Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

WHAT'S NEW?

by Andrew D. Schwartz, CPA

HOME OFFICE UPDATE

Back in 1999, the government made it easier for people to qualify for the home office deduction.  No longer were you required to perform your income producing activity (such as seeing patients) within your home office.  Instead, as long as you used a portion of your home regularly and exclusively to perform administrative and managerial tasks related to your trade or business, you would qualify.

For renters, this was great news.  Since rent isn’t otherwise deductible on your federal tax return, being able to claim the home office deduction made a portion of your rent deductible.

For homeowners, however, there was always a trap.  If you sold your home for a gain, you would generally be taxed on the portion of your home that you claimed as your home office.  This pitfall caused many homeowners to forego this deduction.

Well, the IRS issued final regulations this year pertaining to homeowners who claim the home office deduction, and re-wrote the rules in favor of the homeowner.  Under the new rules, if the home office is within your home (and not a separate structure on your property), you no longer would be taxed on the portion of the gain that is attributable to your home office when you sell your home.  All you need to do is pay taxes on the depreciation you claimed over the years.

If you were eligible to claim the home office deduction during any of the three previous tax years, and didn't do so because you owned your home and were worried about paying taxes when you sell your home, you still have time to file an amended tax return claiming the home office deduction.

INCREASED TAX BREAKS FOR STUDENTS PAYING TUITION

Anyone paying tuition should be aware of these changes taking effect in 2003 and 2004:  

• Increased Tax Credit.  For 2003, if you paid at least $10,000 in tuition, you’ll see your tax savings double to $2,000.  That’s because the tuition eligible for the Lifetime Learning Credit is now $10,000, up from $5,000 in 2002.  However, if you’re single and earn more than $51,000, or married and earn more than $103,000, you’re not eligible for this tax credit.

• Deducting Higher Education Expenses.  In 2004, taxpayers can claim a $4,000 deduction for qualified higher education expenses paid during the year, up from $3,000 in 2003, as long as your income doesn’t exceed $65,000 if you’re single or $130,000 if you’re married.   Plus, in 2004, single taxpayers can earn up to $80,000 and married couples can earn up to $160,000, and still deduct $2,000 in higher education expenses.

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CHECKLIST TO CUT YOUR TAXES

It's not too late to cut your 2003 tax bill.  Prior to December 31^st:

• Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year, you can put away up to $12,000 into your 401(k) or 403(b) plan.  If you’re self-employed, consider setting up a Solo 401(k) by 12/31.

• Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year and might get hit with an underpayment penalty.

• Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year, and then can be used to offset up to $3,000 of wages and other income.

• Send in your January, 2004 mortgage payment early enough so it will be processed prior to 12/31/03.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

• Clean out your closets and donate your clothing and household items to a charitable organization since "non-cash" contributions are deductible if you itemize.  Don’t forget to get a receipt.

• Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.

• Pay off your medical bills if your total medical expenses will exceed 7.5% of your income.

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SECOND MAJOR TAX-CUT PACKAGE IN JUST THREE YEARS

by Andrew D. Schwartz, CPA

With a presidential election right around the corner, it’s only a matter of time before we start hearing about tax simplification once again.  And the timing couldn’t be better.  Thanks to the two tax law changes enacted during the past three years, the income tax code has never been more complicated. 

How will the 2003 Tax Act affect you?

Reduced rates:  Just about everyone will save taxes since the top bracket was reduced by 3.6%, and the next three brackets were each cut by 2%.  A single person with taxable income of $78,400 will save $1,000 in taxes.  With $278,400 in taxable income, the savings jumps to $5,000.

Good news for investors:  The maximum long-term capital gains tax rate was cut to 15% for most taxpayers, but only for post-May 5, 2003 transactions. Remember, to qualify as long-term, an investment must be held for more than one year before being sold.  The tax rate on dividends was also cut to 15%, a reduction of 23.6% from the previous top rate.

Increased child tax credit:  This recent tax-cut package also increased the tax credit for children under the age of 17 to $1,000 per child, an increase of $400 per child over the prior rules.  If you have children, and your 2002 income was low enough, you should have received a check for $400 per child during the summer. 

Beware of the A.M.T.:  One byproduct of this tax-cut package is that your chances of getting hit by the Alternative Minimum Tax (AMT) have increased substantially.  When you’re subject to the AMT, you lose out on your personal exemptions, your standard deduction, and on certain itemized deduction.  While your mortgage interest and charitable contributions generally remain fully deductible, your real estate taxes, state income taxes, unreimbursed professional expenses, and certain home equity loan interest aren’t deductible under the AMT.

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Copyright - CPANiche, LLC - 2004