SIGNMENT #1 -Non refundable tax credits and Adv Cap Gains Rules
Question #4
Gary and Kelly have two children, Ben, age 14 and Cody, age 20. The
children both live at home and are full-time students, dependent on their
parents. The medical expenses and net income for each member of the
family for the current year is as follows:
Medical Expenses Net Income
Gary 2,200 62,000
Kelly 2,750 102,000
Ben 600 500
Cody 6,000 6,000
All of the medical expenses were paid by Gary in the 12-month period ending
December 31st. None of the expenses were covered under a private health plan.
Required:
a) Determine the maximum medical expense credits for the current year.
b) Outline any further tax planning tips that Gary should keep in mind for the future.
To determine the maximum medical expense credits for the current year, we need to follow these steps:
Step 1: Calculate the total eligible medical expenses for the family.
Total eligible medical expenses = medical expenses for Gary + medical expenses for Kelly + medical expenses for Ben + medical expenses for Cody
Total eligible medical expenses = 2,200 + 2,750 + 600 + 6,000 = 11,550
Step 2: Determine the base amount for medical expense credits.
The base amount is calculated as 3% of the lesser of the following:
- Net income of the person with the lowest net income in the family (excluding dependent children)
- Threshold amount for the tax year
In this case, the net income for each family member is as follows:
Gary: 62,000
Kelly: 102,000
Ben: 500
Cody: 6,000
The person with the lowest net income is Cody, with a net income of 6,000. Let's assume the threshold amount for the tax year is 30,000.
3% of Cody's net income = 3% * 6,000 = 180
Threshold amount = 30,000
The base amount is the lesser of the two, so the base amount is 180.
Step 3: Calculate the excess of eligible medical expenses over the base amount.
Excess of eligible medical expenses over the base amount = Total eligible medical expenses - base amount
Excess of eligible medical expenses over the base amount = 11,550 - 180 = 11,370
Step 4: Calculate the maximum medical expense credit.
The maximum medical expense credit is calculated as 15% of the excess of eligible medical expenses over the base amount.
Maximum medical expense credit = 15% * (Excess of eligible medical expenses over the base amount)
Maximum medical expense credit = 15% * 11,370 = 1,705.5 (rounded to the nearest dollar)
a) The maximum medical expense credit for the current year is $1,706.
b) Further tax planning tips for Gary to keep in mind for the future:
- Gary should keep track of all medical expenses paid throughout the year for himself, his spouse, and his dependent children.
- While it's not mentioned in the question, Gary should consider applying for the Disability Tax Credit (DTC) if any member of his family qualifies. The DTC can significantly reduce tax liability.
- Gary should explore the possibility of setting up a Health Spending Account (HSA) if his employment allows for it. An HSA allows for the reimbursement of eligible medical expenses with pre-tax dollars.
- Gary should also review his insurance coverage to ensure that it adequately covers potential medical expenses and explore options for supplemental health insurance if needed.
- It is important for Gary to keep all receipts and documentation related to medical expenses as proof for tax purposes.