Tax Deductions

Some tax breaks made permanent

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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By Bankrate

It’s not quite a done deal yet, but it appears that taxpayers soon will have some finality when it comes to popular tax breaks.

The list of tax extenders, the 50-plus tax provisions that technically are renewed, or extended, every year or so could be shorter thanks to the Protecting Americans from Tax Hikes, or PATH, Act of 2015.

This tax bill, announced late Dec. 15, makes permanent a variety of individual and business tax incentives. If passed by the House and Senate and signed by President Obama, PATH will mean the end of periodic worrying about the availability of some popular tax breaks.

The full bill runs 233 pages, but here are some of the individual taxpayer highlights.

Popular tax breaks made permanent

Teachers will get to write off some of their out-of-pocket classroom expenses every year. This is an above-the-line deduction, meaning it’s available directly on 1040 and 1040A forms and doesn’t require the filer to itemize deductions. Even better, the $250 tax break now will be indexed for inflation.

State and local sales taxes will be a fixture on Schedule A as a permanent choice for taxpayers who itemize, along with the deduction for state and local income taxes. You still have to pick just one set of taxes to deduct, but folks with no or low income taxes won’t have to worry about whether they get the option.

Traditional IRA owners age 70 ½ can continue to directly donate up to $100,000 a year from those retirement accounts to their favorite charities. They won’t get a tax deduction, but the money won’t count as taxable income when contributed this way.

Commuters who take mass transit rather than drive also get permanent relief when it comes to employer fringe benefits. The amount covered for rail and bus travel will remain roughly on par with parking benefits paid to workers who drive to the office.

Family benefits now tax code fixtures

Another group of tax breaks created to help families also will now be a permanent part of the Internal Revenue Code. Most of these provisions were set to expire at the end of 2017.

The child tax credit, which previously was made a permanent part of the tax code, gets another boost. A temporary enhancement that allows more parents to claim an additional refundable child tax credit — that’s money back from Uncle Sam even if you don’t owe any taxes — now is permanent, too.

Obama’s signature education tax break, the American opportunity tax credit, also is now in the tax code for good. This tax break, which increased and replaced the Hope credit, provides a $2,500 credit, a portion of it refundable, for costs associated with 4 years of college costs.

The enhanced Earned Income Tax Credit, which provides tax assistance to low- and middle-income workers, stays put, too. The provisions that offer added help for larger families are now permanent.

One-year extension only

A few folks, however, will have to continue to play a waiting game again next year. Some extenders were renewed retroactively for the 2015 tax year, but extended only through 2016.

The above-the-line deduction for qualified college tuition and fees is good for the 2015 and 2016 tax years only. It remains capped at $4,000 for filers who meet the adjusted gross income thresholds.

Homeowners who are able to get their mortgage terms modified or who face foreclosure also get only temporary tax help. The provision that excludes forgiven home loan debt from taxation applies to qualifying deals made in 2016.

Similarly, the option to count private mortgage insurance, or PMI, premiums as tax-deductible loan interest on Schedule A also is available only through the next tax year.

Some opposition remains

While this generally is good news, the bill must be approved by Congress and then signed by the president.

There is some talk from some lawmakers in both parties about voting against PATH because of its nearly $800 billion cost.

I suspect, however, that PATH opponents will make their points about fiscal responsibility during the floor votes, and the overall bill will still clear both chambers.

The timing of the vote is still a bit up in the air. It must be coordinated with a separate funding bill to keep the federal government, including the IRS, operating through September 2016. But votes on both the tax and spending bills are expected soon.

Did your favorite tax break make it permanently into the tax code? Do you agree with PATH choices? Or do you agree that the cost is too steep?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Deducting transgender medical expenses

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

Bruce Jenner has a new life as Caitlyn Jenner. She revealed her new look this week on the cover of Vanity Fair magazine.
taxes-blog-deducting-transgender-medical-expenses

It’s the most followed male-to-female transgender case since Army Pvt. Bradley Manning, who was sentenced in July 2013 to 35 years at Fort Leavenworth for Espionage Act violations in connection with Iraq war material sent to the WikiLeaks website. A month after that conviction, Manning announced she is transgender and would be living as a woman named Chelsea.

Manning’s situation raised another issue. Would the U.S. government pay for Manning’s physical transition from man to woman? The answer, ultimately, was yes. Earlier this year, the U.S. Army finally began paying for federal inmate Manning’s hormone treatments.

Jenner, thanks to the wealth she’s accumulated as an Olympic champion and more recently as a reality television star as part of the Kardashian family, is financially able to cover her gender transition costs, from hormone therapy through the final surgeries.

But the matter of Uncle Sam’s involvement still is relevant, thanks to the Internal Revenue Code and a 2010 U.S. Tax Court decision.

Gender transition medical issues

Gender identity disorder is listed in the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders. Since it is a recognized medical condition, costs for treatment — that is, transitioning from one gender to another — are allowable medical tax deductions.

This was confirmed in 2010, when the IRS lost a Tax Court case in which a taxpayer deducted transgender medical costs. The court ruled that necessary treatment for gender identity disorder qualifies as medical care under the tax code, making the costs related to that care tax deductible.

The IRS followed with its own announcement on the court ruling in late 2011.

No tax judgment, just IRS rules

While such procedures attract a lot of attention, both in support for and opposition to transgender issues, tax law isn’t judgmental. All that matters is that the costs meet tax code requirements.

