 Hello, and welcome to this session in which we will discuss itemized deductions that goes on schedule a The first thing we need to know about itemized deduction is they are deduction from a GI not for a GI What does that mean? I know I keep repeating this but it's worth remembering You have your 1040 on your 1040. There is a line called adjusted gross income We have certain deduction that are deducted before a GI We call them for a GI before a GI itemized deduction are deducted after from Adjusted gross income. So that's important and those expenses those deductions By nature. They are personal expenses Simply put they are not trade. They don't belong to your business. They are personal in nature Now personal include if you are an employee or if you have investment But again, if you if you're following my lectures employee and investment deductions are suspended from the year 2015-2018 not 2015-2018 to 2025 so what we are left with is other itemized deduction other than employee and investment deduction and These deductions are subject to individual limit and must be collectively Exceeds the standard deduction so the itemized deduction are only good if you add them all up and we're gonna see what they are all of them When you add them all up all the itemized deductions They have to be greater than the standard deduction now How much is the standard deduction the standard deduction is a number given by the government every year every year They tell you the standard deduction is 28,000 or 32,000 I'm making these numbers up. I'm not specific to any year So, you know because it's gonna change every year. So the only you would use those schedule a Only if they are greater than the standard deduction Otherwise, if you don't have enough of them, you don't use them You would just take the standard deduction, which is you will take a deduction given by the government Otherwise, you would use the standard deduction now. There are less usage of schedule a why two reasons Why people are using less and less schedule a one as I just mentioned there are certain deduction that are suspended And those are employee and investment expenses that are personal in nature between 2018 and 2025 that's one reason the second reason is this When the tax law was changed in 2017 During the president Trump administration what president Trump did he increased the standard deduction He took away that some deductions, but he increased the standard deduction and the purpose was To simplify the process simply put I'm just gonna give you this the standard deduction this way You don't have to worry about adding up all those itemized deductions will which consists of medical and dental expenses specific taxes Interest paid on mortgage and investments Cheerable contribution and other miscellaneous expenses, which are suspended. So we're gonna do we discuss miscellaneous expenses When we talked about deductions for employer and employee what we're gonna do we're gonna in this session We're gonna discuss specifically medical and dental expenses and medical and dental expenses This is a schedule a so you can see the form and Goes in this section right here medical and dental expenses Then we discuss taxes then we discuss interest and we discuss charitable contribution So I'm gonna focus on one topic at a time starting with medical and dental expenses to notice here It's medical and dental so let's go ahead and get started before we proceed any further I have a public announcement about my company farhat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today Medical and dental expenses the first thing you need to do is they need to exceed to be deductible They need to exceed 7.5 percent of adjusted gross income, and if you look at the form itself It says here multiply line 2 by 7.5 percent So they have to exceed your adjusted gross income now why and what does that mean? Well, here's what happened when the government wants to raise your taxes What they would do is this one way to do it is to simply they raise the rate For example, the tax rate is 20% they can make it 24% Another way to do it is to is to start to put those Thresholds basically something is deductible. However, it has to exceed a certain amount So once it has to exceed a certain amount you technically most people would lose the deduction and they lose in the deduction They increase your taxes. So this is what the government do They would take away the deduction without taking it away. It used to be 10% used to be you have to even have It was higher threshold at some point Historically, there was no threshold for medical expenses. Then they started to impose this threshold This is historical lesson So medical expenses are deductible to the extent reenbuy unreimbursed medical expenses unreimbursed means you did not get money for them Exceeds 7.5 percent of adjusted gross income so that the first thing we want to learn about this for example Emily H24 her adjusted gross income is 40,000 her medical expenses are 5,000 how much can she deduct? Well, she can only deduct 2,000. How did we come up with this? Well, her unreimbursed medical expenses are $5,000 then the only thing that's deductible is 7.5% in excess of 40,000 and that's 3,000 So