The point of a career is to earn a living, but in my case not only the goal but the everyday details of my professional life are relentlessly focused on money. So as someone who is an accounting and tax professional, I want to devote my December newsletter to remembering ten joys from 2010 that I wouldn’t trade for any amount of the green stuff.

1. Mt. Olympus Volleyball – My fourteen year-old daughter, Emma, has always been tall for her age, but most of her interests—like her dad’s—were artistic in nature. This year, however, she decided she wanted to play a sport suited to her natural assets, and tried out for the Mount Oly volleyball club. Not only did she make the team, she was also given the Most Outstanding Leadership award at the end of the season. Go Mount O!
2. Classical Guitar – Even though I majored in music and played the guitar since the age of 15, I never felt like I possessed the musicianship to play classical guitar. But this year, for reasons I don’t really understand, I gave it a try. I bought a gorgeous Cordoba guitar, and though it took me months to teach myself a single piece, three and four measures at a time, I now have a two-song repertoire and have rediscovered the pure, selfish joy of making music just because I can.
3. College Roommate – Thirty-something years after we were thrown together as total strangers  in our freshman year at Southern Utah State College, I was able to visit the guy who became a dear friend during one of the most influential years of my life when I had a spring business trip to Sacramento. Greg, here’s to you and Juniper Hall Room B-203.
4. Tax Clients – It may not seem like the people who are one of my main sources of income could be considered important without also thinking of money. But I have to say, as corny as it sounds, that many of you have become more than clients to me, and I look forward every year to hearing from you so I can say, “Hey, good to see you again! How’s the family?” Thanks.
5. Elder Sean William Brough – I could list ten great memories just of the experience of being a missionary parent. The dizzying photo taken from the see-through floor of the observation deck of the Sears Tower; the glowing smile on Korina’s face at her baptism; eating at the Mexican restaurant in Kearns owned by the parents of one of Sean’s companions; hearing from a former bishop who ran into Sean on a business trip; and finally the Christmas morning phone call only days ago.  I have completely enjoyed watching from a distance as my son serves in the Illinois Chicago Spanish-speaking mission.
6. Paul McCartney in Concert – Okay, technically this was not something I didn’t have to pay for. In fact, I paid quite a lot for it! And there’s no shortage of irony in the fact that the guy actually wrote a song, called “Can’t Buy Me Love,” about the subject of this article. But if there was ever a memory that will live forever in my heart, it was the thrill of listening to song after gorgeous song by one of my all-time heroes, with my wife on one side of me and my daughter on the other (singing along, I might add). How cool is my life?
7. Franck’s – I love good food, I admit it. God knew what he was doing when he sent me to France to serve a mission. This year, I was able to eat twice at this elegant French restaurant owned by former Jazz player Mark Eaton. One time was in August as I celebrated our 26^th wedding anniversary with my beautiful wife, Elaine. The other was on Christmas Eve, where we were joined by our daughter. Both times it felt like a symphony of flavors had been played on my tongue. And the company wasn’t bad, either!
8. World Cup – Like most Americans of my generation, I grew up having not a clue about the sport the rest of the world calls football. But when Sean became a soccer player at age 6, my gradual education began, and by the time he was 14 I was a fan. It’s fair to say that part of my devotion was in support of my son and the thing he loved. But the fact that I sat through a full month of the highest level of competition the sport has to offer, a soccer-based combination of the OIympics and March Madness, with my son nowhere in sight, should be sufficient testament to the fact that I now get it.
9. Hillcrest Volleyball – This may seem like a repeat of item #1, and certainly they aren’t unrelated. But here’s the twist: When Emma tried out for and made the Hillcrest High School volleyball team as a freshman, it brought back really sweet memories of the four years her brother played soccer at Hillcrest. That was such a great experience I am thrilled to think that we have the same thing ahead of us with Emma. Here’s the other twist: At the end of the season, perhaps because of her on-court enthusiasm, or perhaps because of the fact that she has spent a lifetime tripping over her feet, Emma’s teammates voted her “Concussion Waiting to Happen.”
10. What Child Is This? – It has been a tradition in Elaine’s family that everyone has to perform at the Christmas party. When the kids were little that often involved dressing in costumes and re-enacting the Nativity. For me, for as long as I’ve been there, it has meant playing my solo guitar piece, entitled “Christmas Eve.”  But this year, it also meant accompanying Emma on my new Cordoba guitar while she sang “What Child is This,” as beautifully as I have ever heard it. So much fun, and a memory to last a lifetime.

