less than the standard deduction for a couple filing a joint return. You would want to just take the standard deduction and not itemize at all unless you have other itemized expenses such as state income taxes...etc.

Please also note that the IRS considers cash tips as taxable income on your return.

TwinsMommy

Sun, Jan 25 2015, 8:59 pm

do you own your home?

if ONLY itemizing medical, then no it's not worth it for you UNLESS you own your home.....because you'll be itemizing less than $12000 with your threshold. you don't get the full $14,000.

if you DO include donations then YES it's worth it for you, whether or not you own your home, based on your numbers.

Kudos for the large donations and BOO for the large medical expenses!

summer0808

Sun, Jan 25 2015, 9:23 pm

I don't want to sound obnoxious or anything but shouldn't you ask a Rav if you should be giving more than Maaser when you have such high medical expenses?

I'm also an accountant and I advise against reporting so much charity. It is a major red flag and if it triggers a full audit you'd have a very hard time proving how you live!

$50,000 less
$7650 FICA
$10,000 charity
$14,000 med
$15,000 rent
Utility?
How did you afford food, clothing?

amother

Sun, Jan 25 2015, 9:40 pm

summer0808 wrote:

I'm also an accountant and I advise against reporting so much charity. It is a major red flag and if it triggers a full audit you'd have a very hard time proving how you live!

The IRS has seen it before. People are giving large donations and they lose their job. People incur a large medical expense or plan to take three kids for braces during the same year and fund it through savings or even credit card debt.

I feel horrible going against another professional's advice when I can't sign my own name. But if you have sound documentation, are claiming all your income, aren't claiming tzedakah payments that don't count, and don't continue this pattern into the indefinite future, I think you will be just fine. Keep your documentation for 7 years which is the look back period if fraud is suspected. You will need the tax savings to put yourself in a different direction.

And can you explain what prompted you to give 20% of your before tax income? I agree 100% with summer0808 that you need to address this issue with a Rav or someone else who can guide you. This is highly unusual. But I have seen people give large amounts because they inherited money and were chiyuv and it was a one time thing.

amother

Sun, Jan 25 2015, 9:59 pm

summer0808 wrote:

You are 100% right except that I used $10000 from my saving for medical expense and the rest I receieved from a relative.

The unexpected medical expense happened in November so...

So basically, I'm better off not itemizing?

This is so pathetic.

Thanks everyone for your responses.

You all helped me tremendously.

STovah

Sun, Jan 25 2015, 10:04 pm

amother wrote:

The IRS has seen it before. People are giving large donations and they loose their job. People incur a large medical expense or plan to take three kids for braces during the same year and fund it through savings or even credit card debt.

I feel horrible going against another professional's advice when I can't sign my own name. But if you have sound documentation, are claiming all your income, aren't claiming tzedakah payments that don't count, and don't continue this pattern into the indefinite future, I think you will be just fine. Keep your documentation for 7 years which is the look back period if fraud is suspected. You will need the tax savings to put yourself in a different direction.

And can you explain what prompted you to give 20% of your before tax income? I agree 100% with summer0808 that you need to address this issue with a Rav or someone else who can guide you. This is highly unusual. But I have seen people give large amounts because they inherited money and were chiyuv and it was a one time thing.

I'm an accountant too and I agree with this. If you have the documentation to support what you are claiming on the return, there should be no problems.

amother

Sun, Jan 25 2015, 10:52 pm

amother wrote:

Itemize. A November medical expense is super easy to document and fax back to the IRS along with proof of a gift to cover what did not come out of savings. And with no children you aren't taking EIC credits or child tax credits which is were a lot of lower income fraud lies. There are many accountants that take too many risks or look the other way and there are those lean towards overly conservative. Women accountants are known for being more conservative.

supty

Sun, Jan 25 2015, 10:55 pm

amother wrote:

If you're able to back it up there's absolutely no reason why you shouldn't itemize. We go through audits with clients all the time- it's nothing to be afraid of as long as everything is in order and you're not doing anything dishonest.