Donating a car or vehicle to charity can be a great way for taxpayers to get a large deduction on their income tax returns. Prior to January 2005, the IRS allowed taxpayers to take a tax deduction based solely on their vehicle's market value. Determining the market value of a donated vehicle was often quite difficult and time-consuming, which made determination of the amount of the tax deduction confusing.

Fortunately, as a result of the tax law that went into effect in January 2005, the IRS has taken the guesswork out of determining the value of your donated car, truck, RV, boat or other vehicle. Generally, if the charity sells your vehicle, your deduction is limited to the gross proceeds the charity receives from its sale.

Determining Fair Market Value

If the charity intends to make significant intervening use of the vehicle, a material improvement to the vehicle, or intends to give or sell the vehicle to a needy individual at a price significantly below fair market value, you will need to determine your vehicle's fair market value as of the date of the contribution.

Fair market value is the price a willing buyer would pay and a willing seller would accept for the vehicle when neither party is compelled to buy or sell nor has reasonable knowledge of the relevant facts.

If you use a vehicle pricing guide to determine fair market value, be sure that the sales price listed is for a vehicle that is

• The same make, model and year,
• Sold in the same condition, and
• With the same or substantially similar options or accessories as your vehicle.

Moreover, the fair market value of a vehicle cannot exceed the price listed for a private-party sale.

Steps to Take Before Donating

State charity officials recommend that the donor take responsibility for transfer of title to ensure termination of liability for the vehicle. In most states, this involves filing a form with the state motor vehicle department which states that the vehicle has been donated. A taxpayer donating a vehicle in Colorado need only complete a vehicle title transfer with their local Department of Motor Vehicles.  

If you are considering donating a vehicle to charity and have further questions on the tax deduction you will be receiving, don't hesitate to reach out to us with any questions or concerns.

The federal government supports generosity by allowing you to deduct your charitable donations on your income tax return if you itemize deductions. You must, however, follow the IRS's reporting and substantiation rules to assure your charitable deduction is allowed. While all contributions must be susbstantiated, there are numberous and overlapping requirements.

General Rules

For a contribution of cash, check or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the donee organization showing its name, date and amount of the contribution. Any other type of written record, such as a log of contributions, is insufficient. 

For a contribution of property other than money, you generally must maintain a receipt from the donee organization that shows the organization's name, the date and location of the contribution, and a detailed description (but not the value) of the property. If circumstances make obtaining a receipt impracticable, you must maintain a reliable written record of the contribution. the information required in such a record depends on factors such as the type and value of property contributed.

Contributions over $250

If the contribution is worth $250 or more, stricter substantiation requirements apply. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the donee organization. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won't be able to claim the deduction. If you make separate contributions of less than $250, you won't be subject to the written receipt requirement, even if the sum of the contributions to the same charity totals $250 or more in a year.

The receipt must set forth the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether the donee provided any goods or services in return for the contribution, and, if so, must provide a good faith estimate of the value of the goods or services. If you received only "intangible religious benefits," such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and therefore doesn't reduce the charitable deduction available.

Contributions over $500

If the total charitable deduction you claim for noncash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000 and attach an appraisal summary to the tax return. A qualified appraisal, however, isn't required for publicly traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) non-publicly traded stock for which the claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly traded securities for which market quotations are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more. The IRS may also request that you provide a photograph.