For some time, one of the best retirement savings options has been the Roth IRA. However, as originally designed, it was off-limits to individuals with annual MAGI (modified adjusted gross income) of $120,000 or greater ($176,000 for married couples). Moreover, singles with MAGI of $100,000 or more, or married couples filing separately, were not even permitted to transfer funds from a traditional to a Roth IRA.

But starting in 2010, the rules restricting such transfers—commonly referred to as a Roth IRA conversion—were permanently eliminated. Higher income taxpayers are still not able to open new Roth IRAs, but since they can now convert a traditional IRA to a Roth, a backdoor way to accomplish the same thing is available to them, as long as they are willing to pay the income taxes due on the early distribution from their traditional IRA.

Why does that penalty have to be there? That’s a good question. The answer is found in the inherent difference between a Roth and the old-fashioned IRA. As originally designed, money a taxpayer uses to fund an ordinary IRA is not taxed, giving them an immediate as well as a long-term incentive to save. Instead, the money is taxed when the savings are withdrawn, whether that withdrawal comes prematurely or at retirement.

On the other hand, a Roth IRA is funded with money that has already been taxed, which then is allowed to not only grow tax free until retirement, but is also not taxed even when withdrawn, as long as the rules regarding minimum holding periods are met.

This can create a terrific wealth-building opportunity, particularly for people who still have a long investment horizon. But to be allowed to invest tax-free in a traditional IRA, and then convert to a Roth IRA where that investment can also grow and eventually be withdrawn tax-free, is an unfair advantage. It would mean that a substantial portion of ordinary income would never be taxed, something that is contrary to the tax code and not in the best interest of the country.

So that is why a withdrawal from a traditional IRA has to be taxed, even if it is only being transferred to a Roth IRA. But, there is more good news for taxpayers in 2010. If they convert their traditional IRA to a Roth, Uncle Sam will give them the option of reporting the full amount of the transfer on their 2010 return, or dividing it between their 2011 and 2012 returns, theoretically making the tax liability more manageable.

You should definitely consult with your investment advisor if you think you might benefit from a Roth IRA conversion. I am not an expert on such matters! But as a tax guy, it is my job to help you file the most advantageous tax return that is legally and ethically possible. You only have until December 31 to act, but I know a good tax deal when I see one!

This year, with most of the tax laws still not set for 2011, it will await the last minute work of a lame-duck Congress to know what those rules will be, which makes it tricky to decide what to do before the end of the year. Nevertheless, with the help of the highly respected Kiplinger Tax Letter, here are some of our best guesses as to what the 2010 tax rules will look like, and how to best take advantage of them before it is too late.

Tax Rates – The most likely scenario is that, with the economy still mired in the effects of the recession, the Bush tax cuts will be renewed for all filers. So, most people will benefit from accelerating their deductions to apply for 2010, and deferring their income so that it applies for 2011, unless they expect to be in a higher tax bracket. In that case, the opposite scenario is best—accelerating income and delaying deductions.

Itemizing mortgage interest – Taxpayers who itemize are in an especially good position to shift deductions as described above. For example, making their January mortgage payment before the end of December enables them to deduct the interest portion on their 2010 return.

Itemizing medical expenses – Another good example is the deduction for medical expenses. If you have incurred enough medical expenses so that you are close to or have exceeded the 7.5%-of-adjusted-gross-income threshold, it would pay to have elective procedures and claim the medical expense deduction this year, rather than putting them off and running the risk of never being able to deduct them at all.

