It is the last month of the year, December 2000 – a month that many doomsayers thought would never come. The year 2000 is not over yet and the question still persists, “Is the year 2000 the end of the road for mankind?” We can’t really say for sure until the ball in Times Square counts down to 2001, but we suspect mankind will most likely be here on January 1, 2001.
However, as the clock strikes midnight on December 31, 2000, we as U.S. taxpayers will have reached the end of one road - our 2000 tax road. We will no longer have a significant chance to positively affect our year 2000 income tax liabilities. With that in mind, we thought we would go over a few things you might want to do at the last minute and how to make them count.
First, let’s take a look at your investment portfolio. If this year felt like a roller coaster to you, you weren’t alone. Many of us have taken hits on our investments this year, but all is not lost. One way to benefit from the down market is sell loss stock and take the loss on your return. Hopefully, you have some gain you can offset with the losses. Remember, though, you can only deduct up to a net $3,000 (gains – losses) against other types of income in any year. The remainder will carry forward to the next year.
Don’t get too cute, though. Don’t think you can sell loss stock, buy it back the next day and take the loss. If you buy back shares you sold within 30 days, you won’t be able to deduct the loss. This is commonly known as the “wash-sale” rule.
Another technique that can save money is to specifically identify blocks of stock you sell. Say you own 1,000 shares of ACME Savemetax, Inc. You bought 500 shares at $100 per share in 1985 and the rest at $50 per share in 1980. If you sell 100 shares at $500, your best bet is to use the $100 shares in calculating your gain. To take advantage of this option, you must specifically identify the block of shares you sell. Make sure you tell your broker what you are doing when you make the sale, otherwise you will have to use the lower cost shares first.
Moving a little further down your income tax return, don’t forget to take maximum advantage of any retirement plans your employer offers you or any self-employed plans for which you may be eligible. You also need to make sure to reinvest any distributions from qualified plans into separate IRAs to avoid tax on funds you may not have intended to withdraw permanently.
Turning to page two of Form 1040, let’s take a look at allowable itemized deductions.
First on our list of itemized deductions are medical expenses. Expenses paid to diagnose, cure, treat or mitigate the effects of a specific medical condition are generally allowable as medical expenses. Remember, the only deduction you can take is for expenses that exceed 7.5% of your A
ncome. Some of the more common (and not so common) allowable deductions are:
- Doctor, nurse and therapist fees.
- Cost of prescription drugs, including drugs used in a smoking cessation plan.
- Health insurance.
- Long-Term Care Insurance (subject to limitations).
- Air-conditioner to treat allergies and other respiratory problems that don’t constitute permanent improvements to property.
- Auto mileage incurred to take yourself or a dependent to medical treatment.
- Home modifications to accommodate handicapped persons primarily motivated by medical need.
- Costs of special educational aids, seeing-eye dogs and special education for blind persons.
- Childbirth preparation classes for the mother.
- Hearing aids, hearing-aid animals, special education for deaf persons.
- Hospital fees and test expenses.
- Fees of an Indian medicine man.
- The list goes on, and on, and on…
Some of the more interesting items that do not
constitute deductible expenses are:
- Babysitting expenses to enable parent to see doctor.
- Unnecessary cosmetic surgery.
- Dancing lessons.
- Use of illegal drugs, even when prescribed.
- Dust elimination system.
- Ear piercing, electrolysis, hair transplants.
- Health club dues not related to a particular medical condition.
- Maternity clothes.
- Loss on sale of a residence when moving on advice of a physician.
For further information, see IRSPublication 502
Next on our list of deductions are taxes. One very important point to remember is sales taxes still are not deductible. However, the following taxes are deductible:
- State, local or foreign real estate taxes, unless the tax is really an assessment to make improvements in the property such as streets, sidewalks and similar improvements.
- State or local personal property taxes, including auto license fees that are charged annually based on the value of the automobile.
- State and local income taxes.
- Foreign income taxes to the extent the taxpayer does not take a credit for them on page two of Form 1040.
- Generation-skipping transfer tax imposed on income distributions.
For further information on taxes, see IRSPublications 530 and 514
If you own your home, or should we say if you are buying it from the bank, chances are you have a mortgage on it. In that case, the interest you pay on the mortgage is a deductible expense. Interest on home mortgages is deductible for interest paid on home acquisition loans of $1 million or less and home equity loans of $100,000 or less for all taxpayers except married individuals filing separately. In this case, the amounts are halved.
Other deductible interest includes:
- Interest on loans to acquire investment property.
- Points and origination fees paid on loans to acquire a residence are fully deductible when paid, but points and origination fees on loans to refinance existing mortgages are deductible ratably over the life of the loan.
Personal interest is not deductible. For further information, see IRSPublications 530, 550 and 936
Charitable deductions are one of the most misunderstood items we see. It’s not necessary for our clients to not know what donations are deductible or not deductible. It’s more that people who solicit contributions do not always accurately represent themselves.
We’re sure you have received numerous contribution requests from various organizations to sponsor a child to go to a concert, or receive a Christmas present or some similar request. Many of these contributions are not
deductible expenses. If you have any questions about the qualification of an entity to solicit tax deducible contributions, go to the IRS’ Cumulative List of Organizations.
In general, donations to organizations listed in the IRS’ list Cumulative List of Organizations are deductible as charitable contributions. You can make donations in cash or property. Certain rules exist with respect to reporting the contributions and, if you are ever audited, supporting the deductions.
For further information on charitable contributions, see IRSPublication 526.
Casualty losses are one itemized deduction that seem to be in demand these days – thanks to Mother Nature. If you think a loss you experienced this year will qualify for a casualty loss deduction, check out IRSPublication 547
There are a number of other Miscellaneous Itemized Deductions that include tax preparation fees, union dues, investment expenses and similar items. These expenses are generally limited to any expenses in excess of 2% of your AGI, although some may qualify for a full deduction. See IRSPublication 529
for more information on these deductions.
As we mentioned in October, don’t forget that most individuals are cash basis taxpayers. That means if you don’t pay the cash in 2000, you won’t get the deduction. One exception to the rule is if you charge the deduction on a credit card. That will be considered as having paid in cash.
The ideas and suggestions we have given you this month are just that – suggestions. Space does not permit us the ability to discuss all the various tax planning ideas and opportunities available to taxpayers. We urge you to give us a call immediately to discuss any tax planning ideas that may apply to you. Helping you pay the least amount in taxes – legally – is our job.
Have a great Holiday Season and a most prosperous New Year!!!