Recent Case Provides a Note of Caution to Taxpayers Related to Documentation of Noncash Charitable Contributions

As we get closer to the end of the 2015 tax year, a review of a 2015 Tax Court Memorandum Decision (TC Memo 2015-71, Kunkel v. Commissioner) provides a reminder that the IRS and the courts take the charitable contribution rules seriously and that good tax documentation is required to support a deduction for noncash charitable contributions. Here's a summary of the take-away lessons from the Kunkel case regarding documentation of noncash charitable contributions:

• Taxpayers must obtain a written acknowledgement from the charity that indicates what was donated, the date of the donation and a statement that no goods or services were provided in return for the donation or a description of what was provided by the charity in return for the donation. The written documentation from the charity must be received by the due date of the tax return or the date of filing, whichever is earliest.
• Taxpayers must maintain the following documentation for items donated (including groups of similar items) that exceed $500 in value: (1) date of acquisition of each item, (2) detailed description of the property and its current condition, (3) estimated cost of each item, (4) estimated current fair market value of each item, and (5) an explanation of how current value was determined.
• For noncash items (including groups of noncash items) that exceed $5,000 and included in the donation, an appraisal by a qualified appraiser must be obtained.

Recordkeeping for Contributions for which You Receive Goods or Services

If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if any of the following are true.

• You received free, unordered items from the charity that cost no more than $10.50 in 2015 in total
• You gave at least $52.50 in 2015 and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity's name or logo and cost no more than $10.50 in 2015 in total
• The benefits that you received are worth no more than 2% of your contribution and no more than $105 in 2015

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash Contribution Made Through Payroll Deductions

You can substantiate a contribution that you make by withholding from your wages with a pay stub, Form W-2, or other document from your employer that shows the amount withheld for payment to the charity.

You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn't provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold in case each individual contribution is less than the $250 threshold.

Substantiating Contributions of Services

Although you can't deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed, when you performed them and the organization for which you performed the services. Keep receipts, canceled checks and other reliable written records relating to the services and expenses.

As discussed earlier, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn't know how much those expenses were. You can, however, satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return and a description and good faith estimate of the value of those goods or services.

Please call us if you have any questions about these rules. Together, we can make sure that you'll get all the deductions to which you are entitled when we prepare your 2015 tax returns.

The IRS has issued its cost-of-living adjustments for 2016. Inflation remains low, so many amounts are the same as last year, and those that did increase did so only modestly. Nonetheless, it’s helpful to know the 2016 amounts as you evaluate which 2015 year-end tax planning strategies to implement.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $50 to $100, depending on filing status, but the top of the 35% bracket increases by $1,050 to $2,100, again depending on filing status.

2016 ordinary income tax brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
10%	$0 –    $9,275	$0 –   $13,250	$0 –   $18,550	$0 –     $9,275
15%	$9,276 –   $37,650	$13,251 –   $50,400	$18,551 –   $75,300	$9,276 –   $37,650
25%	$37,651 –   $91,150	$50,401 – $130,150	$75,301 – $151,900	$37,651 –   $75,950
28%	$91,151 – $190,150	$130,151 – $210,800	$151,901 – $231,450	$75,951 – $115,725
33%	$190,151 – $413,350	$210,801 – $413,350	$231,451 – $413,350	$115,726 – $206,675
35%	$413,351 – $415,050	$413,351 – $441,000	$413,351 – $466,950	$206,676 – $233,475
39.6%	Over $415,050	Over $441,000	Over $466,950	Over $233,475

 

The personal and dependency exemption increases by only $50, to $4,050 for 2016. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2016, the phaseout starting points increase by $700 to $1,400, to AGI of $259,400 (singles), $285,350 (heads of households), $311,300 (joint filers), and $155,650 (separate filers). The exemption phases out completely at $381,900 (singles), $407,850 (heads of households), $433,800 (joint filers), and $216,900 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $311,300 (up from $309,900) for joint filers, $285,350 (up from $284,050) for heads of households, $259,400 (up from $258,250) for singles and $155,650 (up from $154,950) for separate filers.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2016, the threshold for the 28% bracket increased by $900 for all filing statuses except married filing separately, which increased by half that amount.

