Tax Advice from Julian Block

Reknown tax advisor and Larchmont neighbor, Julian BLock, provides help for Gazette readers - just as we're struggling to complete our tax returns in time for the April 15 deadline.

Important Tax Changes for 2003

by Julian Block

(April 7, 2004) There have been lots of changes in the tax rules. Many of them are mandated by indexing – that is, annual upward adjustments to provide relief from inflation, as measured by increases in the Consumer Price Index. What follows are the highlights of several changes that might affect freelance writers and other self-employed individuals.

PERSONAL EXEMPTIONS

You get a bigger break just for being you. Exemptions are worth $3,050 apiece for 2003, up slightly from $3,000 for 2002.

REDUCTIONS OF EXEMPTIONS

For upper-incomers with AGIs (short for adjusted gross income, the figure on the last line of page one of Form 1040) above certain levels, the deductions for all exemptions -- including those for a spouse and dependents -- gradually decline. For 2003, the exemption phase-out begins when AGI exceeds $139,500 for singles, up from 2002's $137,300; $209,250 for joint filers, up from $206,000; $174,400 for heads of household, up from $171,650; and $104,625 for marrieds filing separately, up from $103,000.

PARTIAL DISALLOWANCE OF ITEMIZED DEDUCTIONS

Most itemized deductibles must be reduced by 3 percent of the amount by which your AGI surpasses a specified amount -- $139,500 for 2003, up from $137,300 for 2002. Put another way, you forfeit $30 in total 2003 deductions for every $1,000 of AGI above $139,500 if you are single or filing jointly. The $139,500 figure drops to $69,750 if you are married and file a separate return; going that route does not raise the threshold for a couple to a combined $279,000.

STANDARD DEDUCTIONS

The standard deduction is the no-proof-required amount that is automatically available without having to itemize for outlays like charitable donations and real estate taxes. Just how much of a standard deduction you get depends on your filing status.

The normal standard deductions increase slightly to $7,950 for joint filers, up $100 from 2002's figure; $3,975 for marrieds filing separately, up $50; $7,000 for heads of household, up $100; and $4,750 for singles, up $50.

EXTRA-LARGE STANDARD DEDUCTIONS
FOR THE ELDERLY AND BLIND

For those individuals who are at least 65 by the close of the 2003 tax year, the standard deduction increases by $950 for a married person (whether filing jointly or separately) and $1,150 for an unmarried person. Persons who are considered blind are entitled to those additional amounts or double those amounts if they are both 65 and blind.

CAUTION. Special rules lessen the deduction amounts allowed individuals (children, mostly, or elderly parents) who can be claimed as dependents on the returns of other people. The standard deduction can be as little as $750.

Bonus Wealth: Overlooked Tax Breaks

Here are some reminders of often- overlooked tax breaks.

INTERESTING CHARGES

Despite tax reform, you remain able to deduct 100 percent of the interest charges on up to $1 million of mortgage loans incurred to buy, build or improve your year-round residence and one other home, such as a vacation retreat. You may also deduct 100 percent of the interest charges on up to $100,000 of home equity loans, without any restrictions on the use of the loan proceeds.

Mortgage points are 100 percent deductible in the year of payment, provided you pay them to obtain a loan to buy, build or improve (as when you add or remodel a room) your “principal residence” (legalese for a year-round home), as opposed to a vacation retreat or property for which you charge rent. There is no immediate deduction for points paid to refinance (with none of the proceeds used to pay for improvements) a mortgage on your principal residence. The points are deductible over the life of the loan.

FAMILY BUSINESS?

Do you have a family business? Put your youngsters on the payroll to perform chores such as clerical work or deliveries; let the business pay them compensation that it deducts and which they report on their returns. Hiring your children provides a way to keep income in the family, but shift some out of your higher bracket and into their lower bracket.

TAX SAVVY CHARITY

A tax-savvy way to make charitable contributions is with appreciated properties – shares of stocks or mutual funds, real estate or other investments that have gone up in value since their purchase and that you have owned for more than 12 months. Besides garnering a deduction for the property's full market value, you also escape paying taxes on the accumulated gain in value since you made your investment. But check with a tax pro on when and how much to give before you make sizable contributions.

