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It’s true.  In April of 2002, the IRS designated obesity as a disease, and with that designation comes some tax deductions.  Now, tax payers can write off weight loss expenses, as long as they’re for health improvement.

You may be thinking that all weight loss is for health improvement, but it goes a bit deeper than that – your doctor must recommend the weight loss as a way to counteract a medical issue, and the IRS wants to see proof.  Weight loss to combat high blood pressure, heart disease, bad knees and high cholesterol will get you a tax savings; losing those last ten pounds will not.

Here are the rules you need to know:

You can’t deduct your gym membership, home exercise equipment, diet foods, over-the-counter weight loss products (like Alli), nutritional supplements or vitamins, or services that are already paid for by your insurance when you have a co-pay.

You can deduct behavioral and nutritional counseling, and fees associated with community, physician or hospital-based weight loss programs, which often give you a diet and fitness plan, menus, and group support.  You can also deduct weight loss surgery, like gastric bypass (which runs around $25,000), and FDA-approved prescription weight loss drugs.

You can only take the deduction once your expenses exceed 7.5 percent of your adjusted gross income.  That means if your AGI is $40,000 a year, you can write off deductible medical expenses – not just weight loss related, but also out-of-pocket costs like dental and eye care – once they exceed a combined $3,000.  That sounds like a high hurdle, and it is, so plan accordingly to try to bunch your expenses within a single year.

Note:  One up side to the lay-offs and salary deductions we saw in 2009 is that it’s easier to hit this mark.  But if you can’t, and you have a flexible spending account through your employer, you’re able to set aside money pre-tax that can be used for these same expenses.  Many flexible spending accounts also allow over the counter drug purchases, so you may be able to use those dollars for non-prescription weight loss drugs and supplements as well. Ask your human resources department or benefits provider for specifics.

Bottom line?  If you’re losing weight, you’re doing it for the health benefits, not the tax deduction. But go ahead and get documentation from your doctor.  That way, you’ll have it in hand if you’re eligible for a deduction, or if you want to use flexible spending dollars.  And remember that even if your weight loss isn’t deductible, you’ll save money when you shed pounds.  A recent study from the Centers for Disease Control and Prevention found that obese patients spent an average of $1,429 more for their medical care than people in a normal weight range.

Once you have your emergency cushion in place, paying down credit card debt is a terrific use for your tax refund.  (If you don’t have that emergency cushion, put the $1,000 in a money market where you can access it if you need it rather than in a CD.)  Take a look at the interest rates on the cards you’re carrying.  Use the money to completely pay off (if you can) the card with the highest rate of interest. If it will cover more than that, apply the excess to the card with the next highest rate of interest.  It will probably be one of those store cards – they’re known for having very high rates.  Continue paying the debt off in interest rate order until it’s gone.  And here’s what I want you to do next: Change your withholding.  Instead of a $3,500 refund next year, I want you to get an extra $291 a month in pay.  Use that money to pay down those credit cards in real time and you’ll see the debt vanish faster.  And once it’s gone, funnel the same $291 a month into a Roth IRA where you can use it to build a nice cushion for retirement.  Lastly, as for that CD.  Rates are pretty meager right now, but find the best CD you can by comparing rates at bankrate.com.

E-file for Free. In years past, there was an income cutoff for free e-filing. No more. Now anyone can file their tax returns online for free at IRS.gov. If your adjusted gross income was less than $56,000 you are also eligible for free software (from leading companies like Turbo Tax and H&R Block’s Tax Cut) at the site, which will be helpful if you haven’t even started yet. Filing electronically has other benefits as well: It speeds your refund (You’ll have the money in 2 weeks as long as you elect direct deposit, if you filed by snail mail it would take 6 to 8), and it helps you eliminate errors in math as well as flagging other errors you might not have realized that you made.

Know how the stimulus affects you. If you haven’t filled out your return yet, you’re going to want to know how much your 2008 stimulus rebate check was for. Also, if you are planning to take the 2009 home buyer credit (which can be taken on this year’s return OR next) or you are claiming the new car deduction, make sure you have the relevant paperwork handy and read the rules. The $400/$800 making work pay tax cut will be paid via your payroll and not your tax return. You should have started to see that extra $14 or so a week already.

Make a last-minute retirement deduction (and one for next year.) If you haven’t made a tax-deductible retirement plan contribution for this year – and you have some free cash – you can contribute up to $5,000 for individuals up to age 50 or $6,000 for individuals age 50 and older into a traditional or Roth IRA. And, if you’re getting a refund, one way to make the most of it is to have it deposited in your IRA. (The IRS will deposit money in up to three accounts.)

Get a last-minute deduction through an IRA contribution. If you are eligible to make tax-deductible IRA contributions — eligibility depends on your income and whether or not you participate in a pension, 401(k) or similar plans — it’s not too late to have your contribution count for the 2008 tax year: Just contribute before April 15 and specify to your bank or whatever firm holds your IRA that you’d like it be considered a 2008 contribution.

