Deducting health care expenses

SC&H Group experts also address Economic Stimulus Payments

By Jim Wilhelm, Stuart Rudo and Greg Horning | Special to Baltimoresun.com

March 3, 2008

Baltimoresun.com's tax-advice column features three experts from the Sparks accounting firm SC&H Group answering questions about preparing your return every Monday until April 15.

Mary Beth, Timonium: We had a health care spending account in 2007. We spent the entire $5,000 balance and had other health expenses beyond the $5,000 cap. If we itemize deductions, what portion if any out of pocket are eligible for deduction?

SC&H Group: The benefit of a health care spending account (HSA) is that any distributions in one year can be used to reimburse expenses incurred in prior years as long as the expenses were incurred after the HSA was established. Those expenses you've incurred in excess of the $5,000 may be applied to your HSA medical expense reimbursements in 2008. Keep in mind that you must show that the distributions were used to pay or reimburse qualified medical expenses, that the qualified medical expenses were not paid or reimbursed from any other source, and that the medical expenses were not taken as an itemized deduction in the year they were incurred.

Another option is to itemize those qualified medical expenses in excess of the HSA. The downside to itemizing is that those expenses are still subject to the 7.5% adjusted gross income (AGI) limitation. If you itemize those expenses, then the above option does not apply. However, the first option provides a dollar for dollar tax-free benefit to the taxpayer.

Lynette, Brainard, Minn.: Does a person have to file taxes if their earned income was only $1,300?

SC&H Group: Generally if an individual's gross income does not exceed the limits set by the IRS, the individual is not required to file. For example, if you are single and your 2007 gross income does not exceed $8,750, you do not need to file a federal income tax return. However, you may consider filing a tax return to receive a refund of those federal (and state) taxes withheld from your earnings. Also if you are eligible for certain refundable tax credits, such as the earned income credit or additional child tax credits, you may want to consider filing your tax return.

For a detailed listing of the different income limits based on filing status please refer to the filing instructions for Form 1040 on the IRS Web site, www.irs.gov.

Paula, Memphis, Tenn.: Will the upcoming tax rebates be taxable??

SC&H Group: The recovery rebate credit, like other refunds, credits or offsets of federal income taxes, is not included in income. Therefore, the rebate is not taxable. When you receive the rebate, you should keep a copy of the IRS letter listing the amount of your payment for when you file your 2008 return next year. For further information on the Economic Stimulus Payments please refer to the IRS website, www.irs.gov, under 1040 Central's latest updates.

Answers to selected questions are published in The Sun's Money & Life section on Sundays and online on Mondays.

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SC&H Group experts also address Economic Stimulus Payments

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Jim Wilhelm, a partner with SC&H Group, leads the income tax department, providing tax compliance and consulting services to private and public companies throughout the region.

Stuart Rudo is a tax partner with SC&H Group, focusing his practice on individual and corporate tax services and cost segregation studies.

Greg Horning is a founding partner of SC&H Group. He provides comprehensive tax, investment advisory and financial planning services to high net-worth individuals.

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