Deducting self-employment tax

SC&H Group experts also address retirement benefits, disability pensions

Tax Talk 2006 Q&A

April 02, 2006|By JIM WILHELM, STUART RUDO AND GREG HORNING | JIM WILHELM, STUART RUDO AND GREG HORNING,SPECIAL TO BALTIMORESUN.COM

Baltimoresun.com's tax-advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return every Monday until April 17. To be included in the following weeks, please use the form at the right side of this page to submit your questions.

Jane Bortz, Sparks: In 2005, I had less income and more deductions than usual. The results were a bottom-line deficit, even after including my [self-employment] tax. The [self-employment] tax was $1,802. I am in my 70s and collect Social Security, even though I am still working full time. No where does it say that I still need to pay the $1,802 [self-employment] tax, even though my bottom line is negative. I have called the IRS, and the person didn't know the answer.

SC&H Group: The purpose of the self-employment tax is to pay the Social Security and Medicare portion that an employer and employee would normally pay if you worked for someone else. Unfortunately, that is one of the drawbacks of working for yourself -- you are responsible for both halves of the tax. The good news is that people that are self-employed are allowed to take half of it as a deduction. However, regardless of your change in income and expenses, the tax is still required of all self-employed individuals.

As for your reduced income and increased expenses in 2005, as long as your net earnings from self-employment were more than $400, the tax is required. Refer to Schedule SE and its instructions for more information. If you had a net loss from self-employment income, you should not owe any self-employment tax.

W.T. Ruckle, Bel Air: I have the power of attorney for my aunt, who is in a critical care center. I do her taxes. I understand from your [March 26] column that I can deduct the costs associated with her stay there since the medical staff at that facility recommended that she be there. Is this correct?

SC&H Group: As noted in the March 26 column, if the main reason for being in the facility is to obtain medical care, then all of the facility costs that are not reimbursed (Medicare, Social Security, long-term care insurance, etc.) are deductible. If medical care is not the main reason, then only the portion of the facility costs related to medical treatment is deductible.

The critical care centers should be able to provide a doctor's written diagnosis that confirms your aunt is currently unable to perform daily necessary tasks and requires substantial supervision to be protected from threats to health and safety.

Joe Serio, Old Fort, N.C.: I am 74 years old, and my wife is 69. We are in good health. The question is: How much am I able to earn not counting my Social Security but on our interest income from back accounts that consist of CDs and savings accounts? I receive a small pension from my company [from which] no taxes are taken out. The amount is $203 a month. Thank you in advance for your answer.

SC&H Group: As you and your wife are above the full retirement age of 65, you are both entitled to receive full retirement benefits. However, there are limits to the amount of benefits. In 2005, the maximum monthly benefit was $1,939. Also, if your income exceeds a specified base amount, then as much as 85 percent of your Social Security benefits will be taxed.

Assuming you file a joint tax return, if your income (including nontaxable interest income and one-half of your Social Security benefits) is less than $32,000, then none of your benefits are taxable. If your income is between $32,000 and $44,000, then 50 percent of your Social Security benefits will be taxable. Finally, if your income is greater than $44,000, then 85 percent of Social Security benefits will be taxed. The instructions to Form 1040 contain a worksheet to compute the taxable amount.

As an aside, don't forget to claim any Medicare Part B premiums you paid in 2005 as medical expenses on Schedule A. Those premiums should be noted on your SSA-1099.

Phyllis: My son, who is 29 and does not live with us, had over $17,000 worth of non-cosmetic dental work done in 2005 that we paid for. Is any of this deductible for us?

SC&H Group: Non-cosmetic dental work is a valid medical expense that is deductible, subject to 7.5 percent of adjusted gross income (AGI). Unfortunately, in your case, you can only deduct medical expenses incurred for yourself, your spouse or a dependent. The definition of a dependent is less restrictive as it relates to medical deductions; you should review IRS Publication 502 for information on that issue.

If your son paid for any of the dental costs out of his own pocket, he may be able to deduct the expenses in excess of 7.5 percent of his AGI. However, any cosmetic expenses, dental or other types of surgery are generally not deductible.

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