2016 AMT brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
26%	$0  –  $186,300	$0  –  $186,300	$0  –  $186,300	$0   –  $93,150
28%	Over $186,300	Over $186,300	Over $186,300	Over $93,150

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2016 are $53,900 for singles and heads of households and $83,800 for joint filers, increasing by $300 and $400, respectively, over 2015 amounts. The inflation-adjusted phaseout ranges for 2016 are $119,700–$335,300 (singles and heads of households) and $159,700–$494,900 (joint filers). (Amounts for separate filers are half of those for joint filers.)

Education- and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2016. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2016, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2016: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. For 2016, the MAGI phaseout range for this education credit (maximum $2,000 per tax return) increases only for joint filers, to $111,000–$131,000 (up $1,000). The phaseout range remains at $55,000–$65,000 for other filers.

The adoption credit. The MAGI phaseout ranges for this credit also increase for 2016 — by $910, to $201,920–$241,920 for joint, head-of-household and single filers. The maximum credit increases by $60, to $13,460 for 2016.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Retirement plans

Retirement-plan-related limits remain unchanged for 2016:

Type of limitation	2015 limit	2016 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans	$18,000	$18,000
Annual benefit for defined benefit plans	$210,000	$210,000
Contributions to defined contribution plans	$53,000	$53,000
Contributions to SIMPLEs	$12,500	$12,500
Contributions to IRAs	$5,500	$5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans	$6,000	$6,000
Catch-up contributions to SIMPLEs	$3,000	$3,000
Catch-up contributions to IRAs	$1,000	$1,000
Compensation for benefit purposes for qualified plans and SEPs	$265,000	$265,000
Minimum compensation for SEP coverage	$600	$600
Highly compensated employee threshold	$120,000	$120,000

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Most IRA-related MAGI phaseout range limits remained unchanged in 2016:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:

   

  • For a spouse who participates, the 2016 phaseout range limits remain the same as 2015: $98,000–$118,000.
  • For a spouse who doesn’t participate, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2016 phaseout range limits remain the same as 2015: $61,000–$71,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers, the 2016 phaseout range limits also increase by $1,000, to $117,000–$132,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2016 the amount is $5.45 million (up from $5.43 million for 2015).

The annual gift tax exclusion remains at $14,000 for 2015. It’s adjusted only in $1,000 increments, so it typically increases only every few years. It increased to $14,000 in 2013, so it might go up again for 2017.

New year, the same or similar numbers

With inflation in check this year, many 2016 cost-of-living adjustment amounts are $0, and where there are adjustments, they’re minimal. If you’re unsure how this may affect your year-end tax planning or retirement planning, please contact us. We’d be pleased to help you tweak your plans based on next year’s adjustment amounts.

 

Year-end tax planning this year will be just as complicated as it was last year because of uncertainty surrounding many expired tax breaks for individuals. While Congress mulls legislation to extend (or even make permanent) some expired tax provisions, it’s difficult to predict what will be included in the final bill. Rather than waiting to act until potential legislation is passed, implement these year-end tax planning strategies today because most steps to reduce your 2015 tax bill must be taken before year end.

Take advantage of planning strategies for individuals

Individuals often can reduce their tax bills by deferring income to the next year and accelerating deductible expenses into the current year. To defer income, for example, you might ask your employer to pay your year-end bonus in early 2016 rather than in 2015.

And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2015 contributions to IRAs, and certain other retirement plans, after the end of the year.

Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2015 return even if you don’t pay your bill until next year.

Other year-end tax planning strategies to consider include:

Offsetting capital gains. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some poorly performing investments at a loss.

Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married couples filing jointly). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.

In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the applicable NIIT threshold by deferring income or accelerating certain deductions.

Charitable giving. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains.

Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.

Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, and the above-the-line deduction for qualified tuition and related expenses.

We can help

Although not new, uncertainty over expired tax breaks certainly creates some challenges. We can help you to implement the strategies available today and to be in a position to act quickly when tax legislation is signed into law. Call us today to set up a time to begin your year-end tax planning.

