Don’t overlook medical and dental expenses on taxes
The new year has just rolled around, making it a perfect time to start tax planning for 2008. Some tax planning strategies to consider include deducting medical and dental expenses and the tax advantages of selling your home.
MEDICAL AND DENTAL EXPENSES
Medical expenses are the costs of diagnosis, cure, treatment, or prevention of disease and illness, including dental expenses.
They include the costs of equipment, supplies, and diagnostic devices and services needed for these purposes.
They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation to reduce stress.
Medical expenses include the premiums you pay for health insurance, as well as the amount you pay for transportation to get medical care.
Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
Other qualifying medical expenses include eyeglasses, hearing aids, and prescription medication.
You also may be able to include the amounts you pay for home improvements if the main purpose is medical care for you, or your spouse.
Qualifying improvements may include constructing entrance ramps, modifying stairways, and adding handrails or grab bars.
The deductible amount of medical and dental expenses is the amount you paid after reducing the amount by payments you received from insurance and other sources.
For example, if a doctor’s visit costs $100, and your insurance covers $85, your co-pay of $15 is the amount that qualifies as a medical expense.
Medical and dental expenses are deducted on Schedule A (itemized deductions) to the extent they exceed 7.5 percent of your adjusted gross income (AGI).
You can include only the medical and dental expenses you paid during the year, regardless of when the services were provided.
Hawaii taxpayers who are blind, deaf, and “totally disabled” are allowed a special personal exemption of $7,000.
Your personal exemptions are not subject to AGI limitations.
SELLING YOUR HOME
In Hawaii’s real estate market, if you owned your property for a long period of time, it has likely appreciated in value significantly and you will incur a gain when you sell it.
The gain is calculated by first taking the selling price, less any selling expenses. The amount you are left with is your amount realized.
Next, you will take your amount realized and subtract your adjusted basis. The final amount is your gain.
The adjusted basis is usually what you paid for the property, plus any improvements or additions you have made to your home.
Many individuals fear selling their home because of the tax implications. However, you can exclude up to $250,000 of gain on the sale of your Hawaii home if during the five-year period ending on the date you sell your home, you have owned and lived in the home as your main residence for at least two years. For married taxpayers filing jointly, the exclusion is $500,000.
In addition, if you have owned your home for more than one year, the gain will be taxed as a long-term capital gain, subject to a preferential 15 percent rate on your Federal return and 7.25 percent on your Hawaii return.
And, don’t forget that Hawaii taxpayers 65 years or older are allowed an additional personal exemption of $1,040. Make the most of the tax benefits available to you in 2008.
Deneen Nakashima is a senior tax manager in the Honolulu office of Grant Thornton LLP. She can be reached at Deneen.Nakashima@gt.com