Deduction Limitations of the Corporation and Individual

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This is the third section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding deduction limitations of the corporation and individual.

The corporation, on the other hand, is not affected by the § 67 limitation. A corporation will be allowed a one hundred percent deduction on itemized deductions. Therefore, in the foregoing example, the corporate taxpayer will be able to deduct the full amount of $50,000 without limitation. The corporation has effectively just saved the individual taxpayer approximately $4,000 in federal taxes and $1,000 in state taxes.

The subject of deduction limitations becomes more significant when addressing the issue of deductions allowed for medical expenses. An individual taxpayer can deduct the expenses for medical care of the taxpayer, his spouse, or a dependent to the extent that the expenses exceed 7.5% of the adjusted gross income. Using the previous example, if the individual had medical expenses of $25,000, they are not deductible because only those expenses that exceed 7.5% of the adjusted gross income are deductible. With an adjusted gross income of $500,000, the individual would need to have medical expenses of at least $37,500 before any deductions may be taken. In applying the applicable federal and state tax rates, the individual with $25,000 of medical expenses would pay a tax of approximately $12,500 ($10,000 to the federal government and $2,500 to the state government).

* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Los Angeles Business Attorney services page.

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