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FREQUENTLY ASKED TAX QUESTIONS *** DISCLAIMER *** The following information is general in nature and is intended to help you explore tax saving opportunities. The federal income tax code is complex and contains numerous exceptions to the general rule related to specific situations. You should consult your tax preparer regarding your specific circumstances and should not rely upon general information.
Index of Questions1. Should I itemize or use the standard deduction? 2. What types of business deductions are available to employees? 3. Do I have to pay tax on the gain on the sale of my house? Can I deduct a loss? 4. What is considered commuting? Is commuting deductible? 5. How much can I give away to my children each year without any estate or gift tax consequences? 7. What are the substantiation rules for charitable contributions? 9. Is it more advantageous to file Married Filing Joint or Married Filing Separately? 10. What is the child and dependent care credit? Appendixes
1. Should I itemize or use the standard deduction? You should deduct the greater of itemized deductions or the standard deduction. Therefore, it is generally a good idea for you to compute your itemized deductions and compare them to the standard deduction to ensure you take advantage of the largest deduction available. The amount of your standard deduction depends upon your filing status. See the 2001 Standard Deduction Table below. Itemized deductions include:
2. What types of business deductions are available to employees? Unreimbursed employee business expenses are deductible as miscellaneous itemized deductions which are subject to the excess of 2% of AGI limitation. Examples of unreimbursed employee business expenses are: travel (including standard mileage rate but excluding commuting), meals and entertainment (subject to the 50% disallowance), equipment, and special clothing. However, each of these categories are subject to limitations. For example, special clothing is only deductible if it is required as a condition of employment and is not adaptable to general wear. Business equipment is only deductible if it is a condition of employment. Consider the following examples: Sue is a sales rep. for XYZ company. Sue buys a home computer because she wants to be able to dial-in from home to update her contact database in the evenings. Even though the computer is used for business purposes, it is not deductible unless XYZ requires that Sue own a home computer as a condition of employment. Stan works on the ground crew at ABC airport. Because his job regularly involves outdoor work, he purchases heavy duty work boots to keep his feet warm during the winter. The boots are not deductible business expenses because they are adaptable to general wear. However, the special noise reduction head gear he wears is deductible if it is an ordinary and necessary business expense. See disclaimer above. Return to Index of Questions.
3. Do I have to pay tax on the gain on the sale of my house? Can I deduct a loss? Up to $250,000 of gain ($500,000 for marrieds) on the sale of personal residence which served as the taxpayer's principal residence for two of the previous five years is non-taxable. Certain limitations and restrictions apply, particularly if the home-office deduction has been claimed for that residence. See disclaimer above. Return to Index of Questions. The loss on the sale of a personal residence is generally considered a personal loss and is therefore non-deductible. However, if the residence was converted to rental property before it was sold, it MAY be a deductible loss. The conversion to rental property exception has several stringent limitations. See disclaimer above. Return to Index of Questions.
4. What is considered commuting? Is commuting deductible? Commuting expenses between a taxpayer’s residence and a business location generally are not deductible. However, an individual who works at two or more different places in a day may deduct the costs of getting from one place to the other. Consider the following example: Betty drives 30 miles a day round trip from her home to work. In addition, she drives an additional 10 miles per day performing daily mail and banking responsibilities for her employer. She is not reimbursed for any mileage. Betty cannot deduct the 30 mile round trip because it is considered commuting. However, Betty may deduct the extra 10 miles per day as an unreimbursed employee business expense. See disclaimer above. Return to Index of Questions.
5. How much can I give away to my children each year without any estate or gift tax consequences? You can give away the following amounts each year to anyone (including your children) without any gift or estate tax consequences: 2001 $10,000 2002 $11,000 If you are married, your spouse can also give away the same amount to the same person. So, if you and your spouse agree, you can effectively give $22,000 to each child this year without any tax or reporting requirements. Even if you give away more than this, you still may not owe any gift tax. However, you would be required to file a gift tax return. The tax code allows taxpayers to give away certain amounts over and above the annual exclusion amount over their lifetime. If you plan on giving away more than $11,000 in any one year to one person, you should consult your tax adviser regarding the long term implications on your estate and gift tax. For most taxpayers, it does not create any tax, however it can for high net worth individuals. See disclaimer above. Return to Index of Questions.
It depends. If the business (or farm) made a net profit, you must report the income and expenses as self-employment income. If the business (or farm) incurred a net loss, you may be able to deduct the loss as long as it is not considered a hobby. Generally, an activity is presumed not to be a hobby if profits result in any three of five consecutive tax years ending with the tax year in question. Special rules apply to race horse businesses. See disclaimer above. Return to Index of Questions.
7. What are the substantiation rules for charitable contributions? Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the donee organization. Individual contributions of less than $250, which, when added together exceed $250 do not require a contemporaneous written acknowledgment. Non-cash contributions of $500 or more require additional documentation. See disclaimer above. Return to Index of Questions.
Individuals who receive compensation and self-employeds with earned income may make deductible (subject to certain limitations) contributions into their own Individual Retirement Accounts (IRAs). Subject to limitations, certain non-deductible contributions may also be made. Amounts earned by the account (usually interest) are not taxed until distributions from the account are made, at which time distributions are taxed at the taxpayer’s marginal tax rate. A 10% penalty applies to distributions from an IRA before the tax payer reaches age 59 1/2. Roth IRAs are not deductible when made. However, the interest and dividends are not taxable when distributed. Which is best for you, a traditional or Roth IRA? It depends upon what tax bracket you will be in when you retire. If you are going to be in the same tax bracket or a higher tax bracket when you retire than you are now, a Roth IRA is better for you. If you will be in a lower tax bracket when you retire, then a traditional IRA may be best for you. Beginning in 2002, you can contribute up to $2,000 to an Educational IRA for your children/grandchildren. If they withdraw the money and use it for certain college expenses, the earnings of the IRA will not be taxed. This is a worthwhile planning tool for grandparents with very young grandchildren. All types of IRAs may consist of bank certificates of deposit, mutual fund accounts, or self-directed IRAs. As with any provision in the tax code, there are numerous restrictions and exceptions, so consult your tax advisor about your specific situation. See disclaimer above. Return to Index of Questions.
9. Is it more advantageous to file Married Filing Joint or Married Filing Separately? Because Texas is a community property state, all income from both spouses (including income from separate property) is divided equally between each spouse. Therefore, each spouse must report 1/2 of the total community income. As a result, the overall tax burden between the two spouses is the same whether or not they file jointly or separately. However, spouse who are currently separated or going through a divorce may consider filing separately to limit their liability to their half, rather the full amount of tax due. See disclaimer above. Return to Index of Questions.
10. What is the child and dependent care credit? A nonrefundable credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to work. Generally, the dependent must be under age 13 or be physically or mentally handicapped. The maximum amount of expenses to which the credit can be applied is $2,400 for one qualifying dependent or $4,800 for two or more dependents. The credit is computed as between 20% to 30% of the allowable expenses depending upon the taxpayer’s AGI. See disclaimer above. Return to Index of Questions.
See disclaimer above.
Return to Index of Questions. |
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