 Income Tax 2022-2023 Medical and Dental Expenses Tax Software Example Problem. Let's do some wealth preservation with some tax preparation. Here we are in our example of Form 1040 populated using LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related schedules and forms at the IRS website, irs.gov, starting point as usual. Single filer, Mr. Anderson, no dependence, W2 wages 100,000, 12,950. The standard deduction gets us down to the 87,050 taxable income, which is mirrored over here on our formula in Excel 100,000, 12,950. The taxable income, 87,050. We rely on the software to do the calculation of attacks on page number two, which is the 14774, 15,000 was withheld. We're going to say getting us down to that 226, which is mirrored over here as well. But our major focus is going to be on the first half of the equation getting down to the taxable income. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. As we focus now on the itemized deductions and more specifically on the medical expense category of the itemized deduction. So if I go back to page one, then we're looking here, we're focusing on the line 12 standard deduction or itemized deduction remembering that no matter what component of the itemized deduction we talk about, we can't really think about it without relation to the standard deduction because the itemized deductions need to clear the standard deductions before we're able to take them. On the left hand side, we have those amounts 12,950 for a single filer and a whopping 25,900 for a married filer. So what's the thing that's going to kick us over that? It's not usually medical expenses unless there was a catastrophe or something. It's usually the purchase of a home or a home ownership because that's the thing that's going to have the mortgage interest. That's the thing that's going to have the property taxes. If we're nowhere near the 25,900 or the 12,950, then it might not be worth our time, worth our while to be adding up all the medical expenses because we may not be able to deduct them anyways. And as we saw in the prior presentation when we went over all the categories of possible medical expenses, it can get quite confusing to go through and try to add up all the medical expenses. So it's good to know if you think there's no way to get close to that. Plus there's another hurdle if we go on to the Schedule A here, the itemized deductions. Note that medical expenses are listed first, but that's not the first thing that would come to my mind when I think the Schedule A, the first thing that comes to my mind is the purchase of the home or home ownership and the mortgage interest likely related to it. And then the property taxes likely related to it, possibly pushing us over to the point where we can itemize or be close to it and then think about other things such as the medical and dental. The medical also being limited by that 7.5% of AGI. So I have to clear that floor before it even starts to add to the total itemized deductions and the itemized deductions need to clear the standard deduction before we can take the itemized deductions at all. Alright, so let's jump to an itemized deduction and just insert some items here. We talked a little bit about the categories before, so I'm not going to go into too much detail on the different categories, but I'll look at some common issues I'll try to touch on. But let's just say we had $10,000 as some kind of medical expense deductible item. If I pull it back on over, now we've got the 10,000 included here, but we had 100,000 on our income line. So if I go to my 1040, that's my AGI was at 100,000. So that's a pretty significant amount and 7.5% of it is 7,500. I have to clear the floor 7,500 before any of it, 2,500 being the amount over the floor, 10,000 minus the 7,500 even adds to the itemized deductions. Brilliant deduction! You're a credit to your speech. Which are here, which need to be higher than the standard deduction, which is that $12,950 or the $25,009 before we get anything. So that's a further complication. Now remember that most of the time it's going to be more well off individuals that are taking the itemized deductions because they have more cash flow and likely are purchasing possibly a higher value home or something with a bigger mortgage and property taxes and whatnot. So that usually means that they're more likely to itemize, but as the adjusted gross income goes up, it also means there's a bigger floor on the medical expenses before they get any benefit. From the medical expenses. So that's the other thing to kind of keep in mind. So normally it would be like, okay, they own a home that kicks them over to itemizing and then we tack on the added components of say the medical expenses. So for example, a common scenario might be that they own a home. And so we're going to say we're going to expect to see mortgage interest. So let's add the mortgage interest and let's say that that was, let's say that that was 15. Let's say that that was 14,000, let's say, and then we had the taxes, property taxes. These are the two things we would expect to see if they owned a home principal residents, let's say 4,000. If I pull that over now, we have the 4,000 and the 14. And so then then it makes sense to look at the medical expenses to see if that would clear that 7.5% because anything that clears that 75% floor will now add into something that would be beneficial for the itemized deductions because the total itemized deductions now are clearing the amount on the 1040 for the standard deduction. And therefore we're taking the greater of the itemized or standard deduction. So if I go back on over here, I can mirror that on my schedule a and I could say, okay, they owned a home. So 14,000 mortgage interest. I'm going to say I'm just making numbers up and property taxes 4,000. And that means they're more likely to be able to take the medical expenses. Let's see if we could do a little worksheet on the medical expenses. I'm going to add some info here. I'm going to add a couple rows. I'll do this fairly quickly because it's not an Excel course, but I'm going to insert. And then let's say we had we had medical expenses. Let's let's add a couple lines that we can add different medical expenses. Boom, boom. And then I'm going to add a couple more rows here. Insert a couple more