she has she's 2,000 in excess of 7.5 because 5,000 minus 3,000 equal to 2,000 Now let's assume on the other hand Emily was reimbursed the insurance paid her of the 5,000 that she incurred they embarrassed her three It means all what you have left is 2,000 then what would be her deduction? Well 5,000 minus 3,000 what's left is to well now if we take 2,000 and replace the 2,000 here 2,000 minus 3,000 equal to a negative thousand She doesn't get any deduction because the 2,000 is less than 7.5% of her adjusted gross income because once the insurance reimbursed you simply put in the real world This this medical expense this medical expense is seldom taken because again You have to have so much to exceed 7.5 and most people they got insurance or they got their Expenses reimbursed, but this is the formula. This is the formula you will take Your unreimbursed qualify medical expenses you deduct from them for example for Emily. It was 5,000 So can she deduct the 5,000? No She have to she have to reduce it by her adjustments minus 3,000 then minus 7.5 percent of Her AGI and by the time you get the 7.5 percent of her AGI. That's another 3,000 because 40,000 times 7.5 what's left for her is a negative so she cannot deduct the only place where I saw this is Alcohol program where the insurance does not reimburse alcohol recovery alcohol and drug recovery The one that I worked with in the real world. Otherwise that deduction I sell them sell them see or someone had a major operation It was not covered in through insurance. That's another way What are some medical expenses that are deductible now? This is a list and this list those two lists are not exhaustive So you might be saying how would I remember this for the exam? Well, here's some tips for you Remember they are medical and dental medical and dental that's the first thing you want to remember So anything that's medical and dental and it's required by a hospital by a doctor It is deductible test to be required doctor and dentists fees hospital and nursing home expenses Not any type of medication prescription medication. They have to be prescribed health insurance premium Which we'll talk about later long-term care services and premium will talk about later medical equipment and supplies as long as they are Required transportation expense will talk about a little bit more later Those are we need to talk a little bit more about so you will remember them Including smoking cessation program guide dogs and Service animals including their training and care hearing aid and batteries anything that's required eye exam glasses contact lenses Physical therapy and rehab expenses home home modification for medical expenses. We'll talk about those Now what's not deductible? I think it's easier to kind of learn what's not deductible Something over the counter. It means that it's not prescribed by a doctor unless it's a prescribed It's not for example health club and gym membership. It's a great to go to the gym It's healthy, but it's not deductible cosmetic procedures unless it's medically necessary and I will show you an example Non-prescription vitamins or supplement elective surgeries notice here. It's elective elective treatment funeral or burial expenses Non-prescription non-prescription weight loss. Those are not deductible. Obviously illegal medical treatment or drugs. Obviously HSA Health related expenses reimbursed by insurance health related expenses medical expenses paid by a pre contribution Which is an HSA or flexible account? Those are not deductible Let's start to talk about To go little bit and details into what's deductible and what's not starting with cosmetic surgery As I said if it's elective, it's not deductible John 68 paid 15,000 to a plastic surgeon for a facelift procedure the sole purpose is to enhance and hence his appearance Not deductible not medically necessary the 15,000 does not qualify on the other hand Sarah Experience facial disfigurement due to a severe burn incident as a direct consequences of the accident of the incident the cost of Restorative cosmetic surgery undertaken by Sarah. Let's assume 15,000 Would be deductible medical expense How about nursing home when you put someone in a nursing home? Is this deductible or not? Well, if the primary purpose of residing in a nursing home or home for the age is to receive medical care Notice is to receive medical care the expense associated with the care including meals and lodging are deductible for medical expenses So if they put you there and the nurse if you put someone in the nursing home and the reason for that is to medically take care of you Okay, not for the convenience of the family, then it's deductible. However of the primary reason and in such facility as Personal personal means you just you would rather be in a nursing home rather than being home served by the family It's your choice any costs related to medical or nursing can still be deductible However meals and lodging because meals and lodging will be a separate cost is not so the medical care is Deductible if it's up if it's optional meals and lodging. It's not because you can be home and you're not home So for example, Olivia has a chronic Heart issue requiring special specialized