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REG CPA Practice Questions: Itemized Deductions: Medical Expenses
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting medical expenses as itemized deductions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-deducting-medical-expenses-as-itemized-deductions/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:48 Question 1: Allowable Medical Expense Deduction Calculation 03:33 Question 2: Qualifying Medical Expenses 06:46 Question 3: How Timing of Payments Affects Medical Deduction 09:53 Question 4: Medical Expenses Paid For Others 13:24 Question 5: Putting It All Together 16:12 Pillar Topics
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0:00
Welcome to another reg walkthrough video
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I'm Logan, and in today's video, we're going to be going over itemized deductions
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specifically medical expenses as itemized deductions. And we're going to be doing that by diving straight into some questions to learn about this
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If this is the first thing you're seeing from us, or if you don't know much about our strategies, make sure you go to superfast CPA.com to learn more about it
0:21
and especially to sign up for our free one-hour webinar where we teach the six key ingredients to passing the CPA exam
0:28
Again, it's only one hour long, it's free, and it will save you months and months of struggling with your exams
0:33
The link will be in the description, and it looks like this. Also, be sure to check out our Superfast CPA app
0:38
where we have five-question mini-quises, as well as audio notes and review notes, that you can access on the go throughout your day to continually be practicing and learning
0:46
With that said, let's dive straight into some questions. Here's question one. Martha, a taxpayer, who is filing as head of household
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has an adjusted gross income or AGI of $60,000 for the tax year 20x3
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During the year, she incurred the following medical expenses. Hospital bills for $15,000, doctor consultation fees for $3,000, prescription medications for $2,000, non-prescription over-the-counter drugs for $500, and health insurance premiums paid out of already taxed income for $6,000
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Martha was reimbursed by her insurance company for $4,000 of her hospital bills
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For the tax year 20x3, the IRS allows individuals to deduct the amount of total medical expenses that exceed 7.5% of their AGI
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what is the maximum allowable deduction for Martha's medical expenses on her individual tax return
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All right. So right here, it kind of tells you a little bit of how to calculate this
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So what we need to learn from this is how to calculate this and also which of these counts as a medical expense that can be used as an itemized deduction
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So take a second, read through the question, make sure you understand it. But since this is the first question, we have a lot to learn
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So we're going to go straight into it. All right. the answer is $17,500
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So here's the explanation. First, we have to calculate Martha's total qualified medical expenses by adding the hospital bills
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after reimbursement, and we'll learn about that in a second, doctor's consultation fees
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prescription medications, and health insurance premiums. So the total expenses is all added up together is $22,000
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And the non-prescription over-the-counter drugs are generally not deductible unless they are prescribed
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so we do not include the $500. Since these $500 over-the-counter drugs were not prescribed, they will not count as qualifying medical expense
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And we're going to learn more about qualifying medical expenses in the next question
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But right now we're learning how to calculate the amount that can be included as an itemized deduction
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So we take 7.5% of her AGI, and that's 4,500. And we subtract that from the total expenses
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And so that's the allowable deduction. Everything above that 7.5% of AGI is an allowable itemized deduction
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in this case. So essentially we have to figure out what counts as a qualifying medical expense
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and again, we'll learn more about that and the next question. And then we subtract any reimbursed amounts
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and then we subtract the 7.5% limit of AGI, and anything above that is considered a qualifying
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medical expense for deduction. And again, I just want to point out one more time, reimbursements
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lower the amount of expense that you can take. So this $4,000 reimbursement that happened right here
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for her hospital bills, reduced the amount of hospital bills that can be used as an itemized deduction
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So that was the first question. We basically learned how the calculation works for the allowable deduction
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Now let's go to the next question where we learn what qualifies as a medical expense for these deductions
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Here's question two. Jonathan is preparing his tax return and wants to itemize his medical expenses
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He has compiled a list of expenses incurred during the tax year. which of the following expenses can Jonathan include as qualifying medical expenses when calculating
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his medical expense deduction? So what can count? Does the surgery for his vision, prescription for his
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eyeglasses, health club membership, so basically a gym membership, over-the-counter acne treatment
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recommended, but maybe not prescribed, I don't know, that's kind of an interesting wording there
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and then transportation for medical appointments. What of that counts as a medical expense when it
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comes to this deduction. All right, so take a second, think about it, and when you're ready
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come back and we will learn more about it in the answer. All right, here is the answer. So
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answer is one, two, and five only. So that would be the surgery to improve vision, the eyeglasses
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and the eyeglasses, so not the health club and the over-counter acne. So let's learn more about