rows. And then I'm going to format those this way right now. So that'll be the total, total medic medical expenses. And so we put here, how much did we put 10,000? And so let's sum it up equals the sum of those. And then we've got the 7.5 floor. Well, let's let's let's put in our AGI. So the AGI I'm going to say is pulling over from the 1040, which in our case is 100,000. So there's the AGI. And then I'm going to say there's a 7.5% floor, which is going to be equal to this times 0.075. And so it has to clear that. And so then we're going to say medical medical and dental expenses on the outer side, which is going to equal equal this minus the floor. So I know I did that fairly quickly. But you could see the idea of 10,000 is going in. And then we're going to pull in our AGI from our formula. And then we're going to say there's a floor of 7.5% of the AGI. So 10,000 minus that floor. That's the deductible portion that should then pull in as part of our itemized deductions. And then we also have the state taxes that I'm going to let the system calculate on the Schedule A, which they're getting to the 1,017. So I'm going to say, okay, 1,017. That adds up to the 2,1517, which ties out 2,1517, pulls on to the first page of the 1040. So there's the 2,1517 bringing the taxable income to 78,483. So pulling that over. And so now it's taking the greater of the itemized or standard 2,1517. And there's the 78,483. 78,483. I won't go to the second page and do the tax calculation because we're mainly focused up here on the medical expenses. Now, of course, if we were saying that they were married, that threshold goes a lot higher. So if we said they were married, if I went back on over and said, of course, that they were married, then the, and I kept everything else the same. Now I'm only, I'm still only taking the standard deduction because that's a quite high threshold. And we haven't cleared that threshold here. So that would be that. And so let's bring it back. Let's bring it back to single then and go to single. We have to keep in mind all the time that standard deduction when we're thinking about these itemized items. Now also note that if you're including stuff in a medical expense, some questions that often come up is if you look at a W2 form, for example, you might say, hey, look, box six Medicare tax withheld sounds like a medical related item. And I paid for it because my employer. My employer attempted to inject it with poison withheld it through the payroll taxes and then paid it directly to the government. Therefore I should get a deduction for the Medicare tax withheld on box six here for the schedule a medical expenses. But you don't typically get to include this in the medical expenses on schedule a the Medicare tax withheld for the payroll taxes. I think in part because the Medicare tax was originally thought of as not actually paying directly into your insurance premiums. But instead as as like a safety net type of program, although as time has passed, it looks more like you are kind of paying directly into your insurance premiums. But you don't typically get to deduct that on the schedule a the other kind of confusing thing would be most of the time or a lot of the time people have their their premiums for insurance tied in with their employer. So you've got to say, I can't deduct my premiums if they've already been accounted for on the W2. In other words, if box one my wages that are are in place with regards to my federal income tax has already been reduced by the payments for the for the for the health plans or health expenses of some kind. Then I can't also take a deduction on the schedule a because they basically have already been reduced before we even record the income on the 1040. And you can look at some of these items because they'll be listed down here oftentimes in box 12B. So we saw this same kind of concept with relation to like putting money into a 401k plan. For example, that's why you might have differences between box one and box five. For example, which are both recording the wages, but you might have some wages up top in box one that are that are reduced by say the 401k plan and possibly like a cafeteria plan or something. So they've already reduced the income, whereas some of that might not be reduced in the Medicare wages on box five. So you want to keep that into consideration as well. If you paid it through your work, was it already accounted for on the W2, then you'd be double dipping if you also deduct deducted it on the schedule a. The other thing to just keep in mind here is that and that's beneficial oftentimes if you can get that benefit on the W2 and get it through your employer because then, of course, if it's reduced from box one, even if you're not itemizing, then you've already reduced kind of your income as opposed to being only getting a benefit if it was itemizing and being subject to that 7.5% limitation. Why limitations? We are addicted to our own limitations before you get a benefit. Also note that we talked about if you're self employed that you might have this self employed health insurance in some cases here that you could possibly deduct if you have a schedule C so proprietorship type of business. So again, if you deducted here, then you can't deduct it on the schedule a. And this would often be more beneficial to deduct it here if you're able to because then you don't have to itemize once again. You don't have that floor of 7.5% of the AGI that you do with relation to the schedule a. So that's mainly it. So if I go back in here on the schedule a with regards to the just to recap it with the medical and dental expenses. It's not usually the first thing that kicks you over to being itemizing. It's usually the ownership of the home with the interest and the taxes related to the ownership of the home unless there's like a big thing that happened. There's also that 7.5% limitation. That's a floor that you have to clear before you even get any benefit from it at all. And then you've got to be careful on the categorization what types of things are included. We went through a bigger list when we saw the prior presentation, but you also want to make sure that you're not double dipping anywhere. In other words, did you get a benefit from it in some other location such it was already decreased from the W2?