80.3 F
San Fernando
Wednesday, Sep 27, 2023


persfi/25″/april/sfvbj/mike1st/mark2nd By MEL POTESHMAN Personal Finance Tax planning should be a year-round activity. However, if you didn’t get around to doing all you had hoped, it’s not too late to improve your tax situation. The key is to do a thorough job of identifying deductions so you don’t miss opportunities to save tax dollars. To help you get through this year’s returns and to prepare for next year you may wish to consider the following list of Do’s and Don’ts for making the most of deductions available to you. Do deduct interest you pay on home equity lines of credit. Although personal interest is no longer deductible, you may deduct interest on up to $100,000 of debt secured by your house, regardless of how you use the money. Do deduct all state and local taxes you paid in 1996. Also, if you bought or sold a house, be sure to deduct the portion of the year’s real estate taxes you were charged on your closing statement. It’s easy to miss this deduction because you don’t write a separate check the taxes are deducted from the sales proceeds or included in the amount you pay at settlement. Do deduct investment interest. If you borrowed money to buy investments, the interest is deductible as investment interest limited to the year’s net investment income. Do claim a deduction for transportation costs and out-of-pocket expenses you incur in connection with charity volunteer work. The cost of mileage, telephone calls, and supplies, such as stationery and stamps, are all deductible. If you failed to keep track last year, start a tax-deduction diary this year. Do deduct your health insurance premiums if you are self-employed. For 1996, you may deduct 30 percent of the premiums you paid. This amount will increase to 80 percent over a 10-year period. The deduction is treated as an adjustment to income, so you get the tax benefit whether or not you itemize. Keep in mind that the deduction is limited to the earned income from your business. Do deduct half the self-employment tax you pay if you are self-employed. This amount is also deductible as an adjustment to gross income on your Form 1040. According to the IRS, this is one of the most frequently overlooked tax deductions. Do deduct early withdrawal penalties when you cash in a certificate of deposit or other time deposits before maturity. You can deduct the penalty even if you do not itemize your deductions. Do claim a child care credit if you paid someone to take care of your dependent child so you could work. Depending on your income, a credit percentage of 20 to 30 percent applies to your expenses of up to $2,400 for one dependent child and $4,800 for two or more dependents. The credit is reduced for higher-income earners. Don’t deduct reimbursed expenses. Medical, casualty loss, and business expense deductions are not allowed when the costs are reimbursed to you by your insurance company or employer. Don’t overpay the tax due on your mutual fund profits. If you participated in a dividend reinvestment plan, be sure to increase your cost basis by the amount of dividends that were reinvested. Increasing your basis reduces your taxable gain. Don’t forget to take a deduction for used clothing and other property you donate to charity. The fair market value of old clothes, furniture, household items, and books that you give to charity is deductible. Just be sure to have a receipt from the charity to substantiate your donation. Don’t assume that your miscellaneous expenses are not deductible. Although tax law allows you to deduct only those miscellaneous expenses that exceed 2 percent of your adjusted gross income if you itemize your deductions, it is often easier to reach this threshold than you may originally think. Take the time to total unreimbursed employee business expenses like dues to unions and professional associations, tax preparation advice, and investment-related costs, such as investment advice, IRA or Keogh custodial fees, and safe deposit rentals for boxes used to store investment-related documents. Avoid Disputes With the IRS When preparing your tax return, accurate documentation, good faith intentions to meet your tax responsibilities, and a clear understanding of the tax law can make all the difference in disputes with the Internal Revenue Service. There are no excuses for not knowing the law. Distributions from individual retirement accounts are taxed in the year you receive them. However, if you roll over withdrawn IRA money into another IRA account within 60 days, the distribution is not taxed. Miss this deadline and you’ll be required to pay the requisite tax, as well as a possible penalty if you make the withdrawal before the year you reach age 59 and a half. One man discovered this fact the hard way. Because his investment advisor and employer provided conflicting advice about IRA rollovers, he failed to complete the rollover within 60 days. The result: He had to pay taxes on his distribution and was subject to a premature withdrawal penalty. Did you know that the IRS helps underwrite some parties? Entertaining for business is not unusual. As long as you discussed business during, immediately before, or immediately after the event, 50 percent of the expense is typically deductible. Conducting parties at home for customers or potential clients may also fall into this category even when the deduction is for hundreds of thousands of dollars. One couple held a dinner party, replete with a nationally recognized performer, for their sales associates and potential customers. Employed in the home-building business, the taxpayers claimed a $347,000 business-related entertainment expense on the basis that the party was designed to promote the houses. The IRS objected, but the federal tax court ruled in the taxpayers’ favor, noting that there was no personal relationship between the taxpayers and their guests and the fact that the sales of their houses tripled in the years since they started throwing parties. Mel Poteshman is a certified public accountant and president of Poteshman Consulting International & Co. a West Los Angeles-based business consulting firm.

Previous article
Next article

Featured Articles

Related Articles