Itemizing  charitable donations – Contributions to charity that may be planned for next year can be claimed this year as long as you make them by December 31. This can be especially beneficial when the donations are in the form of appreciated stock that you’ve owned for more than a year—you deduct the full value but don’t pay tax on the appreciation. However, don’t donate stock that has lost value, because you can’t claim the loss. Instead, sell the stock first, then donate the proceeds. That way the loss shows up on your capital gains.

Switching to a Roth IRA – This is quite technical, but if you are considering switching from a traditional IRA, where the contributions are tax deductible, to a Roth IRA, where they are not, but the interest grows tax free, 2010 is the year to do it. That’s because withdrawals from a traditional IRA are taxable as ordinary income, but a special, one-time rule allows you do defer part of the conversion so that half is taxed in 2011 and the other half in 2012. If you wait until 2011 to convert, the two-year option will be gone.

Those are just a few ideas, not all of which will likely apply to you, but perhaps even just one or two might be of benefit as you look ahead to the coming tax season.

In our June newsletter, I referred to one of those frivolous tax arguments, and hinted that it would make a great topic for a future newsletter. Well, the future is here! So take a minute and read up on some of the most common examples of unsupportable excuses that your fellow Americans cook up for dodging their legitimate tax obligations. Hopefully you will find them as amusing as I do, although a surprising number of people take them very seriously indeed.

Filing a tax return/paying taxes is voluntary – Some taxpayers assert that filing a federal tax return or paying income tax is not required because it says in the instructions for Form 1040 that the U.S. tax system is voluntary. In addition, tax dodgers often quote from a 1960 Supreme Court opinion, Flora v. United States, which states, in part, “[o]ur system of taxation is based upon voluntary assessment and payment, not distraint.”

Actually, the word “voluntary,” as used in Flora and in IRS publications, refers only to our system of allowing taxpayers to initially determine the correct amount of tax and complete the appropriate returns on their own, rather than having the government determine it for them from the outset. In fact, tax is due on almost all sources of income as it is earned, and any taxpayer who has received more than a specified amount of income, which is determined by law and adjusted periodically for inflation, is obligated to file a return.

Failure to do so could subject the non-complying individual to criminal penalties that include fines and imprisonment, as well as civil penalties. In 1986, the court ruled in United States v. Tedder, “Congress gave the Secretary of the Treasury the power to enforce the income tax laws through involuntary collection . . . . The IRS’ efforts to obtain compliance with the tax laws are entirely proper.”

Wages, tips and other compensation received for personal services are not income – This argument takes various forms, all of which require a deliberate and willing suspension of common sense. The gist in every instance is that exchanging labor for money does not constitute gain because people have a basis in their labor equal to the fair market value of the wages they receive, or that income earned in exchange for labor is a wash because the labor is essentially a “deductible expense.”

Another similar theory holds that the Sixteenth Amendment to the U.S. Constitution did not authorize a tax on wages and salaries, but only on gain or profit, presumably from the sale of goods or property.

In reality, for federal income tax purposes, “gross income” means all income from whatever source derived, including compensation for services. It is, after all, an income tax. The definition of income in the tax code is so all-inclusive that the law doesn’t even bother to define it. Instead, it only defines those examples that are specifically exempted or excluded. In other words, for simplicities’ sake, the law defines income based on what it is not, rather than on what it is, because it is essentially everything a person earns.

In Reese v. United States, the court stated, “an abiding principle of federal tax law is that, absent
an enumerated exception, gross income means all income from whatever source derived.” The language of the Sixteenth Amendment is equally clear. It provides that Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to census or enumeration. The Supreme Court upheld the constitutionality of the income tax laws enacted following ratification of the Sixteenth Amendment in Brushaber v. United States in 1916. Since then, all courts have consistently sustained the constitutionality of a federal income tax.