In many parts of the country, autumn means a drop in temperatures and leaves turning color. But no matter where you live, it also means heading back to school. For college students and those who love them, that means tuition payments and other fees. The good news is that there are a variety of ways to handle these expenses in a tax-savvy manner.

Consider credits

Tax credits reduce tax liability dollar-for-dollar, so let’s start here.

American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC), which was extended through December 2017 by the American Taxpayer Relief Act of 2012, can be worth up to $2,500 per eligible student. However, it is only available for the first four years of post-secondary education and applies to qualified expenses such as tuition and fees, course-related books, supplies, and qualified equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income (MAGI) falls below $80,000 for singles or $160,000 for married couples filing jointly.

Lifetime Learning Credit
Another tax break to look into is the Lifetime Learning Credit. It can be applied to any and all years of higher education, though it can’t be used concurrently with the American Opportunity credit. In 2015, a taxpayer may be able to claim a Lifetime Learning Credit for up to $2,000 for qualified expenses paid for a student enrolled in an eligible educational institution. The same $80,000/$160,000 MAGI limit applies.

Deduce your deductions

• Tuition and fees: Tax deductions are also available for some college-related expenses. For example, eligible taxpayers can currently write off up to $4,000 in tuition and fees. Generally, this deduction can only be claimed by those who make qualified higher education expenses for an eligible student below the $80,000/$160,000 MAGI limit mentioned above.
• Student loan interest: Taxpayers with MAGI of less than $75,000 as single filers or $155,000 as married joint filers may be able to deduct interest paid on a student loan used for higher education during the coming year. The student loan deduction can reduce the amount of income subject to tax by up to $2,500 — even for those who don’t itemize.

Bear in mind that you can’t claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity credit or the Lifetime Learning credit. Taxpayers must take the credit or the deduction based on which is more beneficial.

What expenses qualify

Qualified expenses for the two credit options or tuition deduction are amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution. For the AOTC only, you may also claim the cost of books, supplies, and equipment as qualified expenses. For the student loan interest deduction, the loan is allowed to cover all of the above as well as room and board and other necessary expenses like transportation. Be careful though; room and board is only allowed for the student loan interest deduction.

Get specific

The tax breaks mentioned here may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Ask your tax advisor about what best fits your specific situation.

Have you thought about how you are going to save for your children’s education? There are many available options, but the most well known college savings program is the 529 savings plan. This type of plan has been around since 1996 and is very popular for two main reasons: 

1. Contributions to 529 savings plans don’t have restrictions on them such as adjusted gross income limitations. Plus they are controlled by the custodian of the account to ensure the funds are used by the beneficiary for educational purposes. A custodian of the account can be a parent, aunt or uncle, or even a generous grandparent, but ultimately does not have to be related to the beneficiary. Custodians are also allowed to establish as many accounts as they want.
2. Any income earned within the account is tax free as long as it is used for educational purposes like tuition, room and board, fees, books, supplies, and equipment (including computers if needed for enrollment or attendance at a qualified institution).

The income tax benefit to this type of plan (besides tax-free earnings) is the potential to reduce your taxable income on your state tax return by subtracting the amount of your contribution. For instance, with the Colorado income tax rate at 4.63%, a contribution of $25,000 could save you almost $1,200 in Colorado taxes!  

Things to remember when using a 529 savings plan as a Colorado state tax savings tool:

• There is no limit to the amount you can contribute to an account, but Colorado may restrict how much of your contributions you can deduct on your state taxes.
• The money can be contributed to and withdrawn immediately from an account while still reducing your Colorado taxable income. For example, let’s say parents of a college student need to make a tuition payment in January. If they deposit the money in December, they can trigger the deduction then withdraw the funds right away after the first of the year.
• Colorado requires 529 plans be administered by CollegeInvest for the deduction to be allowed. Contributions to other various state 529 saving programs will not qualify for the Colorado Tuition Program Contribution Subtraction.

Please contact us if you would like to know more or to discuss how a 529 savings plan could benefit both you and your student.

