Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
Valentine’s Day is tomorrow. A nice present would be getting that pesky tax return completed — and hopefully a large refund. Hint, hint, hint. But until then, here are some useful Q&As that will come in handy this snowy Tax Preparation Season.
Question: I recently had a heart attack. Can I deduct the diet I now have to follow?
Answer: Here are a few ‘yes’ and ‘no’ deductions:
Yes: A weight-loss program under a physician’s direction to treat obesity or a condition like a heart disease.
No: A weight-loss program for your appearance, or meal replacements, diet foods, and supplements that are substitutes for food that you normally would consume.
Yes: A treatment at a drug or alcohol clinic, as well as a smoking cessation program and prescribed drugs for nicotine withdrawal, vitamins prescribed to treat a specific condition.
No: A vacation or cruise recommended by your doctor to help with your morale.
No: Marriage counseling.
Yes: Medical devices such as dentures, hearing aid, or orthopedic shoes.
No: Household help — even if recommended by your physician.
Yes: A medical conference, including admission and transportation to and from, if the conference concerns the chronic illness of you, your spouse, or a dependent.
No: The cost of meals and lodging at the conference.
Yes: Lamaze classes for the mother.
No: Maternity clothes.
Yes: Teeth cleaning, orthodontia, a wig for the mental health of a patient bald from disease, contact lenses and peripheral materials, Lasik surgery, cosmetic surgery to improve a deformity caused by congenital abnormality, accident of a disfiguring disease.
No: Teeth bleaching and toothpaste, hair transplants, wrinkle removal, general surgery to improve appearance (face lifts, electrolysis, liposuction).
There are a number of other eligible and non-eligible expenses noted in IRS publ. 502.
New for 2013 taxes, your medical expenses now have to exceed 10 percent of your adjusted gross income (AGI) to be eligible for deducting. If you have an option to participate in your company’s flexible spending account, use it.
Question: I work as a waiter and report my tips to my employer. My employer reported all of my tips on my W-2. However, I split my tips with other employees. Where do I deduct that on my tax return?
Answer: Tip-outs (amounts paid to other employees) are not deductible on an individual’s income tax return. Instead, when you reported the tips, you should have deducted the tips you paid to others from your tips. A tipped employee is taxed only on the amount of tips he/she actually keeps. You must maintain records of tip-outs along with his other tip income (cash tips, charged tips, split tips, tip pool, etc.). Since you over-reported your tips to your employer, you need to provide a corrected form to your employer, who then needs to issue you a corrected W-2 form.
Tax-Free Muni Bond
Question: I have New York State tax free municipal bonds. I just moved from New York to New Jersey. Do I have to pay taxes on the bond interest to New Jersey?
Answer: Yes. Only the interest of your resident state will be tax free. As these are New York bonds, and you are now a New Jersey resident, the New York municipal bond interest will be taxable.
Loss On Stock Bankruptcy
Question: I purchased a stock in a company, which has now claimed bankruptcy. Can I deduct my loss on my tax return?
Answer: What loss? Just because a company goes into bankruptcy, doesn’t mean that the stock is worthless. The IRS says that the stock must be totally worthless — there is no liquidation value and there is no hope they will regain any value in the future. There’s no deduction even if the stock is “delisted.”
Remember, the loss has to be claimed in year that it became worthless; but you do have seven years to file an amended return for that loss.
Withdrawal From 529 College Savings Plan
Question: I am withdrawing funds from the 529 college savings plan, and using all the money for college. Will I be taxed?
Answer: Possibly. When a withdrawal is made from a 529 account, the plan will issue a form 1099-Q to the IRS and to you (by February 1). Line 1 of the form shows the total amount withdrawn; line 2 shows the amount of earnings (interest); Line 3 shows the basis (your investment). The amount on Line 3 is never taxable; the amount on Line 2 may be tax free.
The IRS is now looking into the tax-free nature of your withdrawal. Withdrawn earnings used for the beneficiary (student) are tax-free if the expenses exceed the “adjusted qualified education expenses” for the year.
The allowable expenses are the tuition and related fees for an undergraduate or graduate program; room and board if the student is enrolled at least half-time; and books, supplies, computer, and internet access costs.
Deduct from the allowable expenses those covered by a Pell grant, tax-free scholarship, fellowships, tuition discounts, veterans’ educational assistance; employer-provided educational assistance, etc.
And deduct — here’s the kicker — the amount you used to claim the American Opportunity or Lifetime Learning tax credit, and the amount you used to claim the tuition and fee deduction.
QUIP: Income tax is Uncle Sam’s version of “Truth or consequences.”
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.