 Income tax 2023-2024, medical and dental expenses tax software example. Get ready and some coffee because we're going to stop the tax man in his tracks with income tax preparation. Well maybe not exactly stop them and it's kind of hard to stock the dragon once it's got the head of steam on him. Possibly we could slow him down a little bit. Here we are in our form 1040 example problem using LASERT tax software. You don't need tax software to follow along but if you have access to tax software it's a great tool to run scenarios with. You can also get access to forms, schedules, instructions at the IRS website irs.gov, irs.gov. Starting with our normal starting point taxpayer Adam Taxman just trying to avoid a dang tax man living in Beverly Hills 90210 single file or no dependence. Starting with $100,000 W2 income $13,850 standard deduction $86,150 the taxable income. Marrying that in our income tax formula $100,000 $13,850 the $86,150 tax calculated by the software $14,266 which we can see on page 2 of the form 1040-14266. Let's go back to page 1. We're now focused on our itemized deductions reflected on line 12 which is the greater of standard or itemized deductions. We're starting at the standard deduction and now we're going to think about those itemized deductions which we would only take if they are greater than the standard deduction which means for normal filing statuses it would have to be greater for a single filer than the $13,850 married filing joint double that $27,700 head of household $20,800. So let's go into then our schedule A. This is going to be our itemized deductions. We can see the categories on the left. We're focused first on the medical and dental expenses. So you'll note that the medical and dental expenses have a couple of peculiar things. One is that obviously there are itemized deductions so you have to clear the standard deduction in order to get them which usually means more will-off individuals are more likely to be doing that but you also have this floor of the 7.5% as well which could also be a restrictive factor. So let's jump to a medical and dental expense for example and we'll go back on over here and we have prescription medicines and drugs. So let's say we put, you know, first a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. It's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com Even like 10,000 in here and then we're going to go back on over to our worksheet. There's our 10,000. There was an AGI of 100,000 that pulling in from our form 1040 adjusted gross income. So if I go back on over that means that we have this 7,500 or 0.075 7.5% of the AGI that we have to clear before it even starts giving us a benefit for the itemized deduction. So that cut it down to 2,500 and since I don't really have anything else in here, that is going to be way below the threshold. So you can see the medical expenses in and of themselves are often not the thing that's going to be pushing people over from going from a standard deduction to itemized because if they're high income individuals, they're going to have to clear a high hurdle, a high floor before they even start adding into the itemized deductions. And if we are low income individuals, then it's likely that we're not going to be itemizing because we don't have any other itemized deductions to combine with it. So unless the medical expenses are unusually high for some reason, they're probably not the defining factor that's going to push us over from the standard to the itemized deduction. What is the defining factor? Usually it's owning a home in a fairly large home that has a big loan on it these days, right? So meaning if I owned a home and I had mortgage interest, then the medical expenses would be something that could add to that, right? So I could say if I owned a home, I'd have mortgage interest. Let's say that that was $12,000, let's say, and then I'd also probably have property taxes. And I could say that the principal residence taxes, let's say, was $6,000 again. Let's go back on over to our forms now. So now the home is giving us a significant factor here of the taxes, $7,002 once I include the state taxes, and then the $12,000 of the interest. That, plus the medical expenses now possibly could be beneficial, bringing us over the hurdle now at $21,705 if I go back to the forms. Now we're taking the $21,705 clearing the hurdle for a single filer of the $13,850 even though we have not cleared if they were married, the married filing status. So that's the general idea. Let's mirror that in Excel so we get an idea of the calculation over here and you can kind of double check your work with something like this on an Excel sheet. So if we had medical and dental, so let's say we put the medical and expenses, we have, you know, medical and dental and dot, dot, and let's say we said it came out to $10,000. So what I'm going to do is I'm going to make a little subtotal down here somewhere. Let's make a subtotal and say this is going to be equal to the sum of this data input and then I won't put anything on this side like that. And then we're going to say, okay, and then we have our AGI, the AGI, let's pull that in just so we can see it. It's coming in from our tax formula over here at the 100,000. So I'm going to add a couple rows here, insert, and so we need 7.5% of AGI that's going to be equal to this times 0.075. Boom, maybe I should be taking that and maybe I should be putting this, well, let's keep it