Frequently Asked Questions
Here is a list of questions that are commonly asked by clients:
- How Long Do I Keep This?
- Deductible Medical Expenses
- AMT - Alternative Minimum Tax
- Education Plans
- Income Tax Returns & Supporting Documents - Keep at least four years and preferably six.
- Real Estate Property Records - All purchase, sale, and refinancing escrow/closing statements, and receipts and cancelled checks for improvements should be kept for at least 4 years after property is sold.
- Purchase Receipts for Stocks, Bonds, Mutual Funds - These should be kept for at least 4 years after asset is sold.
- Depreciation Records - These should be kept for at least 4 years after asset is sold.
- Personal Records - Estate and gift tax returns, divorce and property settlement papers, trust documents, deeds, insurance policies, and other important documents should be kept permanently, preferably in a safe deposit box.
- Miscellaneous Papers - Other documents, such as bank statements, canceled checks, credit card statements, deposit slips, charitable contribution acknowledgements, medical expense receipts can be discarded after 4 years.
- Abortion (legal)
- Acupuncture
- Adopted child, medical expenses of
- Alcoholism, treatment of
- Ambulance
- Animals (guide animals, seeing-eye dogs, hearing aid animals, etc.)
- Autoette (three-wheeled vehicle for the disabled)
- Birth control pills
- Breast reconstructive surgery following mastectomy for cancer treatment
- Capital improvements to home prescribed for medical reasons (only excess of cost over increase in home's value)
- Car with handicap controls or equipped to accommodat passengers in wheelchairs (to the extent of the cost of special controls and equipment)
- Childbirth preparation classes (mother)
- Chiropractors
- Christian Science treatment
- Contact lenses, saline solution, enzyme cleaner
- Contraceptives, prescriptive
- Cosmetic surgery (only for procedures that correct a congenital defect, personal injury, or a disfiguring disease)
- Crutches
- Dental Fees
- Dentures
- Diabetic supplies
- Diagnostic fees
- Diapers (disposable), used because of severe neurological disease
- Doctors
- Domestic aid (type that would be rendered by a nurse)
- Drug addiction, treatment for
- Drugs, prescription (including alleviation of nicotine withdrawal)
- Dyslexia, language training
- Egg donor costs, including legal fees, hospital, transportation
- Eye examination
- Fluoride device (on advice of dentist)
- Glasses
- Health club dues (prescribed by physician for a medical condition)
- Health maintenance organization
- Hearing aid
- Hospital care, in-patient
- In vitro fertilization
- Insulin
- Insurance premiums (medical - except coverage of unnecessary cosmetic surgery)
- Iron lung
- Laboratory fees
- Laetrile (legal use)
- Laser eye surgery to correct vision
- Lead paint, removal of
- Hospital services
- Limbs, artificial
- Lodging (limit of $50 per night per person)
- Long-term care services for the chronically ill
- Nursing home (medical reasons)
- Nursing services
- Obstetrical expenses
- Operations (legal - except unnecessary cosmetic surgery)
- Optometrists
- Orthodontia
- Orthopedic shoes (excess cost)
- Osteopaths
- Oxygen equipment for breathing difficulty
- Physical examination
- Prosthesis
- Psychiatric care
- Psychologists
- Psychotherapists
- Radial keratotomy (corrective eye surgery)
- Reclining chair (cardiac patient)
- Remedial reading
- Retirement home, lifetime medical care
- Sanitarium rest home, cost of if for medical, educational, or rehabilitative reasons
- Schools to alleviate medical condition
- Sexual dysfunction, treatment of
- Smoking-cessation programs
- Sterilization operation (legal)
- Teeth, articifical
- Telephone, specially equipped for the deaf
- Television closed caption decoder for the deaf
- Transplant, donor's expenses
- Transportation, essentially and primarily for medical care
- Vasectomy (legal) and reversal
- Visual alert system for the hearing impaired
- Weight reduction program to treat obesity or a specific problem directly associated to excessive weight
- Wheelchair
- X-ray
How Long Do I Keep This?
Generally the IRS has a three year statute of limitations and California has a four year statute.
