Miscellaneous Deductions

           

          

          

                         Miscellaneous Deductions

          

          

          23) Retaining their medical, miscellaneous and employee

          business expense deductions is important to most

          taxpayers, because these expenses generally are

          unavoidable.  Yet Congress tried to curtail these

          deductions because one of the ideas behind tax reform

          was that you would give up some deductions in order to

          get lower tax rates.  Yet the clever taxpayer knows how

          to keep some of those deductions and get the benefit of

          lower rates.  Even after tax reform, that is possible.

               The change in the medical expense deduction is

          very simple.  You can deduct only the unreimbursed

          medical expenses that exceed 7.5% of your adjusted

          gross income, and then only if those excess deductions

          when combined with your itemized expenses exceed the

          standard deduction.  Everything else about the medical

          expense deduction remains the same.

               Miscellaneous deductions had a few more changes. 

          The expenses are deductible only to the extent they

          exceed 2% of adjusted gross income and the excess when

          combined with other itemized deductions exceeds the

          standard deduction.  In addition, some expenses that

          could be deducted in the past can no longer be

          deducted.  The expenses for attending an investment

          convention or seminar are not deductible.  Travel for

          educational purposes is not deductible, so school

          teachers can no longer deduct the cost of a summer

          vacation that was spent in some way related to the

          courses they teach.

               The biggest change is that unreimbursed employee

          business expenses become miscellaneous itemized

          deductions.  In the past most unreimbursed employee

          expenses could be deducted from adjusted gross income. 

          You didn't have to worry about whether you had enough

          itemized deductions or about getting above a 2% floor. 

          That's no longer true.  Items such as travel and

          entertainment expenses and business mileage must be

          included in miscellaneous itemized deductions.  So now

          instead of having two separate categories of

          deductions, there is only the deduction for

          miscellaneous expenses.  In addition, business

          entertainment expense deductions are limited to 50% of

          the cash outlay, and the "quiet business meal"

          exception is eliminated.  Under this exemption, a meal

          could be deducted even if business was not actually

          discussed.  Now there must be a bona fide business

          discussion either during the entertainment or

          immediately before or after it for the expense to be

          deductible.

               Some specialized miscellaneous expenses are

          deductible without regard to the 2% floor.  These

          expenses are impairment-related work expenses of the

          handicapped; estate taxes related to income in respect

          of a decedent; certain adjustments where a taxpayer

          restores amounts held under a claim of right;

          amortizable bond premiums; certain costs of cooperative

          housing corporations; expenses of short sales in the

          nature of interest; certain terminated annuity

          payments; and gambling losses to the extent of gambling

          winnings.  Some actors can report their income and

          expenses as independent contractors instead of

          employers.  These actors are those who have two or more

          employers in the acting profession during the year,

          whose expenses related to acting exceed 10% of gross

          income, and whose adjusted gross income before

          deducting expenses related to acting exceeds $16,000.

               There are a number of actions you can take to

          avoid the onerous effects that these changes were

          intended to create.

          

          24) As with medical expenses, a key concept to

          maximizing miscellaneous expense deductions is

          bunching.  You want to put as many expenses as possible

          in one year.  Since miscellaneous expenses are far more

          discretionary than medical expenses, this is much

          easier to do.  Probably the only good reason for

          failing to do so is cash flow problems.  

               Here are some examples of how bunching should

          work.  Let's say you're an employee and have been

          subscribing to professional publications, paying dues,

          running up some unreimbursed business mileage, and

          buying some job-related equipment.  You also attend a

          professional convention once a year at your own

          expense.  You're used to deducting the mileage and

          equipment for adjusted gross income and taking the

          other items as itemized deductions.  Now all these

          expenses have to be itemized and are deductible only to

          the extent they total more than 2% of adjusted gross

          income.

               There are a couple of approaches you can try.  One

          is to pay for subscriptions and dues two years in

          advance and make all the payments in the same year. 

          Then you will have large expenses one year and no

          expenses the next year.  This increases the amount of

          deductions you'll have above the 2% floor.  But the IRS

          has issued a press release saying that this strategy

          does not work.  The IRS says that when you pay for more

          than 12 months at a time, the payments must be prorated

          over two taxable years.  Fortunately, there is a way to

          comply with the IRS ruling and still bunch

          miscellaneous deductions.  You can make one year of

          payments for everything in January, then pay for the

          next 12 months during the following December.  For

          example, pay for 1989 subscriptions and dues in January

          1989, then pay for 1990 in December 1989.  That way you

          will have two years of payments in one year but the

          deductions qualify under the rules given in the IRS

          press release.