With open enrollment for employer benefits coming up, now is the perfect time to consider opening a Health Savings Account (HSA). An HSA is a great opportunity for eligible individuals to lower their out-of-pocket health care expenses and federal tax bill. But before you sign-up, there are a few things you should know about this option.

Am I eligible to open an HSA?

There are a few requirements for obtaining the benefits of an HSA:

• HSAs are available to individuals who carry health insurance with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. And it’s okay if the insurance plan doesn’t impose any deductible for preventive care, such as annual checkups.
• HSAs are not available to individuals who receive Medicare benefits or are claimed as a dependent on another person’s tax return.

Where can I open an HSA?

An HSA can generally be set up at a bank, an insurance company, or other institution the IRS deems suitable as long as it’s established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses

How much can I contribute to an HSA?

Eligible individuals under age 55 can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. Individuals age 55 or older by the end of the tax year for which the HSA contribution is made can contribute up to $1,000 more. The contribution for a particular tax year can be made as late as April 15 of the following year.

Are my employer’s contributions to my HSA also tax exempt?

Employer contributions to an employee’s HSA are exempt from federal income, Social Security, Medicare, and unemployment taxes.

What can I pay for with my HSA?

HSA funds can be used to cover qualified medical expenses for the account beneficiary, their spouse, and dependents not covered by health or dental insurance such as co pays for doctor’s visits, prescriptions, and laboratory fees. However, health insurance premiums don’t qualify. (Click here for more examples).

Can I withdraw my HSA funds for non-qualified expenses?

HSA distributions that are not used for qualified medical expenses are included in your gross income and subjected to an additional 20% penalty tax.

What happens to my HSA funds if I don’t use them all in a year?

If you make contributions to your HSA account and do not need to spend the entire amount contributed during the year on your qualified medical expenses, the balance in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phase-out rules, so HSAs are available to high-earners and low-earners alike.

How can I deduct my HSA contributions on my taxes?

The deduction for your contributions to an HSA can be claimed on Page 1 of your tax return after completing IRS Form 8889, Health Savings Accounts (HSAs). The deduction is claimed in arriving at adjusted gross income; thus, eligible individuals can claim the benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

Costs for medical and dental care continue to rise in the U.S. along with health insurance deductibles, which means greater out-of-pocket expenses for many people. Yet the good news is there is a way to offset these costs by deducting them on your annual tax return. The IRS allows taxpayers to deduct medical and dental expenses on Schedule A of Form 1040 as an itemized deduction, provided they meet certain qualifications.

Qualifications

It is important to note that certain qualifications must be met before a taxpayer can deduct medical and dental expenses.

• First, the taxpayer must be eligible to itemize deductions, meaning that the total itemized deductions must be greater than the standard deduction: $6,300 for single taxpayers and $12,600 for married taxpayers filing a joint return in 2015.
• In addition, expenses must exceed a specific threshold. Taxpayers age 64 and under can only deduct the portion of medical and dental expenses that exceeds 10% of adjusted gross income (AGI). However, if either the taxpayer or their spouse is age 65 or older, the expenses only need to exceed  7.5% of AGI.

What are deductible medical and dental expenses?

Medical and dental expenses include the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the cost for treatments affecting any part or function of the body (IRS Publication 502). This includes payments for services rendered by physicians, surgeons, dentists, and other medical practitioners as well as the cost of equipment, supplies, and diagnostic devices needed for these purposes. In addition, medical and dental expenses include insurance premiums paid for medical and dental insurance.

The following are examples of qualifying medical and dental expenses:

• Ambulance services
• Physical examinations
• Prosthetic limbs
• Dentures
• Medical supplies including bandages
• Chiropractic services
• Contact lenses and eyeglasses
• Dental services provided in a dental office including teeth cleaning, application of sealants, and fluoride treatments, X-rays, fillings, braces, and extractions
• The cost of transportation to receive medical services
• Fertility enhancement procedures
• Hearing aids
• Prescription medication and insulin
• Psychiatric care
• Smoking cessation programs, however, this does not include amounts paid for drugs that do not require a prescription, such as nicotine gum or patches

This is not an all-inclusive list, but it should give you some idea of the type of expenses that are deductible as medical and dental expenses on Schedule A.

