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| | December
2000 On-line Tax Planning
Don’t
Overlook These Tax Deductions
As we discussed in last month’s tax planning article, you need to be
aware of your current tax situation. In addition to knowing what types of
income are taxable or non-taxable, you need to be aware of what options
you have to reduce your current year taxable income and therefore your
income tax. Many taxpayers have the option to use itemized deductions to
reduce their taxable income. Below are many of the itemized deductions a
taxpayer should take into consideration when looking at his or her current
and future tax situations.
State Income Tax. The state income tax is fully deductible on the
Schedule A provided that it is paid in the year in question. For instance,
an estimated tax payment made on January 1, 2001 is not deductible on the
taxpayer’s 2000 Form 1040 Schedule A. Therefore, to maximize your
current year’s state income tax deduction, you should pay all of your
state income tax estimates by December 31, 2000.
Future Year Tax Consideration: if you anticipate that next year
you will be taxed in a higher income tax bracket, say 31% instead of
28%, you may want to wait until 2001 to pay your 2000 fourth quarter
state income tax estimate. This may increase your current year taxable
income, but overall you will save more tax dollars by waiting until 2001
to pay your fourth quarter estimate.
Caution: consult your tax advisor about possible alternative minimum
tax impact on your tax liability.
Investment Interest. Investment interest is the interest paid by
a taxpayer on funds borrowed to acquire investment assets. Investment
interest is fully deductible up to net investment income for the year.
Net investment income is made up of interest, dividends, annuities and
royalties and short-term capital gains less any investment expenses. An
election is also available to treat long-term capital gains as
investment income. You should consult your tax advisor about the effects
of making the election. In most instances, investment interest will not
be more than net investment income. Any unused investment interest may
be carried forward to all future years.
Charitable Contributions. The deductibility of charitable
contributions is limited by some of the most complex criteria found in tax
law. Some of the more general limitations are:
 | The charitable contribution must be made to a qualified domestic
organization. |
| Most contributions are limited to 50% of adjusted gross income.
Except contributions to most charities of appreciated capital assets
are limited to 30% of adjusted gross income. |
| Contributions of cash or ordinary income property made to a
private nonoperating foundation are limited to 30% of adjusted gross
income. |
| Contributions of appreciated long-term capital gain property made
to a private nonoperating foundation are limited to 20% of adjusted
gross income. |
| When a taxpayer who has made contributions where both the 50% and
30% limitations apply, the allowable deduction comes from the 50%
property before the 30% property. |
| In the event that a taxpayer’s contributions exceed the
applicable percentage limitations, the remaining contributions can
be carried forward to future tax returns for a maximum of five
years. Also, the original year’s property classifications (50% vs.
30%) will apply in the following years. |
| For any contribution made which exceeds $250, the taxpayer must be
able to provide a receipt if inspected by the IRS and the receipt
must be in hand before the return is filed. |
| Any noncash contribution over $5,000 ($10,000in the case of
non-publicly traded stocks), the taxpayer must provide an appraisal
report, signed by the appraisor, as well as file a Form 8283.
Section B. If these items are not provided the IRS will disallow the
contribution. Contributions of publicly-traded securities are
excepted. |
Charitable contributions can be used to help reduce your taxable
income. Like the state income tax fourth quarter estimate, charitable
contributions can be made to help your current year tax situation by
making them on or before December 31, 2000. Or if your tax bracket in
2001 will be higher than 2000, you can wait to make you contribution
until January 1, 2001 or thereafter. Remember, if you are making a
contribution via personal check, the contribution can be taken in the
year that the check is mailed. When giving non-cash items like stock,
the contribution must be taken in the year in which the stock is
transferred out of your account and into the donee’s account.
Generally, contributions made by credit card are deductible in the year
charged, irrespective of when the credit card bill is paid.
Miscellaneous Itemized Deductions. Miscellaneous itemized
deductions are subject to a two percent adjusted gross income
limitation. This means that only miscellaneous itemized deductions that
exceed two percent of your adjusted gross income result in any tax
benefit. Any deductions over the two percent limitation are subject to
the phaseout of all itemized deductions (up to 80%) above $128,950
adjusted gross income married on your Schedule A of the Form 1040. Below
is a listing of some of the more common miscellaneous itemized
deductions:
| Professional dues to membership organizations |
| Uniforms (clothing that cannot be used for normal wear) |
| Tax return preparation fees |
| Fees incurred in litigation before IRS or the courts |
| Job-hunting costs |
| Safe deposit box fees |
| Investment expenses (discuss with your accountant) |
| Appraisal fees – for amount of casualty loss or FMV of donated
property (>$5000) |
| Hobby losses up to amount of hobby income |
| Gambling losses up to amount of gambling income |
| Unreimbursed employee expenses (discuss with your accountant) |
| Federal estate tax on income in respect of a decedent |
| Excess deductions on termination of an estate |
Medical Expenses. Medical expenses which exceed 7.5% of adjust
gross income are deductible on Schedule A of Form 1040. There are many
items which are included as qualifying, deductible medical expenses:
| Medical insurance premiums |
| Medical care (which you pay for, not what your insurance pays for) |
| Prescription drugs |
| Special medical equipment such as wheelchairs, crutches,
eyeglasses, braces, artificial, limbs, hearing aids, etc. |
| Transportation for medical care |
| Costs of certain drug and alcohol rehabilitation |
| Certain costs to quit smoking |
There are many medical expenses which are not deductible such as
nonprescription drugs or cosmetic surgery.
This article may be used by you as a broad guideline in compiling your
deductible expenditures. However, nuances in each individual situation
vary, and you should consult with your tax advisor concerning these or any
other expenditures which you believe might be deductible.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
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