there. And so then we're going to say that we need then the difference. So the difference is what we can basically take then, which is going to be, let's do that down here. That's going to be equal to this minus this, the 2,500. All right, let's delete some of these columns. Will that work? Or rows? All right, is that going to work? Now notice that that is working there. If this is greater than, but that only works then if this amount is greater than this amount. See, if I said that this was only, if this was only 2,000, then I get a negative number. I don't want a negative number for my total. So I can use like a logic function in order to do this to put the proper number here. So I can say, okay, this equals, I'm going to say if logic function, I'll do this fairly quick because it's not an Excel course, but if logic function, we're going to take this number minus that number. If that formula is greater than 0, then that's what the comma means. What do you want to do if that is true? Well, if it's true, I want you to take this number minus this number. But if it's not comma, in other words, what do you want us to do if it's false? If it's false, I just want you to put a zero there because I don't want a negative number. And then enter, so there it put a zero there. If I put this back to 10,000, then now it's at the 2,500. So a little fancy formula we can put in there gives us a general recap of what is actually happening so we can see what happens in our worksheet. And then if I go into my mortgage interest, we said that that was, what do we say, 12,000? And then we said that the taxes, we said we're 6,000. And then they had state taxes of 1,205, 1,205. So that gives us a total of 7205 plus 12,000. The total itemized deductions 21705 pulling into our formula. There's the 21705 that is greater than the standard deduction. Therefore, we're tracking the greater of the two now, the 21705 taxable income at the 78295. So we can go back on over here and say, okay, 1040. We've got then the 21705 78295 page two calculating the tax, which is now at 12,528. So we can say our at 12,528, 12,528. Is that what it said? It is indeed. Let's go back to the first page. So that's the general idea with the medical expenses. So then the question that often comes up is how closely should I be tracking medical expenses? And it's like, well, I mean, if you're itemizing, then you might need to track them because it might be something that we can deduct. Although if your income is very high, you're going to have to clear the threshold, in this case 7500, before you're going to be able to take them. If you're nowhere near that threshold, then it might not be worthwhile going out of your way to track all the medical expenses, right? On the other hand, if you're nowhere near itemizing because you don't own a home, then you would have to clear the standard deduction threshold. If your income was low, you'd have to clear the standard deduction threshold of 13850 or 27700, at least with all your itemized deductions before that's going to benefit you at all. And the medical expenses are only going to give you a benefit after they clear the floor. So if you're nowhere near itemizing, unless you have a whole lot of medical expenses, then those would be the questions that would come up, right? If you're nowhere near itemizing, then it's like, well, then you would need an awfully lot of medical expenses, given the fact that you'd have to clear this, and you would have to basically do that considering also that you'd have to clear the floor of the 7.5% of the AGI is the general idea. Okay, and then just a couple of things on what's included in the medical expenses. I won't go into detail on that because we talked about it before, but you can see there's questions about the medical insurance that could be included in here. Now one of the complications with insurance is there double dipping involved with, say, medical insurance. So one case could be that if you're getting a credit for medical insurance because you have a high deductible plan or something like that, then that's one issue where you already might be getting a tax benefit. Possibly that's not going to have an impact as much because that's usually for lower income individuals if they're going to be receiving a credit to pay for part of their medical insurance. The other thing that could come up is you might be paying part of your medical insurance for a self-employed individual rather than an employee. So let's look at the employee first because that's what we have here. So this is an employee. If their medical insurance is being paid through their work, then it might be reflected over here if I go to their W-2 within the W-2, meaning is it a form of compensation that they've received that's already been reduced from the wages? If it's already been pulled out of the wages in box one, that in essence is equivalent to you already getting a deduction, right? Because it'd be like you put it on wages and then you deduct it. The net income is going to be the same. Instead of doing that, they already just pulled it out of box one of the wages. So for example, you might have in box 12 like this double D, which is the cost of employer-sponsored health coverage, for example. And so if it's already been reduced from the wages, then of course you can't also take it on the Schedule A because you already got a benefit, which would be better if it was reduced on your W-2 if you could do that