Miscellaneous Deductions 23) Retaining their medical, miscellaneous and employee business expense deductions is important to most taxpayers, because these expenses generally are unavoidable. Yet Congress tried to curtail these deductions because one of the ideas behind tax reform was that you would give up some deductions in order to get lower tax rates. Yet the clever taxpayer knows how to keep some of those deductions and get the benefit of lower rates. Even after tax reform, that is possible. The change in the medical expense deduction is very simple. You can deduct only the unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, and then only if those excess deductions when combined with your itemized expenses exceed the standard deduction. Everything else about the medical expense deduction remains the same. Miscellaneous deductions had a few more changes. The expenses are deductible only to the extent they exceed 2% of adjusted gross income and the excess when combined with other itemized deductions exceeds the standard deduction. In addition, some expenses that could be deducted in the past can no longer be deducted. The expenses for attending an investment convention or seminar are not deductible. Travel for educational purposes is not deductible, so school teachers can no longer deduct the cost of a summer vacation that was spent in some way related to the courses they teach. The biggest change is that unreimbursed employee business expenses become miscellaneous itemized deductions. In the past most unreimbursed employee expenses could be deducted from adjusted gross income. You didn't have to worry about whether you had enough itemized deductions or about getting above a 2% floor. That's no longer true. Items such as travel and entertainment expenses and business mileage must be included in miscellaneous itemized deductions. So now instead of having two separate categories of deductions, there is only the deduction for miscellaneous expenses. In addition, business entertainment expense deductions are limited to 50% of the cash outlay, and the "quiet business meal" exception is eliminated. Under this exemption, a meal could be deducted even if business was not actually discussed. Now there must be a bona fide business discussion either during the entertainment or immediately before or after it for the expense to be deductible. Some specialized miscellaneous expenses are deductible without regard to the 2% floor. These expenses are impairment-related work expenses of the handicapped; estate taxes related to income in respect of a decedent; certain adjustments where a taxpayer restores amounts held under a claim of right; amortizable bond premiums; certain costs of cooperative housing corporations; expenses of short sales in the nature of interest; certain terminated annuity payments; and gambling losses to the extent of gambling winnings. Some actors can report their income and expenses as independent contractors instead of employers. These actors are those who have two or more employers in the acting profession during the year, whose expenses related to acting exceed 10% of gross income, and whose adjusted gross income before deducting expenses related to acting exceeds $16,000. There are a number of actions you can take to avoid the onerous effects that these changes were intended to create. 24) As with medical expenses, a key concept to maximizing miscellaneous expense deductions is bunching. You want to put as many expenses as possible in one year. Since miscellaneous expenses are far more discretionary than medical expenses, this is much easier to do. Probably the only good reason for failing to do so is cash flow problems. Here are some examples of how bunching should work. Let's say you're an employee and have been subscribing to professional publications, paying dues, running up some unreimbursed business mileage, and buying some job-related equipment. You also attend a professional convention once a year at your own expense. You're used to deducting the mileage and equipment for adjusted gross income and taking the other items as itemized deductions. Now all these expenses have to be itemized and are deductible only to the extent they total more than 2% of adjusted gross income. There are a couple of approaches you can try. One is to pay for subscriptions and dues two years in advance and make all the payments in the same year. Then you will have large expenses one year and no expenses the next year. This increases the amount of deductions you'll have above the 2% floor. But the IRS has issued a press release saying that this strategy does not work. The IRS says that when you pay for more than 12 months at a time, the payments must be prorated over two taxable years. Fortunately, there is a way to comply with the IRS ruling and still bunch miscellaneous deductions. You can make one year of payments for everything in January, then pay for the next 12 months during the following December. For example, pay for 1989 subscriptions and dues in January 1989, then pay for 1990 in December 1989. That way you will have two years of payments in one year but the deductions qualify under the rules given in the IRS press release. 25) Part of the cost of securing a divorce can be a miscellaneous deduction. You cannot deduct the cost of a personal legal action, such as securing a divorce. But part of the divorce process can be deductible. Each spouse can also deduct any fees attributable to tax advice and planning. The cost of keeping or obtaining property as part of a property settlement is not deductible but can be added to the property's basis. Most likely part of the cost of a divorce will be deductible and part will not be. Key point: Have your lawyer and other advisors submit itemized bills in which they set out the time spent on deductible and nondeductible matters. 26) Some lucky taxpayers can deduct the cost of commuting to work. Take the case of a taxpayer whose principal place of business is a home office. Any business trip you make from that office is deductible business mileage, even if the trip is to another office or place where you work. The key is that the home office must be your principal place of business for that occupation (you can have two jobs), the place where you do most of your work. Commuting mileage also can be deducted when you are away from home on a temporary work assignment. A temporary assignment is one that you know will not last indefinitely, and under the 1993 law, does not last more than one year. When you are out of town on a temporary job, all your mileage is deductibleşincluding mileage from your lodging to your place of business. Commuting mileage also is deductible when you have a temporary work assignment out of town but decide to drive back and forth from your home each day. An individual with two jobs also will have deductible commuting mileage. You cannot deduct the cost of going from either job to home, but the cost of going from one job to the other is deductible mileage. So it pays you not to stop off at home between the two jobs. Another person with deductible commuting mileage is the person with businesses in two different areas. The area where you spend most of your time will be your principal place of business. The other area will be considered away-from-home travel. You deduct not only the cost of going there, but the mileage you drive while at the second location. 