          

          25) Part of the cost of securing a divorce can be a

          miscellaneous deduction.  You cannot deduct the cost of

          a personal legal action, such as securing a divorce. 

          But part of the divorce process can be deductible. 

          Each spouse can also deduct any fees attributable to

          tax advice and planning.  The cost of keeping or

          obtaining property as part of a property settlement is

          not deductible but can be added to the property's

          basis.  Most likely part of the cost of a divorce will

          be deductible and part will not be.  Key point: Have

          your lawyer and other advisors submit itemized bills in

          which they set out the time spent on deductible and

          nondeductible matters.

          

          26) Some lucky taxpayers can deduct the cost of

          commuting to work.  Take the case of a taxpayer whose

          principal place of business is a home office.  Any

          business trip you make from that office is deductible

          business mileage, even if the trip is to another office

          or place where you work.  The key is that the home

          office must be your principal place of business for

          that occupation (you can have two jobs), the place

          where you do most of your work.  Commuting mileage also

          can be deducted when you are away from home on a

          temporary work assignment.  A temporary assignment is

          one that you know will not last indefinitely, and under

          the 1993 law, does not last more than one year.  When

          you are out of town on a temporary job, all your

          mileage is deductibleþincluding mileage from your

          lodging to your place of business.  Commuting mileage

          also is deductible when you have a temporary work

          assignment out of town but decide to drive back and

          forth from your home each day.

               An individual with two jobs also will have

          deductible commuting mileage.  You cannot deduct the

          cost of going from either job to home, but the cost of

          going from one job to the other is deductible mileage. 

          So it pays you not to stop off at home between the two

          jobs.  Another person with deductible commuting mileage

          is the person with businesses in two different areas. 

          The area where you spend most of your time will be your

          principal place of business.  The other area will be

          considered away-from-home travel.  You deduct not only

          the cost of going there, but the mileage you drive

          while at the second location.

          

          27) The IRS in drafting its forms and instructions

          tends not to emphasize miscellaneous expenses.  That

          leaves many people unaware of just now broad this

          category is.  You can deduct any expense you incurred

          in the production of income or for investment purposes. 

          You just have to be able to distinguish those expenses

          from personal expenses.  

          

          28) Deduct your expressions of sympathy?  Flowers and

          other sympathy gifts are deductible only if there is a

          business connection.  However, you can always deduct a

          charitable contribution given in memory of a deceased

          person, whether there is a business tie-in or not, if

          you itemize deductions.  And the family often

          appreciates this more than a gift.

          

          29) Noncash donations to charity are an easy way to

          boost deductions.  Gather up old clothes, unwanted

          books, junk furniture, and any other items you can

          find.  Then take them to a worthy group.  You get a

          deduction for the fair market value of the items at the

          time of the contribution.  Be sure to get a receipt for

          the items from the charity.  Some organizations will

          put an estimate of fair market value on the receipt,

          while others will not.  Documentation is important for

          these transactions.  If the deduction is over $500 you

          definitely need receipts.  If the property is worth

          over $5,000 you need to have it appraised before taking

          the deduction.

          

          30) Give appreciated property to charity instead of

          cash.  Suppose you plan to make a large gift to your

          church or some other charity.  You own some art which

          has appreciated substantially since you bought it.  You

          could sell the property, pay tax on the gain, and give

          the remaining cash to the charity.  But you could also

          donate the art to the charity.  In that case you deduct

          the fair market value of the art and do not have to pay

          any tax on the appreciation in the art's value.  But if

          the art, or the total value of your charitable gifts

          for the year, exceeds $5,000 in value, you must have an

          appraisal of the property done.  The appraisal must be

          signed by both the appraiser and the charity and must

          be attached to your tax return.

               This strategy is even better after the 1993 tax

          law, because Congress eliminated the possibility that

          giving away appreciated property might trigger the

          alternative minimum tax.