As noted, the first hurdle is that the treatment be medically necessary. That’s an issue for all patients and their physicians to determine. They also must be prepared to prove any therapeutic need if the IRS questions deductions.

Once that’s done, then the patient must itemize the deductions.

Shifting medical thresholds

But there is another consideration on Schedule A. The write-offs also must meet a threshold.

For younger taxpayers, all itemized medical expenses must exceed 10 percent of the patient/taxpayer’s adjusted gross income in order to be claimed.

Jenner, however, is eligible for a bit of a break. She turned 65 last October. Filers age 65 or older are allowed to deduct qualifying medical expenses that exceed 7.5 percent of their adjusted gross income. That rule is in effect through 2016.

While Jenner is estimated to be worth $100 million, much of that amount likely is from real estate holdings, so she might have annual income low enough to make at least some of the medical costs deductible. A check of a Philadelphia specialist’s price list for male-to-female transgender surgeries came to $140,450. Hollywood doctor costs are likely to be even higher.

Of course, I suspect that Jenner has some type of health insurance that will pay for part of the costs. Only uninsured and other out-of-pocket medical costs can be counted as medical deductions.

For the rest of us, regardless of whether we have literal life-changing medical expenses like Jenner or simply run-of-the-mill medical costs, it’s always worth checking on possible help via the tax code.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Standard Mileage Rates for 2015

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation! 

2015 Mileage Rates & Employer Health Insurance Reimbursements

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. Likewise, standard mileage rates are available for computing the deduction when a vehicle is used for charitable, medical or moving purposes.

The 2015 standard mileage rates for use of a vehicle are 57.5 cents per mile for business miles (up from 56 cents per mile in 2014), 23 cents per mile for medical or moving purposes, and 14 cents per mile for rendering gratuitous services to a charitable organization.

The business standard mileage rate is considerably higher than the charitable and medical/moving rates because it contains a depreciation component. No depreciation is allowed for the charitable or medical/moving use of a vehicle.

In addition to deductions based on the business standard mileage rate, taxpayers may deduct the parking fees and tolls attributable to the business use of an automobile, as well as interest expense relating to the purchase of the automobile and state and local personal property taxes. However, employees using a vehicle to perform services as an employee cannot deduct interest expense related to that vehicle. Also, if the vehicle is operated less than 100% for business purposes, the taxpayer must allocate the business and non-business portion of the allowable taxes and interest deduction.

Employer Reimbursements of Individual Health Insurance Policies

For plan years beginning after 2013, the Affordable Care Act (ACA) institutes so-called market reform provisions that place a whole host of new restrictions on group health plans. The penalty for violating the market reform restrictions is a punitive $100-per-day, per-employee penalty; or $36,500 per employee, per year. With a limited exception, these new market reform provisions significantly restrict an employer’s ability to reimburse employees for premiums paid on individual health insurance policies, referred to as employer payment arrangements.

Employer payment arrangements

Under employer payment arrangements, the employer reimburses employees for premiums they pay on their individual health insurance policies (or the employer sometimes pays the premium on behalf of the employee). As long as the employer (1) makes the reimbursement under a qualified medical reimbursement plan and (2) verifies that the reimbursement was spent only for insurance coverage, the premium reimbursement is excludable from the employee’s taxable income. These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage.

Unfortunately, according to the IRS and Department of Labor (DOL), group health plans can’t be integrated with individual market policies to meet the new market reform provisions. Furthermore, according to the DOL, an employer that reimburses employees for individual policies (on a pretax or after-tax basis) has established a group health plan because the arrangement’s purpose is to provide medical care to its employees. Therefore, reimbursing employees for premiums paid on individual policies violates the market reform provisions, potentially subjecting the employer to a $100 per-day, per-employee ($36,500 per year, per employee) penalty.

Limited exception for one-employee plans. The market reform provisions do not apply to group health plans that have only one participating employee. Therefore, it is still allowable to provide an employer payment arrangement that covers only one employee. Note, however, that nondiscrimination rules require that essentially all full-time employees must participate in the plan

Bottom line. While still technically allowed under the tax code, employer payment arrangements, other than arrangements covering only one employee, are no longer a viable alternative.

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What should you do if you still have an employer payment plan?

First of all, don’t panic. You are not alone. The impact of the market reform provisions to these plans has come as a great surprise to many small business employers, not to mention the tax practitioner community, and we believe there is reasonable cause to keep the penalty from applying for earlier payments. However, it is important to discontinue making payments under the plan and rescind any written documents. Also, any reimbursements made after 2013 should be classified as taxable wages.

Acceptable alternatives

Because of the ACA market reform requirements, employers are basically precluded from subsidizing or reimbursing employees for individual health insurance policies if there is more than one employee participating in the plan. Employers can, however, continue to do any of the following:

· Provide a tax-free fringe benefit by purchasing an ACA-approved employer-sponsored group health plan. Small employers with 50 or fewer employees can provide a group health plan through the Small Business Health Options Plan (SHOP) Marketplace. A cafeteria plan can be set up for pretax funding of the employee portion of the premium.

· Increase the employee’s taxable wages to provide funds that the employee may use to pay for individual insurance policies. However, the employer cannot require that the funds be used to pay for insurance — it must be the employee’s decision to do so (or not). The employer can claim a deduction for the wages paid. The wages are taxable to the employee, but the employee can claim the premiums as an itemized deduction subject to the 10%-of-AGI limit (7.5% if age 65 or older).

If you have any questions, please give us a call.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.