Reducing Taxes for 2010 and Later

Here are some tax tips that can help with your 2010 income tax returns and your planning for 2011 and later.

Those in Medicare Part D prescription drug plans probably know that under the Affordable Health Care Act the coverage gap, or doughnut hole, is being phased out. In 2010, members whose prescription drug costs exceeded $2,830 were in the coverage gap and received $250 to help with the costs incurred in the gap. The IRS says this payment is treated as a reimbursement of medical expenses. It’s not taxable, but it means if you deduct medical expenses on Schedule A of your income tax return, the reimbursement must be subtracted from your other medical expenses just as an insurance reimbursement must be.

Self-employed taxpayers who also belong to Medicare Part B can treat their Part B premiums as health insurance premiums. They can be deducted as “above-the-line” deductions subtracted directly from gross income. In the 2009 income tax instructions, the IRS said the Part B premiums could not be deducted above the line. It hasn’t explained why it changed the rule for 2010.

Here’s a tax break for parents with adult children who live in the parents’ second home. When an adult child lives rent free or at a reduced rent in the parents’ second home and the parents make an improvement that qualifies for the energy-saving tax credit (such as a geothermal heat pump), the parents can take the full credit. The use of the home by a family member either free or at a reduced rent counts as personal use of the home by the parents. If the home is treated as a rental unit, a lower tax credit is allowed.

An adult child can deduct as itemized expenses on Schedule A medical expenses paid for her by her mother. The IRS says this transaction is treated as a gift from the mother followed by payment of the expense by the daughter. The expenses were the daughter’s obligation, so she can deduct them. When the mother makes the payment directly to the medical provider, they qualify for the unlimited gift tax exemption. (Lang, T.C. Memo 2010-286)

RW April 2011