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that in the explanation here. The IRS allows deductions for medical and dental expenses that
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are primarily to prevent or alleviate a physical or mental defect or illness
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This includes payments for legal medical services rendered by physicians surgeons dentists and other medical practitioners as well as the costs of equipment supplies and diagnostics devices prescribed by a physician So basically anything that has to do with your health or your eye or dental all these things that are prescribed and performed by medical experts
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including equipment that's prescribed by them, can be counted as a medical expense that qualifies
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for this itemized deduction. So let's look at his expenses. So the payment for surgery to
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improve his vision, that qualifies for him. In encryption eyeglasses, again, they were prescribed by a medical professional, so that
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counts as well. Health Club membership. Again, this is basically a gym membership
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Now, do all doctors say, yes, you need to be healthy and go to the gym
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They do say that, but is it specifically prescribed? For most people, probably not
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I would say, generally, in most cases, this is not going to be the case. So a gym membership, not going to count for an itemized deduction here
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Over-the-counter acne treatment recommended by a dermatologist. So again, this is something that the person bought for themselves. It was not prescribed by the dermatologist
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It was only said, this could be helpful, but they didn't prescribe it. So let's read this one
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While typically over-the-counter medications are not deductible, if the treatment is recommended by a physician for a specific medical condition, it could be considered a qualified medical expense
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However, this may require additional clarification as IRS rules generally exclude over-the-counter drugs not prescribed
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So since it wasn't prescribed, generally over-the-counter drugs are not included in this deduction
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If the dermatologist specifically prescribed this over-dictal counter-drug, then it could potentially
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count, but since we don't have that information, we're not going to count it. And then finally, transportation expenses for traveling to and from medical appointments
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these expenses are qualifying as long as they are primarily for and essential to medical care
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So, again, pretty much everything that goes into medical expenses that is prescribed by a doctor
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and performed by medical experts will count for this itemized deduction. So let's take that information and go apply it to the following questions
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So let's go to question three. Okay, here's question three. Margaret incurred several medical expenses throughout the tax year of 20x3, which she intends
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to deduct on her tax return. She had the following medical costs. First, she had a surgery on December 27th, for which she was billed $5,000
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She paid this amount using her credit card. The credit card payment was not posted until January 5th
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Okay, so she had the surgery, and she paid for on a credit card in the 20x3 tax year
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but then the credit card payment wasn't posted until January 5th of the next year
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An orthodontic treatment for her son on November 15th, she paid $3,000 by check
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again still in the same year. Her husband, who passed away on February 10th, had a hospital bill of $7,000
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and she paid this bill in the same year on March 12th. Margaret paid $4,000 out of pocket for a surgery she had on March 20th, 20x3
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So again, in the same year, she then received a $4,000 reimbursement for the surgery from
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her insurance on April 15th. Okay, so what of all those expenses will count in this current tax year
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So take a second, think about it. You probably could figure out the correct answer, but there might
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be a few confusing things in there like the credit card, the check, the insurance reimbursement
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How is that all going to affect it? So again, take a second, figure out what's going to all count
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in the current tax year. All right, let's go ahead and look at the answer. Okay, the answer is
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one, two, and three only. So everything except for what? the thing that was reimbursed by the insurance. So let's take a look at this. Let's review each
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expense with the additional details. So the surgery paid by the credit card still in the same year
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So the way it works is as long as it was charged to a credit card in the tax year, then it counts
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even if they didn't actually pay off the credit card or the payment wasn't posted until the next
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year. So that's one rule right there. Payments with credit cards, as long as it's in the same year
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will count for the itemized deduction. The paying with a check definitely will
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count, especially if it definitely will count as long as it's in the same tax year. Hospital bill
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again, it was paid for in the same year and it was for her spouse, and we'll learn more about
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relations and dependence and things like that in the next question. The surgery, which was
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reimbursed, so basically the reason that this surgery isn't counted is because she was
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reimbursed. It would have been counted, but since it was reimbursed, that reduces it from
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$4,000 to $0 because the full amount was reimbursed through her insurance
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That's why that won't count as a medical expense for this itemized deduction because it was fully
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covered by that reimbursement by the insurance. So everything else will be covered