medical Treatment and nursing care in January her family made a decision to admit her to a nursing home That could take care of her and necessary health care services throughout the year the total expenses of The nursing home amounted to 90,000 and those nursing costs can amount to a lot Among these expenses 60,000 were attributed to medical and nursing care Which is deductible now due to Olivia's substantial need for medical and nursing care and the primary purpose of her replacement in the Facility the entire 90,000 which is lodging and meals is also deductible because she needed that specialized care She wasn't there because her family doesn't want to take care of her because Or she chose that she was there necessary Now sometimes what you have to do you have to put your dependent child and a and a mental or physical disability school or institution are these tuition Deductible well tuition expenses for a dependent attending a special school for individual with mental or physical disabilities Might be deductible. Okay to qualify the primary reason is it must be specialized Resources for addressing the individual impairment. So whatever they are serviced in this in this child It's a specialized service and it's needed. You cannot you cannot provide the service at your home in such cases both Tuition and cost for meals and lodging can be claimed as a deductible expense What could be an example Christopher's son Ethan attended public school until the seventh grade? however Due to Ethan's difficulties and academic struggle. He underwent an evaluation and was diagnosed with ADHD attention deficit hyperactivity disorder and Based on the psychiatric recommendation Chris made the decision to enroll him in a private school that specialized Specialized notice specialized in providing individual attention to students with learning disabilities such as ADHD Well, the school offer a specialized curriculum developed by a team of educational and psychological professional Well, the expenses of attending the school along the cost of any psychiatric here are medical deductible expenses Something you have to do you have to incur a capital expenditure You have to change something in your home for medical expenses For example, if you have a back pain, you might have you the doctor might recommend a pool While you have to build a pool or if you cannot go upstairs You need an elevator. They would recommend to put an elevator the rule for capital expenditure is as follow if Dedicated by medical necessity. It's deductible, but let's talk a little bit more specific. That's the general rule First of all a doctor a physician must determine the medical necessity. You don't determine it and the usage of that of That facility has to be primarily for the patient So if you build the pool, the reason is not because the family wants to have it because it's needed for a year back The cost must be reasonable. You cannot just build the pool. That's unreasonable, you know, all the Whistles and what's where it's not needed Example of qualifying capital expenditure dust elimination system for example for breathing if you have issues with breathing elevator If you cannot go upstairs then specially designed for wheelchair bound individual, for example, if you have a van and you have to put in it like Wheelchair that's that's going to lift an individual Additional qualified expenses may include swimming pool if there's no access to a neighborhood pool They'll ask you, you know, if you have an access to a neighborhood pool, then you can go there Okay, a non permanent air conditioner such as window unit. Those are deductible as well a little bit more about capital expenditure Both permanent Improvement and their associated operating expenses is eligible for medical expenses So after you put the elevator or that pool any additional maintenance is deductible It's it's deductible in the year incurred. So as you maintain those facilities Those assets that you added they are deductible. You don't take any depreciation on these assets Why because when you install the pool the full amount is taken in that year So so you don't depreciate because you took the whole deduction Okay It's it's not in your benefit to depreciate because you want to take the full amount to exceed the 7.5 percent of adjusted gross income The cost that's deductible the cost is deductible to the extent it exceeds the increase in value of the related property What does that mean would look at an example? So you do is you're gonna appraise your home after the capital improvement and determine this, okay So let's take a look at an example James suffered from a heart disease and his doctor recommended installation of an elevator in his home Great to avoid climbing stairs the cost of installing the elevator amounted to 12,000 So how much can you deduct you will take the cost minus any increase in value because you benefited from this 12,000 You benefit at 5,000 what's left is 7 so your net cost Your net cost is 7 and this is what we meant here by the cost is deductible to the extent it exceeds the increase in fair value, okay Ongoing utilities expense and maintenance costs for the elevator are treated as medical expenses as we mentioned as