During 2011, Emily sustains serious injuries from a snow-skiing accident. She in
ID: 2453519 • Letter: D
Question
During 2011, Emily sustains serious injuries from a snow-skiing accident. She incurs the following expenses:
Item
Amount
Doctor bills
$11,700
Hospital bills
9,400
Hot and warm sauna
15,000
Legal fees in suit against ski resort
3,000
Emily is single and has no dependents. For the year, her AGI is $58,000. In 2011, she pays $600 in medical and dental insurance premiums, which are withheld from her paycheck on an after-tax basis, $2,750 in mortgage interest on her home, and $1,200 in interest on her car loan. Her health insurance provider reimburses her for $10,000 of the medical expenses. Based on her doctor’s recommendation and prescription, Emily had a contractor install a certified hot and warm sauna at a cost of $15,000 in the year. She paid all of it with her savings in 2011. The Fair Market Value of the property improved by $7,500. Emily had real estate taxes of $4,000 on her property. Emily had no other personal exemptions. Based on this case study information, determine Emily’s itemized deductions. Which of these items can and cannot be listed as medical deductions? Why? What is her 2011 taxable income?
Item
Amount
Doctor bills
$11,700
Hospital bills
9,400
Hot and warm sauna
15,000
Legal fees in suit against ski resort
3,000
Explanation / Answer
A) Items that can be listed as medical deductions:
According to IRS Publication 502, medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These include the costs of equipment, supplies, and diagnostic devices needed for these purposes. However, medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health.
1) Doctor Bill- $11700 (It is cost associated with the treatment)
2) Hospital Bill- $9400 (It is cost associated with the treatment)
3) Hot and Warm Sauna- $15000 (It is included because doctor has recommended and prescribed it. This is a pre condition that doctor shouls prescribe it than it is a medical expenses)
4) Legal Fees: $3000 (This is incurred because of the injury cost hence it is included)
Items that are not included are as follows:
Medical Insurance Premium= $600 (If you pay your medical premiums with after-tax money, you may deduct your premiums as a medical expense on Schedule A when you file your tax return with the IRS. Before you can get this tax benefit, your total medical premiums must be more than 7.5 percent of your income) In this case it is not more than 7.5% of income
Medical reimbursment should be deducted from medical expenses. As you have already got this money. You cannot claim it twice.
2) Taxable Income= AGI-( deductions and exemptions)
AGI= $58000
Less: Home Mortgage Interest: $2750
Less: Real Estate taxes: $4000
Less: Medical expenses if it is above 10% of AGI( (11700+9400+3000+15000-10000(reimbursed))=(29100- 58000*10%))=23300
Taxable Income= $(58000-2750-4000-23300)=$27950
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