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But we learned a few important rules here. Credit card payments, as long as it's in the current year, do count for expenses in this itemized deduction
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Check, same thing, as long as it's in the same year. And then an expense paying for a spouse or her child they count And again we going to learn more about the dependence and relations like spouse and stuff like that in the next question But overall as long as the
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event occurred and was paid for in the same year, then it will count towards the itemized deduction
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Let's go to question four to learn more about spouses and dependence and things like that
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All right, here's question four. Jenny incurred medical expenses for several individuals during
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the tax year and wishes to know whose expenses she can include when itemizing deductions on her tax return
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During the year, she made payments for the following individuals. Jenny's own dental surgery, a knee replacement for her spouse from whom she is legally separated but not divorced and he lives in a different state
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orthodontic care for her son who lives with her and whom she supports entirely, a specialized bed for her grandmother who receives more than half of her support from Jenny but lives in a senior care facility
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and LASIC eye surgery for her boyfriend, who does not live with her, but for whom she provides significant financial support
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Okay, so she had a very busy year, lots of different people involved here. which of these medical expenses can Jenny legally deduct on her individual tax return
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So what we want to figure out here is she paid for all of these medical things, but which of them can she actually use in her own tax return to count for this itemized deduction
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So take a second. Think about some of the stuff you might know about related parties and different things like that
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about relatives, and when you're ready, come back and we'll look at the answer
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All right, here's the answer. So one, two, three, and four. So not the fifth one
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So let's learn more about how this works. medical expenses for the filing taxpayer are deductible, so that makes sense
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Medical expenses for yourself, they count. Medical expenses for a spouse are deductible, even if legally separated, as long as they
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are not divorced and the spouse does not file a joint return with another taxpayer. If they decide to file separately but still as married, then they must both choose to itemize
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or take the standard deduction. So just to reiterate that, even if you don't live with your spouse, as long as your spouse
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doesn't file with somebody else and you don't file with somebody else, then you can still
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count their medical expenses if you paid for them. And one rule with this is if Jenny and her
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separated spouse don't file a joint return, which they probably won't, if they want to file married
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filing separately, then they both have to choose itemized or they both have to choose the standard
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deduction. So just remember that. Medical expenses for a dependent, her son, who lives with her, does not
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file a joint return and whom she supports entirely are deductible. So somebody who she's taken care of
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completely who lives with her, that's going to be somebody who's covered. Medical expenses for her
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grandmother who is considered a relative, so, you know, grandmother, son, spouse, those things
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lives in a specialized facility and receives more than half of her support from Jenny, are deductible
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even though she does not live with Jenny. So even though she doesn't live with Jenny, she's a relative
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and she's receiving more than half of her support from Jenny. That means that she can also still count
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Medical expenses for her boyfriend who does not live with her and is not a relative by blood or
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marriage are not deductible. However, if her boyfriend did live with her and she provided more than
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half of his support, then his expenses could be considered deductible. So one interesting rule with this
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is they either have to be a relative or live with them. That it's either or. So if both of them
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of met, of course, that means that you can cover their expenses and as long as you provide for more
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than half of their living. So in this situation, since the boyfriend is not a relative and does not
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live with her, that means that even if she supported him more than 50%, those expenses cannot count. But if he
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did live with her, and again, she was covering more than 50%, even though he's not a relative
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specifically for this itemized deduction, that would count. But since that's not the case here
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the medical expenses for him do not count. And then one final requirement for all of this is
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these payments have to be made for individuals who are United States citizens. We've learned a lot
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about medical expenses and how they can be used as itemized deductions in this video so far
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Let's go to the last question and see if we can all, and see if we can tie it all together
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Here's the last question. Question five. Robert is finalizing his itemized deductions for the current tax year
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He has incurred a variety of medical expenses for himself and others, as well as dealing with different timing and reimbursement scenarios
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His adjusted gross income is $50,000 for the year. Below are the medical expenses he paid
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So in the current year, he paid $8,000 for his daughter's braces. He provides more than half of her support