Request an Extension. If you can’t meet the deadline to file your tax return you can get an automatic six-month extension of time to file from the IRS by filing Form 4868. Note: The form must be in by April 15. It can be submitted electronically through e-file. But it is an extension to FILE, it is not an extension to PAY. If you owe money to the IRS, you must make a payment when you file your extension request. You can do this electronically (the IRS will electronically zap the money from your bank account) or you can send a check, but it must be mailed by April 15 and needs to be made out to the US Department of the Treasury.

Apply for an Installment Agreement. So, what if you can’t pay? As long as you owe $25,000 or less you can apply for a payment plan electronically, using the Online Payment Agreement application or form 9465 (you can get all the forms online at IRS.gov, the IRS’s surprisingly easy to use website. You can also still get many forms at local post offices and libraries.) The IRS will usually agree to this as long as you can get out of debt within 5 years. But note: You’ll pay for it. The IRS charges $105 for setting up the agreement or $52 if the payments are deducted directly from the taxpayer’s bank account ($43 for qualified lower-income taxpayers). You’ll pay interest at a little over 6% plus ¼ of 1 percent interest in a penalty every month. You may be able to do better by using your home equity line of credit or a very, very low interest rate credit card (watch out for fees there too). But NOTE these penalties are low compared with the penalties you will face if you don’t FILE. You must file.

Watch Phishing Scams. When people are scrambling to do anything last minute – like finish their taxes – they are more vulnerable to scams. Watch out. The IRS says that there are numerous scams in which people receive unsolicited e-mails, phone calls or faxes that claim to come from the IRS or include an IRS logo or send recipients to a phony IRS Web site, and which request personal and financial information that may be used to commit identity theft. Typically, identity thieves use someone’s personal data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Know this: The IRS is not going to email you or call you and request personal information. And if you get one of these emails DO NOT open the attachments. Instead forward it to phishing@irs.gov.

And – as always – if you are not going to efile, send your return certified mail return receipt. It never hurts to have a paper trail.

This morning on Today’s Tax Hotline

While I like to get good deals at thrift stores, I also like to give back every once in a while too by making a donation. Gaining some extra closet space doesn’t hurt either…Crocs, gladiator sandals…what was I thinking? Luckily, there are resources out there to help determine how much you can deduct from your taxes after you make a donation.

According to the IRS, you can deduct the “fair market value” of donated clothing and household goods. The fair market value is how much the item you’re donating would go for if it were to be sold in today’s market.

The easiest way to determine the fair market value of your item is to take a look at valuation guides on the Salvation Army or Goodwill websites.  You can also use TurboTax’s free online program called ItsDeductible to keep track of your donations throughout the year and get an idea of what your donations are worth.

One last thing…when you go to make the donation, ask for a receipt and make sure you hold onto it.  You won’t get the value of the donation listed on the receipt but at least you’ll be able to prove that you made one.

What’s the best donation from your closet that you’ve ever made? We’d love to hear about it!

What exactly is an enrolled agent?   They are folks licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, appeals and collections. While certified public accountants may or may not specialize in taxes, enrolled agents are all tax specialists. In order to earn the EA license, they must pass a stringent three-part exam and complete annual continuing professional education requirements that keep them up-to-date on the latest changes in the Tax Code. Enrolled agents provide services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct, and they are required by IRS to pursue Continuing Professional Education.  Many of them have even worked for the IRS in a former life.

Join me! Then let me know here if you got your question answered to your satisfaction….

Increased taxes on liquor make a night out more expensive, but that heftier tab saves lives, the American Journal of Public Health finds.  Higher alcohol taxes in Alaska cut drinking-related ailments such as oral cancer and liver disease by one third.  Cheers to that!

I agree — so why was it that New York Governor David Patterson’s idea of a soda tax went nowhere fast? This was a lesson we learned with smoking.  Taxing the cigarettes to high heaven was one of the — if not the — major health advances this century.  Americans stopped buying as many.  Smoking related cancers and other ailments fell off significantly.  Well now we have just as big a health problem in this country: Obesity.  Add up what it costs us in visits to the doctor and other medical procedures — which I did a few years ago for Money magazine — and you’ll see, they are staggering.

We need to raise money in this country.  Why not do it in a way that will lead our behavior in the right direction.  I know there are probably many of you for whom this is simply too much big brother — much like automating contributions into 401(k) plans rather than asking people whether or not they want to be in — I live with one of them.  Not for me.  When it doesn’t work to tell people what’s good for them, nudge them toward what’s good for them by using the most powerful weapon you have: Your wallet.

As if that weren’t bad enough, this year some states have intimated they aren’t going to be giving you your money back — at least not right away.  Kansas. Arizona. California.  All have delayed the processing of tax refunds, again YOUR money, as a solution to their cash flow problems.  And in other states, including New York, where governments have said this is not happening, we have started to see some anecdotal reports that refunds are slowing down.

So what do you do?  Sit down with the payroll department at your company and adjust your withholding. If you get a tax refund you want to increase the number of dependents you are taking.  The key is not to owe Uncle Sam at the end of the year, but to break even.  Particularly when Uncle Sam is so poor, he wants to hang onto your green.