TAKING ADVANTAGE OF DEDUCTIONS

 

Accelerating Deductions Into 2004.  If you are a cash method taxpayer, you can generally accelerate a 2005 deduction into 2004 by paying it in 2004.  Accelerating an above-the-line deduction into 2004 may allow you to reduce your adjusted gross income below the thresholds needed to qualify for many tax benefits. Remember, however, that itemized deductions do not reduce your adjusted gross income and, therefore, will not affect your 2004 deductions and credits that are reduced as your income increases. Itemized deductions include charitable contributions, state and local taxes, medical expenses, unreimbursed employee travel expenses, and home mortgage interest.  Tax Tip.  Payment typically occurs in 2004 if a check is delivered to the post office, or if an item is charged on a credit card in 2004.

 


Bunching Itemized Deductions.  If your itemized deductions fail to exceed your standard deduction in most years, you are not receiving maximum benefit for your itemized deductions. You could possibly reduce your taxes over the long term by bunching the payment of your itemized deductions in alternate tax years. This may produce tax savings by allowing you to itemize deductions in the years when your expenses are bunched, and using the standard deduction in other years. Tax Tip. The easiest deductions to shift between tax years are charitable contributions, state and local taxes, and your January home mortgage interest payment. For 2004, the standard deduction is $9,700 on a joint return and $4,850 for single individuals.  If you are blind or over age 64, you get an additional standard deduction of $950 if you’re married ($1,200 if single).

 

Bunching Medical Expenses.  Many taxpayers ignore the medical expense deduction because medical expenses are deductible only if they exceed 7.5% of your adjusted gross income (10% for AMT purposes).  However, if you have medical expenses that are discretionary, you may be able to bunch  them into 2004 or 2005 and exceed the 7.5% floor.  For example, braces are discretionary, and such medical procedures as radial keratotomy and laser eye surgery may be discretionary and qualify for the medical expense deduction.  Tax Tip.  You can include in your medical expense the following: medical insurance premiums, transportation essential for medical care, lodging (but not meals) while away from home primarily for medical care, and changes to your house to accommodate a physical handicap.  Tuition payments to a special school for a child with severe mental or physical disabilities (which would include medically diagnosed attention deficit hyperactive disorder) may also qualify as a medical expense. However, the IRS requires that a doctor recommend that a child attend the school, and the school generally must determine the portion of the tuition payment that relates directly to the medical needs of the child.  Also, the costs of programs and prescription drugs to help people stop smoking qualify as a medical expense.   

 

Deduction For Self-Employed Health Insurance Costs. If you are self-employed, a partner, or own more than 2% of an S corporation, you are generally entitled to an above-the-line tax deduction for your health insurance premiums. 

 

Maximizing Employee Business Expenses.  If you are incurring unreimbursed employee business expenses, you must reduce those expenses by 2% of your adjusted gross income. Bunching these expenses into 2004 or 2005 so the 2% threshold is exceeded may reduce your taxes. You can bunch 2005 expenses into 2004 by prepaying the 2005 amounts in 2004.  Planning Alert! The IRS says that prepayments of expenses applicable to periods beyond 12 months will not be deductible in 2004. Tax Tip.  If you are a statutory employee (e.g., full-time life insurance salesperson, certain commissioned drivers, certain home workers) you are not subject to the 2% limitation for employee business expenses. The statutory employee box on your Form W-2 should be checked if you are classified as a statutory employee.

 

$     Taking Advantage Of Employer’s Accountable Plan.  As an employee, you can avoid the 2% rule altogether if you document your business expenses and get reimbursed by your employer under an accountable plan. We can help you establish a proper reimbursement arrangement with your employer. Tax Tip! The IRS has issued a revenue ruling approving the use of electronic expense reports and electronic receipts for accountable plans.

 

$     Avoiding The 50% Reduction For Meal And Entertainment Expenses.  You can generally deduct your meals if you are on an overnight business trip. In addition, you can generally deduct business entertainment (including a meal) if you engage in a legitimate business meeting with a bona fide business associate shortly before, during, or after the meal or entertainment.  However, only 50% of your otherwise deductible business meal and entertainment expenses are deductible.  Tax Tip.  You can avoid the 50% reduction if you properly document your business meals and entertainment and receive reimbursement for the expenditure from your employer under an accountable plan.  However, your employer may deduct only 50% of the reimbursement.  If you are self-employed, you can also avoid the 50% reduction if you separately bill your client (with proper documentation) for your qualifying business meal and entertainment expenses on behalf of the client.  Your client, however, may deduct only 50% of the reimbursement. Consequently, you should document and obtain a reimbursement for all business meal and entertainment expenses whenever possible if you wish to avoid the 50% reduction. Individuals working in selected transportation industries and subject to the Department of Labor’s Hours of service limitations are required to reduce their meal deduction by only 30% rather than 50% (e.g., pilots; interstate truck drivers and bus drivers; and railroad engineers).

 


Charitable Contributions. 

 

$     Contributions Of Appreciated Property.  If you are considering a significant 2004 contribution to a public charity (e.g., church, synagogue, or college), it will generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds.  By contributing capital gain property held more than one year (e.g., appreciated stock, real estate, etc.), a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. Tax Tip. Generally, this rule does not apply to contributions to private foundations.  However, you can contribute qualifying publicly-traded stock to a private foundation and deduct the full fair market value (rather than the cost basis).  Planning Alert! The American Jobs Act of 2004 imposes new reporting requirements for certain noncash contributions made after June 3, 2004, and for contributions of qualified vehicles after December 31, 2004.

