In our very long and complex tax code, tax deductions come in all shapes and sizes, and have a lot of sticky rules attached to them. For example, business expenses must be ordinary (common and accepted in an industry) and necessary (helpful and appropriate for the trade or business) to be deductible. If your clients itemize deductions, they can deduct medical expenses paid for themselves, spouses and dependents to the extent they exceed 7.5% of adjusted gross income. Under the Tax Cuts and Jobs Act, you can no longer deduct miscellaneous employee business expenses subject to the 2% adjusted gross income threshold.
Review the following list of expenses to help your clients stay compliant and minimize their tax liability. Excerpts were taken from Publication 502, Medical and Dental Expenses, and Publication 529, Miscellaneous Deductions. Please refer to these publications for a more complete list of tax deductions.
Deductible Medical Expenses
Alcoholism: Amounts paid for inpatient treatment at a therapeutic center for alcohol addiction, including meals and lodging provided by the center during treatment.
Fertility enhancement: The cost of the following procedures to overcome an inability to have children:
- In vitro fertilization, including temporary storage of eggs or sperm.
- Surgery, including an operation to reverse prior surgery that prevented you from having children.
Guide dogs and service animals: The cost of buying, training and maintaining a guide dog or other service animal to help a person who is visually impaired, hearing disabled or has another physical disability. Expenses include food, grooming and veterinary care to maintain the health of the animal so it can perform its duties.
Non-Deductible Medical Expenses
Weight loss programs: The cost of a weight loss program if the purpose is the improvement of appearance, general health or sense of well-being. However, you can deduct the expenses if the weight loss treatment is for a specific disease diagnosed by a doctor (for example, obesity, hypertension or heart disease).
Nonprescription drugs and medicine (except for insulin): A prescribed drug requires a prescription by a doctor to be deductible.
Health club dues: Includes amounts paid to improve your general health or to relieve your physical or mental discomfort, and is not related to a medical condition.
Cosmetic surgery: Includes procedures directed at improving one’s appearance, but does not meaningfully promote the proper function of the body, or prevent or treat an illness or disease. Examples include face-lifts, hair transplants, hair removal or liposuction. You can deduct cosmetic surgery if it is necessary to improve a deformity arising from a congenital abnormality, personal injury or disfiguring disease.
Deductible Miscellaneous Deductions
Gambling losses to the extent of gambling winnings: Includes wagers plus expenses incurred in connection with the conduct of a gambling activity, such as travel.
Casualty and theft losses on income-producing property: Includes stocks, notes, bonds, gold, silver, vacant lots and works of art.
Federal estate tax on income in respect of a decedent: Gross income the decedent would have received if the death didn’t happen and was not properly included on the decedent’s final tax return.
Fines and penalties: In general, fines and penalties paid to a government or specified non-government entity for the violation of any law are disallowed, except for the following situations:
- Amounts paid for restitution
- Amounts paid to come into compliance with the law
- Taxes due
- Certain court orders where no government agency is a party
Home office: You can take a home office deduction if you use part of your home regularly and exclusively for business purposes.
Club dues: The following organizations are not treated as clubs organized for business, pleasure, recreation or social purpose (unless one of the main purposes is for entertainment):
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations
- Real estate boards
- Trade associations
Losses from Ponzi-type investment schemes: Deductible as theft losses from income-producing property.
Non-Deductible Miscellaneous Deductions
Unreimbursed employee expenses: These are not deductible, unless you fall into one of these categories:
- Armed Forces reservist
- Qualified performing artist
- Fee-basis state or local government official
- Employee with impairment-related work expenses
Campaign expenses: This applies to a candidate for any office, and includes qualification and registration fees and legal fees.
Commuting expenses: The transportation cost going from your home to your main or regular place of work is not deductible. However, there is an exception is for Armed Forces reservists, qualified performing artists, fee-basis government officials and employees with impairment-related work expenses. They can deduct the additional cost of hauling tools, instruments, or other items in their car to and from work.
Fines and penalties:
- Amounts paid to settle your actual or potential liability for a fine or penalty (civil or criminal)
- Parking tickets and tax penalties
- Restitution paid to come into compliance with the law (unless the amounts are specifically identified in the settlement agreement or court order)
- Reimbursement to the government for the cost of an investigation or litigation
- Influence legislation
- Participate or intervene in any political campaign for or against any candidate for public office
- Attempt to influence the general public about elections and legislative affairs
- Communicate directly with executive branch officials to try to influence official actions
Club dues: Includes the membership in any club organized for business, pleasure, recreation or social purpose. Examples include athletic, luncheon, sporting, airline, hotel and country club.
- Political contributions made to a political candidate, campaign committee or newsletter fund.
- Advertisements in convention bulletins and dinners and programs that benefit a political party or candidate.
Enhance Your Trusted Advisor Role
Feel free to share this information with your clients and prospects to help grow your practice and bolster your role as a trusted advisor. Your clients will be delighted for every tax dollar saved!
Editor’s note: This article was originally published in CPA Practice Advisor.