Arguments to the contrary are considered so baseless after all this time that they are now routinely dismissed by the courts without consideration whenever they are raised. Furthermore, criminal and civil penalties have been imposed against individuals who use them.

These are just a few of the feeble claims that some taxpayers continue to raise in defense of the essentially selfish position that they do not need to contribute their fair share to the cost of living in a free and prosperous society.  We will revisit more of them in future newsletters.

While you may find them amusing, as I do, or shake your head in disbelief, I include them here because in these political times a surprising number of people continue to fall for them. I suspect that this is not only due to sheer greed—afterall, who wouldn’t like to pocket thousands of extra dollars every year –but also to a misplaced sense of patriotism that considers the very government our forefathers fought and died to establish as now, somehow, our enemy, rather than our common heritage and a blessing.

Please don’t be one of them. But if you do, be prepared for it to end badly, and remember I told you so.

The consequences for a lack of bookkeeping can be significant. If nothing else, it makes tax time a nightmare, for you and for your tax preparer (ahem!). It can also keep you from qualifying for a loan to expand your business. But more importantly, it means you may be running your business without enough financial information to have a clear idea of what is really going on.

For example, I have a client named Jeff who runs a small side-business in addition to holding down a good job. By day he is in charge of the IT department for a successful firm, but on his own time he markets magic books, DVDs and tricks. He is well-respected in the magic world, but isn’t exactly getting rich off his hobby/business. This year, as I prepared his taxes, I found that Jeff had repeatedly put cash into his business account to keep it going. This is what is called “owner’s investment,” and he was doing it to cover what he thought of as necessary expenses that wouldn’t have been met on the basis of his magic revenues alone.

Except that, when all the income and all the costs and expenses were accounted for, Jeff had made a small profit last year! Not enough to quit his day job, but more than his business had ever made before. If only he’d known he was profitable, he could have avoided constantly reinvesting in his own business, and saved that money in his personal account. But his lack of accurate bookkeeping kept him in the dark.

Jeff’s business is small enough that he really can’t afford to hire me as a bookkeeper. I give him pointers, do his taxes, and until this year he’s always taken a small loss. But because he finally had made a profit he was ignorant of until months later, we talked about a way for him to use a simple spreadsheet to keep track of his own books, and at least know where his business stands at any given time.

So for you, my readers, I have decided it might be helpful if I offer you the same advice. If your side business or hobby is too small to afford a bookkeeper, you can accomplish much the same thing if you remember a simple formula, and take just a little extra time with your receipts instead of shoving them all into a box or a drawer to be sorted out later, when your taxes are due.

Business profitability can be thought of as a simple math equation. Since business taxes are paid on business profits, knowing how to separate costs and expenses from income is the rock bottom foundation of a business tax return, and this is the two-part formula by which we do that:

Gross Income – Costs = Gross Profit

Gross Profit – Expenses = Net Profit

Net profit is what we are looking for. It’s how we know if we are making money. I have talked about this equation before, but this is, in fact, the same equation on which even the most complex business returns are based. A version of this equation is built into every business tax form the IRS uses.

So Jeff’s spreadsheet only needs to track his various income amounts, earned throughout the year, as well as the costs (DVD production, for example) and expenses (internet hosting for his website, or tax preparation fees) he has to pay. If he makes a little effort and keeps it current, it isn’t accounting exactly, but it will give him a running total of his net income or loss for the year.

If he can do it, you can do it. Where there’s a will, there’s a way, and Jeff’s resolve was firmed up this year by the embarrassment of being profitable and not even knowing it. Hopefully, his story will inspire you.

Good luck!

With the month of July, President Obama has placed his signature on a new piece of stimulus legislation, the Homebuyer Assistance and Improvement Act. In this month’s newsletter I want to take the opportunity to briefly explore what it means to all of us.

