Federal Tax News – September

By Team HRH | October 12, 2016

Coping with seniors’ medical deductions. A change in tax law may cause taxpayers age 65 and older to lose medical expense deductions in 2017 and be forced to take the standard deduction. Medical expenses for taxpayers (or their spouses) who reach age 65 before the end of 2016, and who itemize, are deductible to the extent they exceed 7.5% of adjusted gross income. However, beginning in 2017, this floor will become 10%, making it more difficult to qualify for a deduction. Seniors may want to “bunch” expenses from 2016-2017 into one year to get enough to deduct medical costs.

On September 13, the U.S. House of Representatives passed the “Halt Tax Increases on the Middle Class and Seniors Act,” which would repeal the raised income threshold (from 7.5% to 10%) for those age 65 and older. Unfortunately, the White House has indicated it strongly opposes the bill.

On-the-side aviation deduction grounded. The U.S. Tax Court upheld the IRS’s disallowance of a commercial airline pilot’s business deductions on her federal tax returns for expenses associated with her side aviation activity. She purchased a military training aircraft but didn’t have any clients and didn’t advertise her services to the public. The court concluded that, although the taxpayer intended to ultimately enter into an aviation business for profit, the activity didn’t rise to the level of an active trade or business. A deduction typically is allowed for ordinary and necessary expenses paid or incurred while carrying on a functioning trade or business (TC Summ. Op 2016-42).

Taxpayer’s legal fees paid to a lawyer are deductible. A car salesman claimed a Schedule A itemized deduction for legal fees incurred in connection with a national origin discrimination complaint he filed against his former employer. He received $45,000 pursuant to the settlement agreement. The U.S. Tax Court ruled he was actually entitled to an above-the-line deduction based on the fact the claim involved unlawful discrimination plus the settlement specifically applied to claims for compensation with respect to an employment relationship and termination. (TC Memo 2016-156).

Husband denied innocent spouse relief. Filing a joint tax return means spouses share responsibility for the return’s contents and the tax owed. But innocent spouse relief offers some reprieve from joint liability if you can prove certain points. In one case, the U.S. Tax Court denied an ex-husband relief because he failed to show unreported income items were attributable only to his ex-wife. He also wasn’t entitled to a funds misappropriation exception even though she’d allegedly withdrawn all their bank account funds, because the funds weren’t intended to pay tax. (TC Memo 2016-164)

Healthcare premiums rise for those covered by “Bronze-level” Exchange plans. As of 2014, taxpayers and individuals for whom a taxpayer is responsible must have minimum essential health coverage, or make a shared responsibility payment along with the current year tax return (unless exempt). The monthly national average premium is recomputed yearly based on a preset formula. For 2016, the maximum premiums for Bronze-level plans offered through Exchanges are: $223 per individual (up from $207 in 2015) and $1,115 for a family of 5 or more (up from $1,035 in 2015).

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