long as the medical Necessity for the capital expenditure persists. So if James became better then we no longer take those deduction Transportation cost incurred for medical care. So what do we have to do you have to travel? For example, you have to go to New York City or Philadelphia to a bigger city to have medical treatment Deductible expenses are subject to an adjusted gross income floor just like everything else and deductible expenses include fares, taxi, train, plane, charges for ambulance services and out-of-pocket cost for using personal vehicle So transportation expense is deductible or you could use a government Mileage allowance subject to change. I'm not gonna mention it because it's gonna change every year could be like 50 cent per mile or 30 cent per mile, whatever that mile is Also deductible transportation expenses include parking fees if you have to pay for parking fees tolls Costs of accompanying individual like family member or nurses However, the cost of meals during travel for medical purposes is not deductible because you have to eat whether you are home or Traveling physically handicapped individuals. Sometimes what you have to do is you have to make certain expenditure capital expenditure Made to facilitate independent living and productivity for physically handicapped individual and those would qualify as medical expenses For example, you must widen the hallways So this individual they can push themselves and the doorways they can go in and out Install support bars and railings and adjust electrical outlets and fixtures so they can turn the electricity on and off These expenses are Necessary and These expenses are subject only to the adjusted gross income test floor with no increase in the home value considered So remember when we installed the elevator for James We looked at the ink the cost and we subtract the increase in fair value and what we deducted only the 7000 for physically handicapped individual. We don't Reduce the value of the house. We don't reduce the increase in value. We don't have that It's only subject to the 7.5 percent floor How about spouse and independent medical expenses? Well when calculating the medical expenses deduction the taxpayer can include the medical Expenses for their spouse and any dependent now for the dependent and the spouse There's no you don't subject this to a joint return or gross income It doesn't matter what their gross income is and joint return Okay, for example Christopher age 22 is married and enrolled as a full-time student at a university throughout the year Christopher incurred medical expenses that were covered by his mother Olivia now Olivia provided over one half of Christopher's financial support for the year Even if Christopher files a joint return with his wife Olivia is eligible to claim the medical expenses because the joint return is not a factor in that So his mother can claim his medical expenses on her return Okay, so Olivia would combine her own medical expenses wherever she has plus that of Christopher although He's married and he is filing with him. He's filing with his wife. It doesn't matter. She can get the deduction Divorce individual in the case of a divorce individual with children specific rules apply to the non-custodial parent So you you might be the non-custodial and you could still claim medical expenses That you paid for the child. Okay, even though they're not you're dependent of the non-custodial because you're the non-custodial Okay, so an example Alex and Emily and Emily's divorce last year Emily was granted custody of her child Ethan. So Ethan with Emily Throughout the year Alex covers three thousand of the medical expenses of Ethan. He's not the custodial That's fine. Despite Ethan's being Emily's dependent Alex has the ability to combine the three thousand with his medical expenses when calculate the medical expense deduction Lodging while away from home for medical care sometime you have to travel you have to stay in a hotel are these deductible? Well, if the following conditions are met one the lodging is for the primary purpose of medical care and Provided by a licensed physician in a hospital or similar medical facility and Most hospitals now they they have those facilities or they have they have a relationship with others reasonable It has to be reasonable. Okay, it cannot be too much and The travel does not need to involve significant personal pleasure Also, lodging expenses is limited. How much can you deduct is $50 per night per person? But I believe it's very it's very small for hotel costs these days and this deduction applies Not only to patient but also to any accompanying individual who must travel with the patient Now meals expenses are not deductible unless they are directly related to a medical care To the medical care and provided at medical facility So they have to be for example healthy food and they are provided at the medical facility again some hospital They do have those kind of like hotel medical facilities if these meals qualify for a deduction They are not subject to 50% they are 100% deductible those medical meals How about medical insurance premium when you when you have insurance is that deductible? Well, medical insurance