The key provision of the act extends the deadline for purchasing a new home and qualifying for the first-time homebuyer credit until September 30, 2010, provided the taxpayer entered into a binding contract before May 1 (the previous closing deadline was June 30, 2010). The reason for this extension is that it has been taking longer than usual for buyers to close on their homes, due to delays in the funding of loans on the part of banks and mortgage companies.

This will have the effect of putting hundreds of thousands of dollars into the pockets of countless homebuyers, stimulating the housing, real estate and finance industries and hopefully triggering increased spending of at least some of those dollars in the broader economy. Congress estimates that this benefit will cost some $140 million over the next ten years. However, to prevent this price tag from deepening the federal deficit, Congress also plans to pay for it in three ways.

The first is rather complicated and involves implementation of the Travel Promotion Act, which was designed to use the “power of travel to serve as an economic stimulant, job generator and diplomatic tool” by promoting the United States as a travel destination. The program is funded, in part, by a fee of $10 charged to visitors from certain foreign countries for a special visa waiver. The Homebuyer Assistance and Improvement Act delays by one year the transfer of these fees and the start of a corresponding matching funds program, which is expected to raise $95 million over the next ten years.

The second revenue raiser is much more straightforward. Simply stated, it means that a longstanding IRS rule imposing a penalty for submitting bad checks now also applies to electronic payments. The penalty currently amounts to a two-percent tax on checks or money orders paid to the IRS from taxpayer accounts that have insufficient funds. This provision is expected to generate $48 million over the next ten years.

Third, Congress has put in place a number of provisions to prevent incarcerated taxpayers from fraudulently claiming tax benefits such as the first-time homebuyer credit, the earned income credit, and others to which they are clearly not entitled. This represents a response to a scheme some prisoners took part in that enriched them for falsely claiming the first-time homebuyer credit, at a cost to taxpayers of some $9 million. The new restrictions are not only expected to shut off that illegal pipeline, but prevent similar problems in the future, and streamline certain recordkeeping requirements for state and federal prisons, raising some $6 million over the next ten years.

If you do the math, it should be apparent that this legislation raises a total of $149 million in revenues, not only offsetting the $140 million cost of the Homebuyer Assistance and Improvement Act, but making a dent in the deficit as well. If that’s just election-year appeasement, I’ll take it!

But it is doubtful these same taxpayers give a thought to what would happen to their tax preparer in that case. So, for the record, let me take a moment to explain some of the risks I face when I sign my name to your tax return, if for no other reason than to give you an idea why I sometimes ask such probing questions about your finances.

As a basic rule, the IRS requires that all professional tax preparers exercise what is called “due diligence” in the completion of the tax return. In most instances this just means that I must show the same level of care and competence that other careful, competent professionals show. I don’t have to personally examine all your financial records, but I should at least remind you that you must be able to document any expenses you claim.

However, there are a few areas where due diligence actually requires me to either know certain facts, or make rather pointed inquiries to ascertain them. A good example is the Earned Income Credit. Due to a high level of fraud associated with this tax benefit, the IRS demands that I pose several quite specific questions to qualifying taxpayers. I must actually file a special tax form declaring that I have done so. Failure could result in financial penalties to me, not my clients, and a warning to clean up my act!

Even more serious are the penalties associated with willful or reckless misconduct, such as allowing a client to claim a deduction that I know for a fact he is not eligible for, or worse, helping him lie in order to feign eligibility. You might think I would never go to such an extent, and that you would never ask me to, but telling me that expenses of a certain kind were “about the same as last year” without providing more detail comes dangerously close.

Some tax preparers, of course, are not the least bit ashamed of committing fraud and literally guarantee a refund, regardless of whether their client’s financial condition warrants it. Others actively promote illegal tax shelters or frivolous tax positions (such as the oft-abused claim that there is no such thing as income tax under the Constitution, and therefore the IRS is illegal and taxpayers have no obligation to file a return*).