Non-deductible expenses

Taxpayers should not take a deduction for any insurance premiums paid by an employer-sponsored health insurance plan unless the premiums are included in your taxable wages on Form W-2. In addition, payments for medication that do not require a prescription are not deductible on Schedule A. The exception to this is for insulin used for the treatment of Diabetes. Any expenses that are reimbursed by your medical or dental insurance should also not be deducted on Schedule A.

The list of expenses that do NOT qualify as medical and dental expenses includes, but is not limited to:

• Controlled substances that are illegal under federal law. This includes marijuana that has been legalized by some states.
• Cosmetic surgery, unless it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease
• Health club dues
• Maternity clothes
• Nutritional supplements

Conclusion

Although thresholds need to be surpassed in order to deduct medical and dental expenses on your tax return, there are many categories of expenses that are overlooked by taxpayers. It may be worth taking some time to review your qualifying expenses. Because if you have enough medical and dental expenses to take a deduction, this will increase your total itemized deductions and lessen your taxable income.

We encourage you to contact one of our tax professionals should you need help determining if you can take a deduction for medical and dental expenses on your tax return.

 

You may already contribute to an organization here in Colorado that helps children. But did you know that your donation may qualify for a sizable tax credit? The Colorado Child Care Contribution Tax Credit is available for Colorado donors who make a contribution to a qualifying child care organization or fund. Such a donation can generate a Colorado tax credit of up to 50% of your total donation. However, please note that in-kind donations (non-cash gifts like school supplies, snacks, etc.) don’t qualify.

What donations qualify?

To qualify for this tax credit, your donation(s) must be made to an organization that promotes the establishment or operation of a licensed child care facility or program. For example:

• Child care centers
• Placement agencies
• Family child care homes
• Foster care homes
• Homeless youth shelters
• Residential child care facilities
• Residential treatment centers

*Registered child care programs that provide services similar to licensed programs may also qualify.

How your child care donation reduces your taxes

Here’s how your child care donation gives back to you, the taxpayer. Let’s say you are in the 25% Federal income tax bracket, itemize your deductions, and make a $5,000 donation to a not-for-profit licensed agency that provides child care to children under 12. When you file your federal taxes, you’ll receive a $5,000 charitable deduction, which will reduce your federal liability by $570 and your Colorado liability by $230. You will then receive a $2,500 credit against your remaining Colorado liability when you file your state taxes. The credit will either reduce your payment or increase your refund. So, although you may have written your donation check for $5,000, your contribution actually cost you only $1,700. (See the chart below.)

Check written to Child Care agency	$5,000
Reduction of Federal Taxes	-$570
Reduction of Colorado Taxes	-$230
Credit against Colorado Taxes	-$2,500
Net cost of Donation	$1,700

Things to remember

• The tax credit is limited to $100,000 per year
• The tax credit is limited to the tax liability of the taxpayer. Any excess credit can be applied against the tax liability in up to five successive years.
• Your donation must be made to licensed child care programs that benefit children age 12 or under. Organizations that serve children under 12 and over 12, unless grandfathered, will allocate your donation between both groups, unless specific donor restrictions are given at the time of the donation.
• The organization you donate to will provide you with a DR1317 Child Care Contribution Tax Credit Certification form for you to attach to your income tax returns for the year you claim the credit.

As you can see, when you give a financial gift to a child care organization, you not only help improve the lives of local families, but also help yourself save by utilizing an effective tax strategy. If you have any questions about the Colorado Child Care Contribution Tax Credit, please do not hesitate to contact us.