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.