Since penalties for tax practitioners who fail to meet IRS standards range from $50 to thousands of dollars per return, plus jail time in case of fraud, a careless preparer could easily face financial ruin. Moreover, if the IRS believes that there is a clear pattern of such behavior, unintentionally or not, the Office of Professional Responsibility can even take away a preparer’s right to practice his profession.

That’s a penalty I am not willing to face. So please bear with me when we are working together if I appear to probe and pry into areas that you think are private. In all likelihood, I am simply trying to meet my IRS-mandated duty to exercise due diligence. As you can see, the penalties for filing a less than accurate return are not faced by you alone.

*For the record, it is true that the original Constitution, as drafted and signed by our founding fathers, did not contain a clause providing for the collection of an income tax. However, neither did it contain a clause granting a right to free speech. Both of those were subsequently added by amendment according to a strict process that was allowed for in the original Constitution. So the claim that an income tax is un-Constitutional is, at best, mistaken, but is so commonly claimed by schemers and conspiracy nuts that the courts have finally declared it abusive and won’t even grant a hearing to anyone who uses it as their basis for refusing to pay taxes. A great topic for another time!

Whatever the circumstances, most taxpayers misunderstand how this deduction is claimed, so this month I will summarize the rules that the IRS expects them to comply with in order to benefit from what can be a very lucrative deduction.

Rule #1 is that you have your choice of claiming either your actual automobile expenses, like gas, oil, tires, repairs, insurance, etc. Or, you can claim a standard IRS rate for every business-related mile you drive (50 cents per mile for 2010). But you cannot take both.

Rule #2 is that you have to keep a written record of your mileage in order to claim either version of the deduction. You would be surprised how many people want the credit without making the effort to maintain a mileage record, relying instead on ceiling-tile receipts (so named because they involve staring at the ceiling while saying, “Oh, I guess I drove about…”).

As a result of this frequent abuse of the vehicle expense deduction, the IRS has modified the tax forms to require the preparer to enter the actual amount of total miles driven during the year, and the actual amount of business miles and commuting miles driven, and to calculate the business percentage of those miles. This is then used to arrive at a percentage of vehicle expenses to claim, or the total of deductible miles that can be multiplied by the mileage rate. It also requires the preparer to state that the taxpayer has a written record to prove his claim, whether it is a mileage log or accumulated receipts for actual expenses (and since you are only allowed to take the percentage of actual expenses that corresponds to the percentage of your business miles, you have to keep a mileage log either way).

Please don’t ask your tax preparer to lie for you! If it isn’t worth it to you to actually keep an accurate mileage record, it isn’t worth it to him to be fined up to $5,000 for knowingly filing a false return.

Rule #3 is that only miles driven as part of your job are deductible, whether it is to meet with a client, attend a conference, or pick up office supplies. Miles driven from home to the place you work are considered commuting miles, and are not deductible. Even if your commute is a hundred miles a day, and even if you don’t have a fixed place of business (for example, if your workplace is a construction site and changes from time to time) commuting miles are not deductible.

Keep in mind that there is also a mileage deduction for medical and charitable use of a personal vehicle, or for moving, all with the same recordkeeping requirements. The medical and moving mileage rate for 2010 is 16.5 cents per mile; the charitable mileage rate is 14 cents per mile.

I can tell you from personal experience that the mileage deduction is almost always better than a percentage of your actual expenses, and at up to 50 cents per mile, it can add up to thousands of dollars in a hurry. Well worth the extra time and effort to qualify for it!

This magic property is contained in the rules governing extensions. As the tax season comes to a close, many friends and clients find that they have still not received all of their tax documents, or have waited until too late to give them to me. They are unable to file a completed return by April 15 and wonder what it means when I tell them not to worry, we’ll just file an extension.

The first thing to understand about an extension is that it is not merely a request. Generally speaking, if the IRS receives Form 4868, Application for Automatic Extension of Time to File U.S. Individual Tax Return, by midnight on April 15, the taxpayer is automatically granted an additional six months to file their tax return. That means their return can be filed as late as October 15.

