Tax Guru – Ker$tetter Letter

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Archive for April 3rd, 2002

Posted by taxguru on April 3, 2002

Deducting Diet Costs

I could literally spend all of my time pointing out errors in how the media report tax and financial stories. I have already seen & heard numerous mistakes involving today’s “big news” about IRS allowing a deduction for diet costs by overweight people. I was listening to a radio newscast and the airhead newsreader actually went through the entire story calling them the “International Revenue Service.” I kept waiting for her or anyone else to catch her mistake; but no such luck.

The headline for this story on FoxNews.com actually says “Slim Down, Fatten Wallets.” The article itself is quite accurate. My problem is with the completely misleading headline, which is all that most people will read, as they browse the stories. It implies that you can actually earn money by spending money on diet programs. This is so wrong, on at least two counts.

First, no tax deduction of any kind actually makes anyone money. A deduction only reduces taxes by the person’s tax rate. For example, a normal $1,000 deduction for someone in the 30% tax bracket will reduce that person’s income tax by $300. That means s/he will still be out of pocket $700.

However, medical deductions are not normal and in fact aren’t even available to most people. For decades, our rulers in DC have rigged the tax code so that very few people qualify to deduct any medical costs. In order to claim any medical costs on an individual income tax return, s/he must itemize on Schedule A. Even then, only the medical expenses that exceed 7.5% of AGI (adjusted gross income) are counted. As I tell my clients who moan about not being able to receive any actual medical expense deduction: “you really don’t want to be that sick.”

One way to enable a deduction for 100% of all medical costs is to set up a C corporation and establish a full medical expense plan for all employees. This doesn’t work for S corporations because tax law does not allow such lucrative tax free benefits for anyone who owns 2% or more of the corporate stock. This is just one of many pitfalls to using an S instead of a C.

KMK

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