Can dad get a tax break for his generosity?
Q My dad has been buying prescription drugs for my boyfriend, who has a physical problem and is unemployed. Can my dad deduct these costs from his income taxes? If so, how and where?
S.B.O., Richmond, Va.
A According to a spokesperson for the IRS, your father can deduct the expenses of a person who qualifies as a dependent.
But to establish the dependency status, the boyfriend must pass at least some of the following "tests:"
1. Support test. (Did your father pay for more than 50 percent of the boyfriend's annual expenses?)
2. Relationship test. (Is the boyfriend related by common-law marriage?)
3. Citizenship and residency test. (Is the boyfriend a US citizen and has he lived in your father's home during the year?)
If a dependent status can be established, then your father might be able to deduct the costs, as long as his total medical expenses are more than 7.5 percent of his adjusted gross income.
To get a definite answer, call the IRS at 800-829-1040 and speak with a customer-service representative. He or she can make a quick assessment of whether or not your dad can deduct the prescription costs.
Q Which is the better investment vehicle, an annuity or a traditional IRA? I have maxed out my 401(k) and do not qualify for a Roth IRA. I am considering investing an additional $2,000 a year in an annuity that includes mutual-fund-type investment options or a traditional IRA through a mutual-fund company. It seems like the tax-deferred growth in the annuity would be a better option than a mutual fund, due to the capital-gains taxes incurred by a mutual fund.
T.J., via e-mail
A "The IRA is the way to go," says Gary Schatsky, an attorney and fee-only financial planner in New York.
"An annuity will usually hit you with extraordinarily high expenses compared to the far lower expenses of an IRA. Both have the same tax treatment. Annuities also charge hefty fees [beyond taxes] if you suddenly need to withdraw from the plan. And incidentally, taxes on an IRA are deferred until such time as you withdraw monies from the account," says Mr. Schatsky.
If you do buy an annuity, he says, be sure you do not overlook low-cost mutual-fund companies that offer them, such as Vanguard Group and Fidelity Investments.
Questions about finances? Write:
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