Posts Tagged ‘deduction’

B is for Bad Debt (Personal)

We often think of bad debt in the business sense.  However, from time to time we run into a non business or personal bad debt.  Believe it or not, the IRS allows you to deduct this loss… but there’s a catch.  It is treated as a short term capital loss and therefore is subject to the capital loss limitations (you cannot deduct more than $3,000 of net capital losses from income per year).

In order to deduct the loss, you must prove the debt had value at the beginning of the year and no value at the end of the year.  You must make a reasonable attempt to collect the debt and make a demand for repayment in writing.  If the debtor is unable to pay, request a written statement from him stating that he will not be able to meet his obligation and the reason why.

 A statement outlining the following must be attached to the tax return in order to take the personal bad debt.

  1. Description of the debt, amount and date due
  2. Debtor’s name and taxpayer’s relationship to debtor (cannot be a child or similarly related party)
  3. Description of efforts made to collect the debt and,
  4. Explanation of why the debt is now worthless (such as bankruptcy)

As always, seek advice from your tax preparer when writing of a non business bad debt.  If prepared improperly, the IRS likely will not allow the deduction.

Deductible Auto Mileage Expense Increase

The IRS has issued the new mileage rates.  Beginning July 1, 2011, the standard mileage rate for business purpose is 55.5 cents per mile (was 51 cents from January 1 through June 30).  The most common uses of the rate include:

  • Mileage reimbursement to employees using an accountable reimbursement plan (can be less than the federal rates, but never greater)
  • Mileage deducted on schedule C
  • Unreimbursed business miles deducted on Schedule A 

The IRS publishes these rates as a guideline, not a requirement.  Businesses are allowed to use a lower rate if they choose.  However, you cannot use a higher rate.  If a business reimburses its employees using a higher rate, the difference would be taxable to the employee. 

The mileage rates for medical or moving expenses also increased 4.5 cents from 19 cents to 23.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile.

Deducting Charitable Contributions

In order to deduct charitable contributions, the charitable organization must be created or organized in the US (including the states, District of Columbia and possessions of the US) or must be provided by a treaty (side note – have you ever tried to read a treaty?  Not fun!).  Many generous people want to give for causes around the world and there is absolutely nothing wrong with it.  It is commendable!  However, in order for charitable contributions to be tax deductible, you need to give it to a bona fide US charitable organization which can direct the funds to those in need around the world.  Some think that Catholic churches located in other countries would qualify because they are arms of the Roman Catholic Church, a universal organization.  Tax courts have repeatedly rejected this argument. 

 Also beware of giving money to an individual or earmarking a donation for a specific individual.  You cannot give money to your church or other charity to give to a specific family in need. While it is a charitable act, it is not tax deductible.

Which medical expenses are tax deductible?

Everyone in my family was sick this weekend.  Unfortunately I wasn’t able to fight it off.  What a bummer too, my four day weekend was ruined by a cold. 

If you are like me, you avoid the doctor as much as possible and self medicate when possible.  The question is, are these self subscribed medications a tax deduction?  In most cases, the answer is no.  Drugs and medicines that do not require a prescription to purchase are not deductible even if your doctor recommends you take it (like aspirin).  The exception is insulin. 

However, there are some expenses that may surprise you: 

Tax deductible:

  • Acupuncture
  • Air conditioner necessary for relief from allergies or other respiratory ailments
  • Treatment for alcoholism or drug addictions
  • Birth control pills
  • Chiropractor
  • Exercise program or weight loss program (but generally not food) IF doctor recommended as a treatment for a specific condition
  • Fertility enhancement
  • Medical supplies such as bandages, needles, crutches or diagnostic devises
  • Pregnancy test kit
  • Sex therapy at a hospital upon doctor’s advice (I think I’ll leave my comments to myself on this one)
  • Wig for the mental health of a patient with hair loss caused by a disease

Not tax deductible:

  • Cosmetic surgery (some exceptions – congenital abnormality, accident or disease including obesity)
  • Dancing lessons (even if recommended by doctor)
  • Funeral expenses
  • Health club dues
  • Illegal treatments or surgeries
  • Medicines purchased from another country (unless FDA approved to be imported legally)
  • Marijuana (even if legal in your state for medical treatment like California)
  • Maternity clothes
  • Teeth whitening

This is not a complete listing, only some items that are not obvious.  See the IRS Publication 502  Medical and Dental Expenses for further guidance.  There are limitations to taking a deduction for medical expenses.  I’ll leave that for another discussion.


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