27) The IRS in drafting its forms and instructions tends not to emphasize miscellaneous expenses. That leaves many people unaware of just now broad this category is. You can deduct any expense you incurred in the production of income or for investment purposes. You just have to be able to distinguish those expenses from personal expenses. 28) Deduct your expressions of sympathy? Flowers and other sympathy gifts are deductible only if there is a business connection. However, you can always deduct a charitable contribution given in memory of a deceased person, whether there is a business tie-in or not, if you itemize deductions. And the family often appreciates this more than a gift. 29) Noncash donations to charity are an easy way to boost deductions. Gather up old clothes, unwanted books, junk furniture, and any other items you can find. Then take them to a worthy group. You get a deduction for the fair market value of the items at the time of the contribution. Be sure to get a receipt for the items from the charity. Some organizations will put an estimate of fair market value on the receipt, while others will not. Documentation is important for these transactions. If the deduction is over $500 you definitely need receipts. If the property is worth over $5,000 you need to have it appraised before taking the deduction. 30) Give appreciated property to charity instead of cash. Suppose you plan to make a large gift to your church or some other charity. You own some art which has appreciated substantially since you bought it. You could sell the property, pay tax on the gain, and give the remaining cash to the charity. But you could also donate the art to the charity. In that case you deduct the fair market value of the art and do not have to pay any tax on the appreciation in the art's value. But if the art, or the total value of your charitable gifts for the year, exceeds $5,000 in value, you must have an appraisal of the property done. The appraisal must be signed by both the appraiser and the charity and must be attached to your tax return. This strategy is even better after the 1993 tax law, because Congress eliminated the possibility that giving away appreciated property might trigger the alternative minimum tax. 31) Casualty loss deductions are still available if you avoid the three traps the IRS likes to use. The first trap is that you must claim the deduction in the year the loss occurs, even if the amount of the loss is not ascertainable. This is a trap because the deduction can be deferred when you cannot yet determine if a loss has occurred. The difference may seem slight, but it can have a big effect on your tax bill. Suppose a deep freeze does damage to your trees. A landscape gardener says he might be able to save the trees, so you cannot determine yet if any loss has occurred. The deduction can be delayed until a subsequent year when it is clear that the trees cannot be saved. In a recent case a taxpayer tried to apply this rule. The taxpayer's driveway was washed away in a thunderstorm. At the time the return was filed, the taxpayer believed the amount of the damage could not be determined because several contractors disagreed over how much repair work would be required. But a federal appeals court said the deduction should have been taken in the year of the thunderstorm. A loss clearly had occurred, the question was how much the loss was. The taxpayer should have estimated the loss and deducted it; if the estimate turned out to be wrong, the return could be amended. (Allen, 4th Cir., 9/9/85) The second trap is related to the first. The taxpayer thought the amount of the loss could not be determined because he thought the cost of the repairs would be deductible. That's wrong. Your deduction is the lower of (1) your basis in the property or, (2) the reduction in value due to the casualty. Your replacement or repair cost is irrelevant. That's one reason why it is important to keep your property and casualty insurance policies up to date. If an item has appreciated substantially above its cost to you, the tax deduction won't help you recover the value if it is lost or stolen. Your deduction will be limited to the item's cost. In any case, casualty losses can be deducted only to the extent they exceed 10% of adjusted gross income. The third trap was created by tax reform. In order to claim a casualty loss deduction, you have to file an insurance claim if the property was covered by insurance. Only the amount of your unreimbursed loss can be deducted. If you do not get a reimbursement from the insurer until after you already took the full deduction, you can file an amended return or include the reimbursement in income next year. 32) Taking a new job can boost your itemized deductions. Most people don't realize that the expenses of looking for a new job in the same field are deductible. The deductible expenses include everything from printing up resumes to visiting out-of-town firms. The expenses are deductible even if you eventually decide not to take another job, as long as you were seriously considering a new job. The expenses are not deductible, however, if you are looking for your first job. These expenses can really add to your miscellaneous deductions, so you should maximize other miscellaneous expenses in a year when you decide to look for another job. 33) The family vacation can still generate deductions. If you can combine a business trip with a short vacation, part of the vacation costs can be deductible. Your transportation expense (the cost of getting from here to there and back) is deductible if the primary purpose of making the trip is business. So your transportation cost is deductible when you made the trip because of a convention or an important business meeting. It is best to spend more than half the trip on business, but your transportation will be deductible when you can show that the trip would have been made even if no vacation were possible. Traveling expenses for your spouse and other family members generally cannot be deducted. After 1993, traveling expenses of a spouse or dependent or deductible only when the individual is employed by the taxpayer paying the expenses and there