being either under a group plan or an individual plan is Included with other medical expenses now sometime after in the US if you work for a company the employer Your company pays all or part of the medical insurance. Okay? Now the amount paid by the employer is not included in your income. So what happened is this? The the company pays for your medical insurance and they don't include it in your income now bear in mind Although they don't include it in your income It's deductible by your company. So your company deduct this as a Expense for a GI that's as far as the company is concerned. It's a business expense having as an employee Now once they pay for it It's not deductible by you so you cannot deduct the medical insurance expense because you are getting the insurance expense basically free Not free you work for it. It's not deductible, but it's not subject to tax You cannot deduct it because you did not pay taxes on that money, but it's deductible by your employer Now the taxpayer is self-employed now what you do is you are the employer and the employee Insurance premium paid for medical coverage including your spouse and dependent or dependents are deductible as a business expense for a GI Okay So if you have your own company and you're using you're paying your own insurance, then that's deductible now Deduction is not allowed if the taxpayer is eligible to participate in an employer-provided plan or the taxpayer spouse for that matter What does that mean? Let's assume I have my own company Can I deduct my medical insurance? I can as long as I don't work for another company that offer medical insurance or my wife Works for another company in offer it if they do then I cannot deduct my medical insurance because you do have other option When can you deduct year of deduction? When can you deduct? Well medical expenses can only be deducted in the year They are paid regardless of the taxpayer accounting method now most taxpayer accounting method use the cash basis anyway So it's when you pay it and you cannot prepay and deduct You know the payment has to be related to a medical expense. Let's take a look at an example at the recommendation of his dentist Marcus seek consultation from dr. Johnson Specializing in restorative dental work dr. Johnson informed Marcus that the necessary restorative restorative work He recommended it to cost 15,000 and require a 40% prepayment notice it requires for all new patients Marcus paid the 6,000 in 20x3 and the remaining balance in 20x4 so notice the payments were since two separate years in this scenario Marcus can claim medical expenses 6,000 for x3 and 9,000 and 9,000 in 2024 Now now what if Marcus paid the full amount in 20x3? It's not deductible Now you are better off paying everything in one year because you want that They want this amount as high as possible so you could exceed the adjusted gross income How about reimbursement when we have reimbursement reimbursement means is when they pay you when they pay you some money back by the insurance? reimbursement for medical expenses received in the same year Simply reduce the medical expense deduction as I told you you have your medical expense deduction Minus the insurance reimbursement in what's left then has to exceed 7.5% as I told you at the beginning okay now Sometime what happened is this you would receive reimbursement you would receive reimbursement in a different year where you had the deduction in one year You would receive the reimbursement in a different year under the tax benefit rule Which we covered in a separate recording if the taxpayer received insurance for medical expenses that were deducted So year one you had a deduction year two You got the money back well if you got the money back and you took the deduction you have to go back and Include not go back include the income in year two to the extent that that deduction benefited you okay However, if you did not itemized in other words in the year of expense were paid you don't include that income So if you don't get a benefit you don't include income. Let's take a look at an example Ethan had an AGI of 45,020 x3. He experienced an unfortunate car accident that resulted in 4,000 in hospital expenses and 1,700 in doctor bills also incurred 600 in medical expenses for his dependent child in 20x4 here he received a reimbursement at 950 from the insurance company. So the medical expenses threshold for the year one or year three is 3,375 which is 7.5% of 45,000 now his medical expenses amounted to 6,600 all together when we deduct the difference the medical expenses minus the 7.5% of AGI he have left 3,250 and this is how much he can deduct now when he receives the 950 from the insurance company he got benefit He'll have to include that in his income because he benefited 3,250 the prior year what should you do now you should go to far hat lectures and look at additional resources MCQs true false that's gonna help you understand this topic better in the next session what I'm gonna do after I cover the Medical expenses. I'm gonna jump to the next session, which is what let's take a look at schedule a I'm gonna go with schedule A we're gonna look at taxes you paid. Good luck study hard and of course stay safe