Medical Expenses as Business Deductions; Mortgage Interest Deduction; Tax Breaks for Students

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, February 20, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question: I am a licensed therapist who needs two hearing aids to do my job. May I take a business deduction for them?

Answer: Yes. In your situation, hearing aids are an ordinary and necessary business expense because they are required to do your business. If you had another line of work in which your ability to hear was not critical to your ability to do your job, it would not qualify as a business expense.

A court ruled that the cost of replacing the teeth of an actor who lost them while acting in a boxing movie was a deductible expense. IRS has ruled that the expense of readers used by a blind person in the practice of his profession was a deductible business expense. Your situation is analogous to the blind professional's condition.

Usually, medical expenses must be taken as an itemized deduction, subject to a floor of 7.5% of your adjusted gross income. For example, if your AGI is $100,000, then you are entitled to deduct medical expenses exceeding $7,500.

Question: The mortgage on my home is $300,000. What forms do I use to deduct the interest payments?

Answer: Interest paid on a first or second residence is deductible only if you itemize your deductions. You report the interest paid on Schedule A, lines 10 or 11 of Form 1040. You may not deduct mortgage interest if you use the standard deduction.

Question: As a senior in college, I've always filed my taxes on Form 1040 EZ. Should I go to a tax preparer to ensure I'm getting all the tax breaks I deserve?

Answer: Probably not. Unless you are eligible for the education credits or are paying interest on your student loans, the Form 1040 EZ will fit your needs. The following tax breaks are available to students or their families and require that you file either the Form 1040 or 1040A:

Hope Scholarship: This tax break provides a maximum tax credit of $1,500, per year, per student for the first two years of post-secondary ("college") education -- $1,000 of the first $1,000 paid, plus an additional $500 (50% of tuition up to $1,000). This credit is allowed for tuition, registration fees and related expenses, but not room or board, at an "eligible educational institution." Families of half-time students also qualify for these credits.

Eligible educational institutions will include most accredited colleges that offer credit towards a degree. Vocational and proprietary institutions may qualify if they satisfy the Department of Education's student aid programs.

Lifetime Learning Credit: This is another tax credit equal to 20% of the first $5,000 of qualified expenses in total (whether incurred in one year or several), may be claimed for "qualified expenses" (including expenses to acquire or improve job skills) at an eligible educational institution. The Lifetime Learning Credit is available only when the Hope Scholarship is not claimed.

For both credits, the qualified educational expenses must be incurred for the taxpayer, spouse or dependents under age 24 and who are claimed as dependents on that parent's tax return. Credits are phased out ratably for adjusted gross incomes (AGI) between $80,000 and $100,000 for joint filers ($40,000 - $50,000 for single filers). These AGI limitations apply even if more than one child qualifies for the credits.

Unlike the Hope Scholarship, the Lifetime Learning Credit may be used for: (1) undergraduate, graduate or professional degrees; (2) an unlimited number of years; (2) any course that helps acquire or improve job skills; and (4) any course load. However, it is determined on a per-taxpayer, not per-student, basis. For example, a parent is entitled to a maximum credit of $1,000, regardless of how many dependents qualify for the Lifetime Learning Credit. In contrast, the Hope Scholarship's $1,500 maximum credit is available for each eligible student.

Student Loan Interest Deduction: A deduction is available for interest paid on student loans, during the first 60 months in which interest payments are required. The maximum annual deduction in 1999 is $1,500. Eligibility for the deduction is phased out for single filers with AGI of $40,000 to $55,000, joint filers of $60,000 to $75,000. The loan must be incurred for the cost of attending an eligible educational institution, including tuition, fees, books, room and board. Institutions conducting internship or residency programs, and hospitals or health care facilities offering post-graduate training are also eligible institutions.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.