 

$     Substantiation Requirements.  If you contribute $250 or more to a charity, you are allowed a deduction only if you receive a qualifying written receipt from the charity by the time your return is filed. The receipt generally must include the amount of money and a description of any property contributed, and a good faith estimate of the value of any goods or services that were provided to you in exchange for the gift. If no goods or services were provided to you in return for the contribution, the receipt must contain a statement that no goods or services were provided.  Caution! You must receive this receipt before we file your 2004 return, and you should retain the receipt in your tax files in case you are later audited.  IRS says a canceled check is not sufficient where a receipt is required! 

 

$     Be Sure to Pay Your Charitable Contribution In 2004. A  charitable contribution deduction is allowed for 2004 if the check is mailed on or before December 31, 2004, or the contribution is made by a credit card charge in 2004. However, if you give a note or a pledge to a charity, no deduction is allowed until you pay off the note or pledge. 

 

Maximizing Home Mortgage Interest Deduction.  If you are looking to maximize your 2004 deductions, you can increase your home mortgage interest deduction by paying your January, 2005 payment on or before December 31, 2004.  Typically, the January mortgage payment represents interest that was accrued in December and, therefore, is deductible if paid in December.

 

$     Look For Deductible Points.  Points paid in connection with the purchase or improvement of your principal residence are immediately deductible.  Points are deductible even if the bank labels them as something else.  For example, points include loan-processing fees, loan premium charges, or loan origination fees so long as they don’t represent fees for other services (e.g., appraisal, title, inspection, attorneys fees, credit checks, property taxes, or mortgage insurance premiums).  

 

$     Remember To Deduct Seller-Paid Points.  If you bought a house this year and negotiated for the seller to pay your points at closing, the IRS says you can deduct those seller-paid points as though you paid them yourself.

 

$     Pay Off Personal Loans First.  If you have both home mortgage loans and other personal debt, pay off the personal debt first because interest on personal debt is generally not deductible but home mortgage interest is generally deductible. This will maximize your interest deduction.

 

 

Tax Relief for Hurricane Losses.  This year's hurricane season has had a devastating impact on many southeastern and east coast states, including, Alabama, Florida, Mississippi, Louisiana, Georgia, Virginia, North Carolina and South Carolina.  Many counties in those states have been declared Presidential Disaster Areas which qualify those counties for various tax relief provisions recently announced by the IRS.  For an updated list of Presidential Disaster Areas by state, please consult the FEMA website at www.fema.gov.  For the most recent IRS tax relief announcements, please consult the IRS website at www.irs.gov.  Tax relief for these counties which have been declared as part of a Presidential Disaster Area include extensions of time to file tax returns and pay taxes, and special periods within which the IRS may waive penalties for failure to timely deposit payroll taxes and excise taxes.   Tax Tip.  If you or your business is in a county located in a Presidential Disaster Area, you will receive this relief whether or not you or your business suffered damage because of the storms.


If you have a loss from a casualty in one of these disaster areas (after considering any insurance claims), you have an option to deduct the loss on either your 2004 income tax return or on your 2003 return. You should generally take the deduction in the tax year that produces the greater tax reduction. Planning Alert! If the loss produces about the same tax benefit on the 2003 or the 2004 return, then you may wish to amend the 2003 return and take the loss in order to speed up the refund. Caution! Generally, if you wish to take the casualty loss deduction on the 2003 return, the return must be amended no later than April 15, 2005. We will gladly help you determine the amount of your deductible casualty loss and help you decide whether to take the loss in 2003 or 2004.

 

Tax-Wise Payment Of State And Local Taxes.  Consider paying state and local income taxes (fourth quarter estimate and balance due for 2004) and property taxes for 2004 prior to January 1, 2005 if your tax rate for 2004 is higher than or the same as your projected 2005 tax rate. This will allow a deduction for 2004 (a year early) and possibly against income taxed at a higher rate.  Planning Alert!  You should not employ this tactic without carefully calculating the alternative minimum tax impact.  Also, overpayment of your 2004 state and local income taxes is generally not advisable since a refund in 2005 from a 2004 overpayment may be taxed at a higher rate than the 2004 deduction rate.  Please consult us before you overpay state or local income taxes!  Tax Tip.  Remember, the 2004 Jobs Act allows you to elect to deduct state and local sales taxes in lieu of state and local income taxes.

 

Club Dues.  Club dues are generally not deductible at all, unless the dues are business related and are paid to professional organizations (e.g., ABA, AICPA, AMA), civic or public service organizations (e.g., Kiwanis, Lions, Rotary, Civitan), business leagues, trade associations, chambers of commerce, boards of trade, or real estate boards.  Tax Tip.  Although you may not generally deduct dues paid to country clubs, golf and athletic clubs, and airline clubs, there is a special rule for employers who reimburse these club dues.  If you document to your employer the percentage of the time you use these clubs for bona fide business purposes, your employer can reimburse you for this business portion of the club dues and elect to exclude that reimbursement from your Form W-2.  However, if your employer makes this election, the employer may not deduct the reimbursement. 

 

Companion Travel Expenses.  Generally, you are not allowed a deduction for taking your spouse or other companion on a business trip unless there is a bona fide business purpose for taking the person, and the person is also a bona fide employee of the person paying or reimbursing the expenses.  Tax Tip.  If your spouse is not an employee, but there is a bona fide business reason for taking your spouse on a business trip, your employer may reimburse you for your spouse’s expenses without including the reimbursement on your Form W-2.  However, you must document the amount and the business nature of your spouse’s expenses.  Furthermore, if your employer chooses this option, the employer will not be allowed a deduction for the reimbursement of the expenses.