MOVING WISELY

To qualify for a moving-expense deduction, the key requirement is that the new job location must be at least 50 miles farther from your old residence than the old job was. An example: If the distance between your old home and old job is 20 miles, the distance between your old home and your new job has to be at least 70 miles. But you've some leeway on that 50-mile minimum. You needn't measure the mileage on the basis of a straight line on a map. You can calculate the mileage on the shortest of the routes you'd ordinarily travel.

BUSINESS EXPENSES -LARGE AND SMALL

The law allows you to deduct nonreimbursed employee business expenses -- say, a brief case to carry business papers to and from work, searching for a new job in the same line of work, and work clothes and uniforms that are required as a condition of employment and are unsuitable for everyday use. These kinds of expenses fall into the category of miscellaneous expenses, allowable just for the part above 2 percent of your AGI, adjusted gross income. AGI is the amount you list on the last line of the first page of Form 1040.

MEDICALLY DEDUCTIBLE

Medical expenses are allowable only for the part above 7.5 percent of your AGI. If you do overcome the 7.5 percent hurdle, remember to include travel to doctors, dentists and the like. For car trips, you can simplify the paperwork and claim 12 cents per mile for 2003, down from 13 cents for 2002, plus parking fees and bridge or highway tolls.

Previously, medical deductibles included the cost of purely cosmetic surgery. Now, however, no deductions for procedures such as facelifts, nose jobs, hair removal (electrolysis), tush trims and liposuction. The IRS cautions that the cosmetic surgery must be necessary to improve deformities arising from, or directly related to, congenital abnormalities, personal injuries arising from accidents or traumas, or disfiguring diseases.

What about procedures done for both medical and cosmetic reasons? Presumably, the IRS will not dispute payments for nose reshapings that alleviate breathing problems and eyelid operations needed because heavy lids obstruct vision. But expect the IRS to frown on write-offs for Botox injections, even for aging TV anchors who believe their careers are jeopardized if they do not look at least as young as their competitors.

Fortunately, the IRS does not always have its way. The Tax Court okayed an exotic dancer’s business-expense deductions for the cost of breast implants that enlarged her bust size to 56N (this is not a misprint). Post-surgery, she immediately experienced a surge in earnings. A sympathetic court reasoned that for someone like an exotic dancer, breasts are business assets and implants are a necessary “stage prop.”

DO YOU VOLUNTEER?

Do you volunteer to help raise money or perform other chores for charities? No deduction for the value of your time and services, though your volunteer work does entitle you to deduct nonreimbursed out-of-pocket expenses -- say, travel (14 cents a mile for car use for 2003, unchanged from 2002) and telephone calls, as well as the cost and cleaning of uniforms not adaptable to ordinary wear that you're required to wear while performing services.

BUSINESS TRIPPING

When you go on a business trip (36 cents a mile for car use for 2003, down from 36.5 cents for 2002, if actual expenses are not claimed), forget about any deduction for expenses of an accompanying spouse who tags along just for fun. But suppose you stay at a hotel where rooms go for $150 for a single and $170 for a double. You're entitled to a per-day deduction for your hotel room of the entire single rate of $150 -- not half the double rate, or $85.

WASH SALE - MORE THAN LAUNDRY

The "wash sale" rule bars a current deduction for a loss on a sale of shares of stock that you then buy back, unless at least 31 days elapse between the sale and the repurchase. But this restriction doesn't apply to a profit on a sale of stock. You are free to take your profit and immediately reinvest.

ENTERTAINING AT HOME

Home entertaining qualifies as a business-expense deduction as long as you satisfy either of two requirements. It must be "directly related" (business is discussed during the entertaining) or "associated with" (the entertainment directly precedes or follows a substantial and bona fide business discussion) active conduct of business. There's a noteworthy exception when you're host to business guests from out of town. You can deduct entertaining that takes place the day before or after the business discussion.

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as “a leading tax professional” and by the Wall Street Journal as an “accomplished writer on taxes.” His “Tax Tips For Freelance Writers” shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. Send $9.95 for an e-mailed copy or $12.95 (in the U.S.) for a postpaid copy to: J. Block, 3 Washington Square, #1-G, Larchmont, NY 10538-2032. Contact him at julianblock@yahoo.com.