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He also paid $2,000 for his own psil therapy sessions in the tax year and his HSA covered those costs
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Robert was billed $5,000 for a medical procedure he underwent in the current tax year and charged it to his credit card at the end of the current tax year
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The credit card payment was finalized in the following tax year. He incurred $3,000 in medical expenses for his nephew, who lives with him in the current tax year, but his nephew's parents provide more than half of the nephew's support
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And in the previous tax year, Robert paid $6,000 for surgery for his mother, who does not live with him but is claimed as a dependent in his tax return because he provides more than half of her support
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after considering all applicable rules and regulations what is the total amount of medical expenses that Robert can claim as itemized deductions for the current tax year Okay So like I said we wrapping it all together in one question now You learned a lot in this video This is the last question Pause the video Figure it out
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for yourself. See if you can get the correct answer. And when you've done that, then come back and we will
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look at the answer. All right. Let's go ahead and look at the answer. So the answer is $9,250
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So first we have to determine which expenses count for this deduction. So the dental braces
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that's deductible. Sile therapy, not deductible because they were covered by an HSA. So kind of like
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the reimbursement type thing, since it was paid for by something else like an HSA, then it's not
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deductible. Medical procedure on credit card, it was paid for on a credit card in the current
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year that counts. Nephew's medical expenses, even though his nephew lives with him
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he doesn't pay for more than half of his support and it also doesn't count
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as a dependent. So that doesn't count. And the mother's surgery was in the previous tax year
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So even though his mother lives with him and he provides more than half of her support since the
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medical procedure was paid for in the previous year, that would have been claimed in the previous
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year. And if it wasn't claimed, then it wasn't claimed. That won't count for the current tax year
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So we take the things that did qualify, which was just the braces and the medical procedure
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And that adds up to $13,000. Then we take the 7.5% AGI floor and multiple, and, and
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multiply his $50,000 of AGI by that. So we take the $13,000 less the $3,750
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and that gives us $9,250. So that is the amount of medical expenses that he can use as an
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itemized deduction in the current year. Okay, so we learned a lot about medical expenses and how
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they can be used for itemized deductions in this video. Let's do one last part of the super
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fast CPA strategy to finish up called pillar topics. So essentially, the idea behind
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pillar topics is after you've gone through the questions or even while you're going through
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questions, you will notice the things that are obviously most important, the concepts that you're
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obviously supposed to be learning and pulling out from doing the questions. So you take a second
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and write down the things that you learned based off of the questions that your review course
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provided. So let's go ahead and write down a few pillar topics. The allowable deduction equals
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qualified medical expenses, less reimbursements, less the 7.5% AGI4. So that's the calculation
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Once you've figured out what qualifies as a medical expense for the current year, then you do
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this calculation to see how much can actually be used as an itemized deduction. Most medical
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expenses performed by a medical professional. that are professionally prescribed count
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Expenses covered by HSAs or that are reimbursed are not included slash reduce the amount of deduction taken
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So basically what I'm saying there is expenses covered by an HSA, they just don't count
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And then any amount that was reimbursed has to be subtracted from the qualified medical
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expense payments made in the current tax year for medical procedures that year count even if paid by
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credit card or check. And here's a general rule. Expenses for spouses and dependents as well as the
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taxpayer themselves are counted. Dependants have to have 50% or money. more of their support from the taxpayer and they either have to be a relative, such as a child
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such as a child, parent, grandparent, or they have to live with the taxpayer route the year
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So they have to have both the 50% and then either be a relative or live with the taxpayer
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All right. So those are some pillar topics that we learned from this video. Now, obviously, maybe there's something I missed in the pillar topics
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or maybe there's something that you wanted to write down for yourself, so definitely write those things down
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But that's the end of this video. Be sure to go to superfast CPA.com to watch our free one-hour webinar training
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so you can learn more about our strategies and learn the six key ingredients to passing the CPA exam
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And also be sure to check out the Superfast CPA app where we have five question mini quizzes, audio notes, and review notes
19:04
that you can access on your phone on the go throughout the day so you can continue learning
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If you liked this video, make sure to leave a like and a comment in the YouTube video
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And with that said, I'll see you in the next video
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