because then you don't have this issue of it being an itemized deduction where you would only get the deduction if it clears 7.5% of the AGI and if you're itemizing as opposed to taking the standard deduction. So that's one case of like the double dipping issue that you need to be aware of. So the question is who's paying the health insurance? How is it being paid? Is it being paid through my work? If it's being paid through my work, then is it something that has already been deducted or accounted for by reporting on the W-2, in which case it's not in box one if it is, then you would think, again, I can't double dip and put it on the Schedule A. Now what if it wasn't there? What if instead of having a W-2, we were self-employed? So let's remove this for now and say let's go and say we have a Schedule C kind of business and we have 120,000 here and then we have advertising of 20,000 and we're going to say, okay, so now I have a Schedule C, net income is flowing into the form 1040 ultimately on the, here it is flowing into the 1040 and then we also have the social, the self-employment tax and so on that we have to deal with. But what about the health insurance in this case? So the question is, are you covered by the health insurance? Well, if they are but it's not through the work, then you might be able to deduct it but possibly not on the Schedule A in that case because it would most likely be more favorable to be able to deduct it as an above the line deduction. So that would be Schedule 1, Page 2 that we talked about before. So you might have the self-employed health insurance deduction. So this would be the better place to put it because you're going to get the above the line deduction here which again isn't, if I say it was 10,000 here or whatever that would be better than having it on the Schedule A because that would then be pulling in if you're able to do that because that would be pulling in to an above the line deduction and included an adjusted gross income as opposed to a below the line deduction or itemized deduction which again would be severely limited by that floor of 7.5% of AGI and the fact that we have to have clearing the itemized deductions before we get a benefit from them. So obviously again, we can't really double dip. I couldn't also put it on the Schedule A because that would be basically reporting it twice. Alright, let's go back to the original one and say, okay, let's say, let's remove it from here and let's remove the Schedule C, say, get rid of that, okay, and then let's go back to our income and say we have our W-2 income and 100,000 to do, to do, to do. Now you also might say, hey, look, I'm paying the Medicare right here and my insurance, remember that like the insurance is somewhat complicated to think about, right? You're paying insurance right now for your general health insurance and then you're also paying into Medicare and Medicare you might think is like a safety net program but more and more it's not. It's basically a program that everybody is going to be basically having the Medicare insurance when they reach the age to be eligible for it. So you might be saying, well, I'm already paying into Medicare but you generally can't deduct the Medicare withholdings for the FICO withholdings which are like your payroll taxes. So that's another thing to basically be aware of. You also have the long-term care which is kind of a separate type of thing as well and that's the kind of care where like if you needed help with just day-to-day functions and whatnot, a whole lot of care then that becomes a different kind of category so sometimes those categories can get a little bit confusing. Now in the prior presentation we went through some big long lists of the types of medical care that might be deductible so I won't go into that in detail. You can take a look at that more in the prior presentation. We're kind of looking more at the logistics this time. So that's the general idea. If I go back on over another question that could come up is who qualifies for the medical care and typically it's going to be the people that are on the tax return because you're one taxable entity basically, right? So yourself, your spouse and your dependents. And we talked a little bit last time about some exceptions with regards to people that aren't dependents that you're paying the medical expenses for and so on and so forth and if you think you fall into those categories you can take a look at those items in more detail. Let's just quick take one more look if we go into a married filing status and keep everything else the same. So we're going to go back on over. Now we've got the 100,000 and but now we're taking the 27,700 which is simply the standard deduction because it was doubled and now it's greater than the itemized deductions even though we have the same information in here, right? We've got the medical expenses. We could still deduct the 2,500 if we're able to take the itemized deductions but we're not clearing the hurdle now even with the home of the 6,000 and the 1,369 of taxes as well as the home mortgage interest because that's only adding up to 21,869. If I mirror that over here which might be easier to see all we're doing is saying hey look that itemized deduction has not changed basically but the standard deduction is now 27,007 because they're married the lesser of the two is I mean sorry the greater of the two is now the standard deduction as opposed to the itemized deduction.