The second thing to understand is that Form 4868 only extends the amount of time granted to file the return. It does not extend the amount of time for paying taxes owed. If a taxpayer knows or suspects that he will owe taxes when the return is completed, he should pay as much of them as he can at the same time he files Form 4868; otherwise, he will be assessed standard late fees and interest for each month thereafter that payment is not received by the IRS.

The lone exception is something the IRS refers to as the “safe harbor” rule, which, in simplified terms, means that if you have paid 100% of the amount of tax you owed last year, even if you wind up owing more this year, there is no penalty.

Form 4868 is a very simple document and is routinely accepted by the IRS at this time of year. There is almost nothing you can do to cause the IRS to reject it. So, for certain taxpayers, it really can have the almost magical effect of “stretching time” for an extra six months, at least as far as filing your tax return is concerned.

Another thing you should know, at least if you are my tax client, is that I try very hard not to put you in a position of needing to file Form 4868 through no fault of your own. I have actually completed returns by April 15, even though I did not receive the tax documents until April 14. As long as a return is pretty simple, I can usually make that work, and so far I have never had to say to someone, “I just didn’t get around to your taxes, so we’ll have to file an extension.”

But there are circumstances where neither I nor the client can control when they receive all of their various tax statements. I have one client who is in a partnership, and every year the report of the partner’s share of profit or loss arrives months after tax season is over. We literally have no choice but to file an extension. Fortunately for him, that option exists, and he always benefits from it.

This year, I had to file extensions for about half a dozen clients. Most of them were due to their own procrastination about getting in touch with me, or because they didn’t provide me with all the necessary tax documents and needed extra time to dig up additional data. What a relief, for them and for me, that IRS rules allow them to stretch tax time for another twenty-six weeks!

The most common way the IRS lets us deal with healthcare costs is through itemizing our medical expenses on Schedule A. That basically means we can claim expenses for three kinds of out-of-pocket expenses: Our cost for health insurance; our actual medical and dental expenses, including required minimums and co-pays; and the cost of our prescriptions, such as pharmaceuticals, eyeglasses and contact lenses.

However, a less well-known provision allows for the cost of travel for medical purposes, up to 24 cents per mile. If treatment involves travel to another town, even the cost of accommodations can be deducted.

As with all tax deductions, there are rules and limits that need to be met. First of all, in order to be deductible, medical expenses must be for the purpose of alleviating or preventing a physical or mental defect or illness. Things that are merely “good for our health,” such as vitamins or gym memberships, are excluded.

Secondly, the intent of the rules permitting a deduction for medical expenses is to protect against the financial burden of catastrophic or chronic illness. Ordinary, year-in and year-out health costs are not what we mean by that.  Therefore, expenses must total more than 7.5% of adjusted gross income to be deductible. That means that if my adjusted gross income is $100,000, only my medical expenses in excess of $7,500 are deductible. So, if I have $8,000 in deductible health care expenses, only $500 can be claimed on Schedule A.

Itemizing deductions on Schedule A is not the only way the IRS has your back when it comes to the cost of health care. For instance, on line 25 of Form 1040 there is also an adjustment for health savings accounts, or HSAs. That means that if I qualify for an HSA, I can save up to $6,150 per year for out-of-pocket healthcare expenses, and deduct up to $11,900 per year in actual outlays.

Finally, there is also an adjustment, this time on line 29, for the cost of health insurance purchased by self-employed individuals, which puts them on even footing with other employers. Large companies can deduct the expense of providing health care insurance for their workers; why can’t the employer whose only worker is himself? In this case, eligible taxpayers can deduct all the costs of health care insurance or long-term care coverage, as long as the deduction doesn’t exceed the total net earnings of the business, minus the deductions for one-half of self-employment tax and contributions to a qualified retirement plan.

With the costs of health care coverage climbing by double-digit percentages every year, it’s nice to know there is something we can do to help alleviate at least some of that expense on our tax return. If you think you qualify for any of these deductions, check with me about it right away.