When it comes to filing taxes, getting the best returns is not about skill - it's about what you know. Unfortunately, many taxpayers miss out on deductions and credits simply because they just aren't aware of them. Several of the most overlooked deductions pertain to health and medical expenses and insurance premiums. Are you paying more tax than you need to? Read on for some deductions you may be missing.
Tips for Individual Filers
Disability insurance is probably the most common type of premium that is overlooked as a tax deduction. These premiums are always deductible by self-employed taxpayers as a business expense. However, if you deduct the premium, any benefits paid from the policy will be considered taxable income. By contrast, policy benefits will not be taxable if you do not deduct the premium, and some taxpayers use this arrangement so that they can receive tax-free benefits if they become disabled. (The Disability Insurance Policy: Now In English will show you how to translate this complicated type of policy.)
Health Savings Accounts
Another insurance–related tax perk that people without access to traditional group health coverage should be aware of is health savings accounts. which combine a tax-advantaged savings element with a high-deductible health insurance policy. All HSA contributions, up to the maximum permitted by law, are tax-deductible. even for those who do not itemize, and earnings accumulate tax-free. All proceeds withdrawn from the account are tax-free, provided they are used to pay for qualified medical expenses. (See Health-y Savings Accounts for further explanation of how HSAs work.)
Timing Medical Expenses
Because medical expenses are only deductible if they exceed 7.5% of adjusted gross income. few taxpayers accumulate enough unreimbursed bills in one year to qualify for the deduction. If you have substantial medical bills pending, you can boost your deduction by scheduling other medical procedures or expenses in the same year.
For example, someone with annual adjusted
gross income of $40,000 would be able to deduct any medical expenses not covered by health insurance in excess of $3,000. The deduction might include $17,000 of a $20,000 operation not covered by insurance, plus any other unreimbursed expenses incurred in the same year, such as routine medical checkups, dental procedures, chiropractic treatments and even contact lenses and prescription drugs.
Receipt of Unemployment or Workers' Compensation Insurance Benefits
It is important to discern unemployment benefits from a state unemployment agency from workers' compensation. which is awarded to workers who cannot perform their duties as a result of injury. Unemployment benefits are always taxable, as they are considered a replacement of regular earned income, and should be reported on IRS Form 1040. Workers' compensation is never declarable as income.
Deductions for Businesses and Self-Employed Taxpayers
Self-employed taxpayers and other business entities can deduct business-related insurance premiums of any kind, including health, disability and dental insurance premiums as well as legal and liability coverage. Vehicle insurance can also be deducted, if the taxpayer is elected to report actual expenses and is not taking the standard mileage rate.
Life insurance premiums are deductible as a business-related expense, and the death benefit is generally tax-free for individual policy owners. Although death benefits for business-related beneficiaries are often tax-free as well, there are certain situations in which the death benefit for corporate-owned life insurance can be taxable. However, employers offering group-term life coverage to employees can deduct the first $50,000 of premiums that they pay, and amounts up to this limit are not counted as income to the employees. Life insurance premiums can also often be deducted for most types of non-qualified plans. such as deferred compensation or executive bonuses. Usually, the premiums are considered compensation for key executives under the rules of these plans. However, in some cases the deduction cannot be taken until the employee constructively receives the benefit.
Other Qualifying Plans