Deductible Medical Expenses
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AMT- Alternative Minimun Tax
The Alternative Minimum Tax (AMT) applies if it exceeds the regular tax. Form 6251 is used to report and calculate the AMT. Generally, AMT is calculated by starting with regular taxable income and then adding back, either as adjustments or tax preference items, certain items (such as state and local taxes, personal exemptions, and miscellaneous itemized deductions to determine alternative minimum taxable income (AMTI). The AMT is then computed by applying a flat 26% rate on the first $175,000 of AMTI, and a 28% rate on AMTI in excell of $175,000.
According to a report of the Congressional Research Service (CRS) issued on June 14, 2006, personal exemptions (22%), itemized deductions for state and local taxes (48%), and miscellaneous itemized deductions (20%) together account for over 90% of preference items that are subject to tax under the AMT but not subject to tax under the regular income tax. The CRS estimates that, absent legislative change, about 23 million taxpayers will be subject to the AMT in 2007, and about 31 million by 2010. Taxpayers with incomes in the $100,000 to $500,000 income range will be the hardest hit, with 90% of these taxpayers subject to the AMT in 2010. The report also lists the following states, by order of rank, as those with citizens most prone to be subject to the AMT: New Jersey, New York, Connecticut, the District of Columbia, California, Massachusetts, Maryland, Rhode Island, Minnesota, and Oregon. The five states least prone to be subject to the AMT were Tennessee, South Dakota, Alaska, Alabama, and Mississippi.
Education Plans
EDUCATION PLANSSECTION 529 AT A GLANCE | |
PROS | CONS |
| Income and growth are tax free as long as withdrawals are used for qualified higher education expenses. | No deduction is allowed for contributions. |
| The donor retains control to disburse the money. The donor can change the beneficiary. | No investment control. Funds are managed by the trust. TIAA-CREF manages the California ScholarShare plan. |
| The donor can take the money back (and pay taxes and penalties.) | Trust will be in conservative investments not necessarily those that a donor would choose. |
| If money remains after beneficiary graduates, it can be used for grad school or transferred to another family member. | Contribution applies against annual and lifetime gifting amounts where direct payment of tuition does not. |
| No AGI limitation for donors. | Financial aid may be impacted by amounts in the plan. |
| Estate planning can include transfers to Section 529 plans. | Only cash can be contributed. Other assets must be liquidated if they are used to fund the plan. |
| Student may attend any accredited school in the nation. School does not have to be named when the account is opened. | Penalties apply if funds are not used for college. |
| Trust can be used for most college expenses including tuition, fees, books, supplies and room and board. | Some tax advantages are due to expire in 2010. |
MORE INFORMATION AVAILABLE ON THE WEBSeveral web sites provide information on the various state plans and also include calculators for college expenses and links to federal financial aid sites. See www.savingfor college.com for general information on Section 529 plans and for the comparative analysis of the various state plans.
HOW DO THE EDUCATION SAVINGS ACCOUNT AND THE SECTION 529 PLAN COMPARE? | ||
ISSUE | EDUCATION SAVINGS ACCOUNT | SECTION 529 PLAN |
| How much can be contributed? | $2,000 a year until the child is 18 years old. | Maximum depends on state plan, age of child and investment chosen. |
| What is the AGI limit? | No contribution allowed when AGI reaches $110,000 single or head of household, $220,000. | None. |
| Who controls the distribution of the money? | The child when he or she turns 18. | The donor retains control until the money is disbursed. |
| Who controls the investment of the money? | The investment can be moved from one fund to another as investment philosophy changes. | The investment is named when the money is contributed to the plan from a choice provided by the plan manager. The money can be rolled to another investment or plan once each 12 months. |
| How do gift tax limits apply? | The $2,000 contribution is counted into the annual $11,000 gifting limit. | The contribution is counted into the year's total gifts, but special rules allow the donor an election to use 5 years of annual gifting limits in one year. |
| What are counted into qualified education expenses? | Tuition, tutoring, books, supplies, room/board and computer equipment for K through 12 and college. | Only for post secondary expenses. Computer equipment is not included in the definition of qualified education expenses. |
| How do the funds affect financial aid calculations? | Counts as the student's asset in the financial aid formula. | Counts as the donor's asset in the financial aid formula. |