is a bona fide business reason for the person's presence on the trip. 34) Moving expenses can be easier to take under latest change. Previously, moving expenses were an itemized deduction. If you used the standard deduction you were out of luck. After 1993, qualified moving expenses can be deducted directly from gross income. Even better, if your employer reimburses you for qualified moving expenses, the reimbursement is tax free. The trade off is that not as many expenses qualify for deductions as before. You no longer can deduct househunting trips or meals consumed while traveling to the new home or living in temporary quarters. Also, the new place of work must be at least 50 miles farther from the old residence than the old residence was from the old place of work. You can deduct the cost of moving household goods and the cost of traveling from the old home to the new home. 35) There are quite a large number of miscellaneous expenses. Here is a list of the most commonly overlooked deductions. * Accounting fees for investment or tax work * Agency fees paid to get a new job * Books used for employment or investment purposes * Auto expenses or taxi fares to visit your broker or other advisor * Christmas gifts given to customers or clients * Clothing and uniforms needed on the job * Conventions * Correspondence courses * Dues and fees for organizations related to employment or investments * Educational expenses * Entertainment expenses * Fees paid for collection of interest and dividends * Fees paid to set up or administer an IRA * Home office expenses * Investment management fees * Local transportation related to the job * Medical exams required for the job * Passport fees for business travel * Periodicals and publications related to job or investments * Safe deposit box used to store investments * Supplies and equipment used on the job * Tax return preparation fees * Telephone calls made on personal phone or credit card * Tools used on the job * Travel costs to look after or investigate investments, if reasonable compared to size of investments * Union dues 36) Tax reform has not limited your ability to engage in year-end tax planning. You can increase tax deductions or shift income into next year. Here are some steps that will cut this year's tax bill. (1) Make a large contribution to your church in December instead of smaller weekly contributions in the following year. Consider making two year's worth of charitable donations at once and taking the deductions this year. (2) Renew subscriptions to business, tax, and investment publications in order to bunch deductions and get your miscellaneous itemized deductions above the 2% floor. (3) Medical expenses also should be bunched to get above the 7.5% floor. Elective surgery and regular check-ups should be timed to coincide with years in which you pay for nonelective treatment. (4) Prepay miscellaneous itemized deductions such as safe deposit box rental fees and bank custodial fees. (5) Pay professional or business association membership dues by December 31. Purchase work-related equipment and uniforms by the end of the year. (6) Some local jurisdictions allow you to prepay real estate and personal property taxes. If so, such prepayments are deductible in the year paid. But other jurisdictions consider these payments to be deposits on future taxes. A deposit is not deductible. Check with your local tax office to see how a prepayment will be treated. (7) If you are planning to give property to reduce estate taxes, give away stocks or mutual funds that pay large year-end dividends. (8) Have repair and maintenance work done on rental properties completed by December 31st. (9) A sale of property can be done on an installment basis. You can delay receipt of the money for only a few months, say in January or February, and defer recognizing the income on your taxes for an entire year. After 1986 you cannot do an installment sale of property traded on a public exchange (such as stock and bonds), or property for which you are a dealer. (10) An alternative is to delay closing a sale until next year. The money you are to receive can be put in an escrow account and held there until next year. (11) If you have a business, it is a good policy to mount a late year advertising campaign. These expenses will be deductible, but you generally won't get the bulk of the income generated by the campaign until early next year. You deduct the expenses this year and recognize the income next year. (12) Sell capital assets with paper losses until the realized losses equal your capital gains for the year. The capital gains and losses offset each other and only the difference is brought into taxable income. If you think the assets that showed losses are good long-term investments, you can buy them back after more than 30 days have passed. (13) A gain on stock can be preserved yet delayed until next year by a "short sale against the box." This means that you hold the stock you already own, but make a short sale of the same number of shares by borrowing them from your broker. The short sale is covered sometime in January by giving the broker your original shares. You recognize gain only when the short sale is covered. 37) Credit cards are not all alike for the purpose of tax deductions. Around the end of the year, the newspapers and popular magazines like to tell readers that using a credit card near the end of the year can be a way to take a tax deduction this year and pay the bill next year. This works for any deductible expense -- whether it be a personal prescription or a business expense. The angle is that the charge can be deducted in the year it is charged, not the year it is paid. But there is a dangerous hole in the popular advice can leave you stuck with a big tax mess. Credit card deductions are not all the same under the tax rules. The general rule of tax deductions is that you only get a tax deduction in the year you actually pay for a deductible expense, and the tip about using credit cards is an exception to the general rule. What most of the people giving you this end of the year tip don't tell you is that there is a critical exception to the exception. If you charge a deductible expense on a credit card issued by the company supplying the deductible goods or services, you can't take a deduction until the credit card bill is paid. If you use the store credit card you can't deduct it until you pay. But if you use your Visa or MasterCard you can take the deduction immediately. If you use your credit card you can take the deduction this year, but if the store bills you directly you can't take the deduction until you pay the bill. Keep this in mind near the end of the year, when you may want to choose which card you use depending upon which year you want to take the tax deduction in.