Tax Info Newsletter
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Tax Info Newsletter
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Dated: 03/07/2002 |
We all make mistakes, and, more often than not, the mistakes are acts of omission as opposed to commission. In other words, we miss the little things and they add up. It doesn’t make any difference if you’re talking about scuba diving (a favorite activity of my family) or taxes. So take a little time to compare this list against all your activities of last year. You’ll probably find some things that can save you money -- if not this year, then next.
Read this list before you file.
Pay off any credit card debt with a home equity loan or through a home equity credit line. The interest on that loan is deductible. Home equity debt is any debt secured by your house. The money can be used to pay off your credit card debt, for vacations, or anything else you want. The interest on up to $100,000 of debt is deductible as home equity interest.
In addition to home equity interest, you can deduct the interest paid on debt to acquire or purchase your house.
By shifting from credit card debt to home equity debt, you not only convert nondeductible interest into interest or expenses you can write off, but you'll probably pay a much lower interest rate.
See Publication 936 for more information.
Make sure you get a receipt. The receipt usually will say something like three bags of clothes, without any value given. But don't leave without it. Think of that receipt as green paper with pictures of dead presidents. If you're in the 27% bracket in 2002 (down from 27.5% in 2001), a $1,000 contribution of old clothes means $270 in your pocket. You wouldn't walk out of a store without your change, so don't forget your receipt.
See Publication 526 for more information.
It's called “bunching your deductions.” That means if you know you're going to spend a large amount on medical bills this year, look to see if there are others you can take now rather than waiting until next year. If your daughter needs orthodontia work, do it in the year where you know you can get the deduction. Otherwise, you'll be buying those braces with no empathy or sympathy from Uncle Sam.
See Publication 502 for more information.
Creativity here can be rewarding. For example, if you take a friend to lunch in an attempt to use him as a reference or referral, you can use the cost of the lunch as a job-hunting expense.
Rather than buy your investment newspapers and magazines at the newsstand, subscribe to them and use your check as the receipt. If you use your computer for investment purposes (more than just tracking a few stocks), or subscribe to an Internet service for investment purposes, those expenses also become deductible.
See Publication 529 for more information.
The key here is that you use the items in the business, not that you necessarily need them. So long as the items are reasonable and appropriate to use in your business, they don't have to be absolutely “needed.”
If there's any doubt, have your employer write a letter saying that such items are required for your position and attach that letter to your tax return. If you're audited, the IRS may ask for such a letter. The best way to win an audit is to avoid it.
If you're self-employed, tax preparation fees can be deducted as business expenses, potentially not only reducing your income tax but your Social Security and Medicare taxes as well.
See Publication 529 for more information.
Capital expenditures are deductible to the extent their cost exceeds the added value to your property. If you have arthritis or any other medical condition that can be helped by a sauna or a whirlpool, those items are deductible. Upkeep for these items would also qualify as deductible medical expenses.
If you used your car for trips to the doctor, keep a record. You can deduct the mileage as a medical expense. In 2002, the mileage rate is 13 cents a mile, up from 12 cents a mile in 2001.
Let's get creative. It has been established that significant dental work is less expensive in Europe than in the United States. Therefore, even with adding the transportation cost, you could pay less for expensive dental work overseas than here domestically. On that basis, the courts have ruled that such transportation costs are allowable as medical deductions.
See Publication 502 for more information.
See Publication 502 for more information.
Moreover, for 2002, you can pay each child as much as $7,700 (each child gets a $4,700 standard deduction plus $3,000 in an IRA), deduct the sum in full, and they pay zero taxes. (For 2001, the standard deduction was $4,550 and the IRA deduction $2,000, bringing the total to $6,550.) If you're in the 30% bracket in 2002 and hire two minor children, you save $4,620 in taxes ($4,700 x 2 x .30). This technique has been allowed for children as young as 7 years old. (In 2001, the savings were $4,061.)
Not only does this technique save income taxes, it reduces your liability for Social Security and Medicare taxes on your net income. This could save you an additional $2,356.20 ($7,700 x 2 x .153). The savings were $2004.30 in 2001.
Also consider establishing an IRA (I usually suggest ROTH IRAs for children, but traditional is a consideration in itself) for each child and have the child contribute the maximum deposit in the IRA. Those deposits grow tax free, and can be withdrawn up to a limit without penalty for college expenses when the time comes.