          

          31) Casualty loss deductions are still available if you

          avoid the three traps the IRS likes to use.  The first

          trap is that you must claim the deduction in the year

          the loss occurs, even if the amount of the loss is not

          ascertainable.  This is a trap because the deduction

          can be deferred when you cannot yet determine if a loss

          has occurred.  The difference may seem slight, but it

          can have a big effect on your tax bill.  Suppose a deep

          freeze does damage to your trees.  A landscape gardener

          says he might be able to save the trees, so you cannot

          determine yet if any loss has occurred.  The deduction

          can be delayed until a subsequent year when it is clear

          that the trees cannot be saved.  In a recent case a

          taxpayer tried to apply this rule.  The taxpayer's

          driveway was washed away in a thunderstorm.  At the

          time the return was filed, the taxpayer believed the

          amount of the damage could not be determined because

          several contractors disagreed over how much repair work

          would be required.  But a federal appeals court said

          the deduction should have been taken in the year of the

          thunderstorm.  A loss clearly had occurred, the

          question was how much the loss was.  The taxpayer

          should have estimated the loss and deducted it; if the

          estimate turned out to be wrong, the return could be

          amended.  (Allen, 4th Cir., 9/9/85)

               The second trap is related to the first.  The

          taxpayer thought the amount of the loss could not be

          determined because he thought the cost of the repairs

          would be deductible.  That's wrong.  Your deduction is

          the lower of (1) your basis in the property or, (2) the

          reduction in value due to the casualty.  Your

          replacement or repair cost is irrelevant.  That's one

          reason why it is important to keep your property and

          casualty insurance policies up to date.  If an item has

          appreciated substantially above its cost to you, the

          tax deduction won't help you recover the value if it is

          lost or stolen.  Your deduction will be limited to the

          item's cost.  In any case, casualty losses can be

          deducted only to the extent they exceed 10% of adjusted

          gross income.

               The third trap was created by tax reform.  In

          order to claim a casualty loss deduction, you have to

          file an insurance claim if the property was covered by

          insurance.  Only the amount of your unreimbursed loss

          can be deducted.  If you do not get a reimbursement

          from the insurer until after you already took the full

          deduction, you can file an amended return or include

          the reimbursement in income next year.

          

          32) Taking a new job can boost your itemized

          deductions.  Most people don't realize that the

          expenses of looking for a new job in the same field are

          deductible.  The deductible expenses include everything

          from printing up resumes to visiting out-of-town firms. 

          The expenses are deductible even if you eventually

          decide not to take another job, as long as you were

          seriously considering a new job.  The expenses are not

          deductible, however, if you are looking for your first

          job.  These expenses can really add to your

          miscellaneous deductions, so you should maximize other

          miscellaneous expenses in a year when you decide to

          look for another job.

          

          33) The family vacation can still generate deductions. 

          If you can combine a business trip with a short

          vacation, part of the vacation costs can be deductible. 

          Your transportation expense (the cost of getting from

          here to there and back) is deductible if the primary

          purpose of making the trip is business.  So your

          transportation cost is deductible when you made the

          trip because of a convention or an important business

          meeting.  It is best to spend more than half the trip

          on business, but your transportation will be deductible

          when you can show that the trip would have been made

          even if no vacation were possible. Traveling expenses

          for your spouse and other family members generally

          cannot be deducted.  After 1993, traveling expenses of

          a spouse or dependent or deductible only when the

          individual is employed by the taxpayer paying the

          expenses and there is a bona fide business reason for

          the person's presence on the trip.

          

          34) Moving expenses can be easier to take under latest

          change.  Previously, moving expenses were an itemized

          deduction.  If you used the standard deduction you were

          out of luck.  After 1993, qualified moving expenses can

          be deducted directly from gross income.  Even better,

          if your employer reimburses you for qualified moving

          expenses, the reimbursement is tax free.  The trade off

          is that not as many expenses qualify for deductions as

          before.  You no longer can deduct househunting trips or

          meals consumed while traveling to the new home or

          living in temporary quarters.  Also, the new place of

          work must be at least 50 miles farther from the old

          residence than the old residence was from the old place

          of work.  You can deduct the cost of moving household

          goods and the cost of traveling from the old home to

          the new home.

          

          35) There are quite a large number of miscellaneous

          expenses.  Here is a list of the most commonly

          overlooked deductions.

