The medical expense deduction is one of the most commonly overlooked tax deductions, so in this week’s deduction of the week entry we explain it to all of our readers. In order to claim this deduction you need to itemize your return, meaning you do not take the standard deduction.
7.5% Rule
To qualify for the medical expense deduction your total expenses need to total at least 7.5% of your adjusted gross income. This includes any qualifying expenses that you incurred during the tax year, regardless of when the medical services were provided.
Spouse, Children, and Dependents
In addition to your own medical payments, you can also deduct expenses paid for your spouse, children, and dependents. You can deduct the expenses for a dependent even if you are not able to claim them as an exemption on your current tax return. In order to be eligible, the person must qualify as your dependent at the time you paid for their medical expenses.
Travel Costs
One of the most frequently forgotten parts of calculating medical expense deductions are travel costs. The IRS allows you to deduct all expenses related to traveling to and from medical treatments using the standard mileage rate for the year.
Allowable Expenses
The IRS has a whole list of allowable expenses. To view the list download IRS Publication 502.
Claiming the Deduction
When you prepare your federal income tax return you will want to include your total medical expenses (as long as they exceed 7.5% of your adjusted gross income) on Schedule A of your IRS Form 1040.
The federal government offers a couple of tax incentives to taxpayer who chose to adopt a child. These incentives include a tax credit and partial income exclusion. For our readers who might be thinking about adopting, we have put together the following summary on the federal benefits you might be eligible for:
The Basics
There are two main tax incentives for families that adopt, an exclusion and a credit. Taxpayers can take advantage of the credit and exclusion for the expenses of adopting an eligible child. Meaning, you may be able to exclude up to $12,170 (or whatever the limit is for the tax year) from your income, and claim a credit for the same amount. However, you cannot claim both the credit and exclusion for the same expenses.
Credit Amounts
The value of the credit for the past few years is listed below. It is important to note that the credit was expanded in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, which is due to expire at the end of 2010. Unless Congress extends the package the value of the credit will be reduced by at least 50%.
- 2011: $6,000 or less
- 2010: $12,170
- 2009: $12,150
- 2008: $11,650
- 2007: $11,390
- 2006: $10,960
Income Phase Outs
As with most federal tax credits and deductions, the value of the adoption credit phases out when your income reaches a certain level. The phase out ranges are listed below for the past few tax years. The IRS also provides a worksheet for figuring out your credit value in the Instructions for Form 8839.
- 2010: $182,520 - $222,520
- 2009: $182,180 - $222,180
- 2008: $174,730 - $214,730
- 2007: $170,820 - $210,820
- 2006: $164,410 - $204,410
Eligible Expenses
According to the IRS, for both the credit or the exclusion, qualifying expenses include adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child.
Expenses that are NOT Covered
The credit can be applied to dozens of allowable expenses, but there are certain expenses that do not qualify for the credit. Including any expenses that violate state or federal laws, fees paid to a surrogate, expenses associated with adopting a spouse’s child, and any expenses that you have already been reimbursed for.
Qualifying Children
In order to claim the adoption credit you need to adopt an eligible child, and pay for the expenses out of your own pocket. In order to be considered eligible the child needs to be under the age of 18 at the time of the adoption.
Claiming the Credit
The year you claim the credit is going to depend on when the adoption was finalized. For expenses paid relating to an adoption that has not yet been finalized you will have to wait a year to claim the credit. However, for expenses paid during the year, or the year after the adoption became final you can take the credit in the same year the expenses were paid.
Other Incentives
While you are going through the adoption process, be sure to check around for other financial incentives. Lots of local government agencies have tax breaks for families that adopt, and you should also ask your employer about assistance as many companies offer reimbursement programs for employees that adopt.