Expert deductions regarding your tax questions
Q: I heard that if I donate my dilapidated 1991 Saab to charity within the next two months, I can still get a tax deduction for 2002. Is this true? How do I determine how much I can write off?
J.W., Lincoln, Mass.
A: It's too late for 2002, but a donation anytime during calendar year 2003 is valid for your next return.
Jim Seidel, senior tax analyst at RIA, a New York-based provider of tax information, says you can deduct (as long as you itemize) the car's fair market value. For property contributions of more than $500, you need to be able to prove the acquisition cost; if it's more then $5,000 you'll need to include an appraisal form with your return.
Would it surprise you that some taxpayers have fudged the value of their beaters? The IRS has been focusing on auto donations in recent years, so Mr. Seidel says, it's not a good idea to claim too high a value. No sense in raising an audit flag.
Q: Can I deduct any expenses that I incur moving into a new home?
A.S., Cumberland, R.I.
A:Only in certain instances. For example, if the move is job-related and certain other conditions are met, you can deduct reasonable expenses of moving household goods and personal effects to the new dwelling, plus the cost of travel - including lodging - from old to new. You cannot deduct house-hunting trip expenses, says Seidel.
The good news is that you can deduct the expenses whether you itemize or take the standard deduction. The bad news is that qualifiers abound. For starters, your new job must be at least 50 miles away from your old home plus the mileage of your old commute. (For example, if your old job was 10 miles from your old home, your new job must be at least 60 miles from your old home).
You also must maintain employment for a certain amount of time at the new job in order to claim expenses.
Q: I got married at the end of August last year. Since we were single for most of the year, do we file jointly or separately? Our tax bill will jump if we have to file jointly.
L.C., Milton, Mass.
A: For tax purposes, your marital status is determined on the last day of the year. Since you presumably were still married on Dec. 31, 2002, your filing status can be one of two choices: married filing jointly, or married filing separately.
Either way, you'll be affected by the so-called marriage penalty, which leaves many married couples owing more taxes together than they would if they were single.
Seidel says that the 2001 tax law chips away at the impact of that penalty. But it doesn't take effect until later years. President Bush is pushing to make those changes fully effective this year.
Q: My 15-year-old grandson runs a small business that looks poised to take off. This year, he may well earn enough to make it necessary to declare income. He's savvy enough to know that becoming a legal business would allow him to deduct the cost of any new equipment, including a company car. (Hey, he's a teenage boy!) Should I advise him to keep it small and simple, and just file a 1099 - or to, say, incorporate? If it's the latter, what steps should he take?
I.H., LaGrangeville, N.Y.
A: Whether incorporated or not, your grandson will have to pay taxes if he earns enough money. And if he's self-employed - his current status - he'll also be liable for that nasty little self-employment levy that can be such a burden on entrepreneurs.
Cindy Hockenberry, a researcher at the National Association of Tax Professionals, says your grandson may want to incorporate if for no other reason than to give himself some personal protection from lawsuits or creditors.
If he doesn't go the full-blown corporation route, which could be a bit too complicated and expensive, he could form an S corporation. This limits liability somewhat and allows income to flow through to his personal tax return, where the rate would likely be lower than corporate rates in his company's formative years.
If incorporation is on the horizon, see a qualified attorney.
Q: I would like to deduct the expenses of a home-based-business office. Since I'm already deducting the interest on my house payments, the expenses would be only for utilities and maintenance. But my tax consultant advises against this. He says this relatively small deduction would leave me vulnerable to a significant tax if I sell the house. I'd have to pay taxes on a part of the profits reflecting that portion of the house that I declared a business and not a residence. Is this true and are there ways to mitigate the future tax burden?
T.T., Niantic, Conn.
A: Home-office deductions are complicated and noted for drawing the attention of the IRS, so don't dismiss your consultant's advice.
Vernon Jacobs, a tax and investments consultant in Prairie Village, Kan., suggests that you work up numbers that apply to your specific situation, and that you get a second opinion.
Mr. Jacobs offers some personal advice based on his 35-year tenure as a home-based business, for which he deducts 20 percent of his mortgage interest, real estate taxes, insurance, utilities, and maintenance expenses.
He also claims a depreciation deduction each year based on 20 percent of 2.5 percent of the cost of the home and any improvements
"If I were to sell the home, I would have to pay a capital gains tax on 20 percent of the total gain," says Jacobs. "The other 80 percent of the gain would be tax free (up to $500,000 because he files a joint return). Thus, the tax would equal 4 percent of the gain.
"By contrast, the home-office tax deductions I take each year save me almost 50 percent in income taxes and self-employment taxes on my business income. The value of the deductions [for me] is far more than the potential tax I might have to pay when or if I were to sell the home."