               *    Accounting fees for investment or tax work

               *    Agency fees paid to get a new job

               *    Books used for employment or investment

          purposes

               *    Auto expenses or taxi fares to visit your

          broker or other advisor

               *    Christmas gifts given to customers or clients

               *    Clothing and uniforms needed on the job

               *    Conventions

               *    Correspondence courses

               *    Dues and fees for organizations related to

          employment or investments

               *    Educational expenses

               *    Entertainment expenses

               *    Fees paid for collection of interest and

          dividends

               *    Fees paid to set up or administer an IRA

               *    Home office expenses

               *    Investment management fees

               *    Local transportation related to the job

               *    Medical exams required for the job

               *    Passport fees for business travel

               *    Periodicals and publications related to job

          or investments

               *    Safe deposit box used to store investments

               *    Supplies and equipment used on the job

               *    Tax return preparation fees

               *    Telephone calls made on personal phone or

          credit card

               *    Tools used on the job

               *    Travel costs to look after or investigate

          investments, if reasonable compared to size of

          investments

               *    Union dues

          

          36) Tax reform has not limited your ability to engage

          in year-end tax planning.  You can increase tax

          deductions or shift income into next year.  Here are

          some steps that will cut this year's tax bill.  (1)

          Make a large contribution to your church in December

          instead of smaller weekly contributions in the

          following year.  Consider making two year's worth of

          charitable donations at once and taking the deductions

          this year.  (2) Renew subscriptions to business, tax,

          and investment publications in order to bunch

          deductions and get your miscellaneous itemized

          deductions above the 2% floor.  (3) Medical expenses

          also should be bunched to get above the 7.5% floor. 

          Elective surgery and regular check-ups should be timed

          to coincide with years in which you pay for nonelective

          treatment.  (4) Prepay miscellaneous itemized

          deductions such as safe deposit box rental fees and

          bank custodial fees.  (5) Pay professional or business

          association membership dues by December 31.  Purchase

          work-related equipment and uniforms by the end of the

          year.  (6) Some local jurisdictions allow you to prepay

          real estate and personal property taxes.  If so, such

          prepayments are deductible in the year paid.  But other

          jurisdictions consider these payments to be deposits on

          future taxes.  A deposit is not deductible.  Check with

          your local tax office to see how a prepayment will be

          treated.  (7) If you are planning to give property to

          reduce estate taxes, give away stocks or mutual funds

          that pay large year-end dividends.  (8) Have repair and

          maintenance work done on rental properties completed by

          December 31st.  (9) A sale of property can be done on

          an installment basis.  You can delay receipt of the

          money for only a few months, say in January or

          February, and defer recognizing the income on your

          taxes for an entire year.  After 1986 you cannot do an

          installment sale of property traded on a public

          exchange (such as stock and bonds), or property for

          which you are a dealer.  (10) An alternative is to

          delay closing a sale until next year.  The money you

          are to receive can be put in an escrow account and held

          there until next year.  (11) If you have a business, it

          is a good policy to mount a late year advertising

          campaign.  These expenses will be deductible, but you

          generally won't get the bulk of the income generated by

          the campaign until early next year.  You deduct the

          expenses this year and recognize the income next year. 

          (12) Sell capital assets with paper losses until the

          realized losses equal your capital gains for the year. 

          The capital gains and losses offset each other and only

          the difference is brought into taxable income.  If you

          think the assets that showed losses are good long-term

          investments, you can buy them back after more than 30

          days have passed.  (13) A gain on stock can be

          preserved yet delayed until next year by a "short sale

          against the box." This means that you hold the stock

          you already own, but make a short sale of the same

          number of shares by borrowing them from your broker. 

          The short sale is covered sometime in January by giving

          the broker your original shares.  You recognize gain

          only when the short sale is covered.

          

          37) Credit cards are not all alike for the purpose of

          tax deductions.  Around the end of the year, the

          newspapers and popular magazines like to tell readers

          that using a credit card near the end of the year can

          be a way to take a tax deduction this year and pay the

          bill next year.  This works for any deductible

          expense -- whether it be a personal prescription or a

          business expense.  The angle is that the charge can be

          deducted in the year it is charged, not the year it is

          paid.  But there is a dangerous hole in the popular

          advice can leave you stuck with a big tax mess.  Credit

          card deductions are not all the same under the tax

          rules.  The general rule of tax deductions is that you

          only get a tax deduction in the year you actually pay

          for a deductible expense, and the tip about using

          credit cards is an exception to the general rule.  What

          most of the people giving you this end of the year tip

          don't tell you is that there is a critical exception to

          the exception.  If you charge a deductible expense on a

          credit card issued by the company supplying the

          deductible goods or services, you can't take a

          deduction until the credit card bill is paid.  If you

          use the store credit card you can't deduct it until you

          pay.  But if you use your Visa or MasterCard you can

          take the deduction immediately.  If you use your credit

          card you can take the deduction this year, but if the

          store bills you directly you can't take the deduction

          until you pay the bill.  Keep this in mind near the end

          of the year, when you may want to choose which card you

          use depending upon which year you want to take the tax

          deduction in.