Tax Tips Blog

Doug writes: I recently purchased some property (unimproved land) as an investment and possibly a location for a dream home. At the time of purchase I wasn’t too concerned over the tax implications, expecting that nothing would be deductible. Am I correct? Can any of my expenses (loan interest, surveys, permits, etc.)be deducted?

My reply: If this is an investment, you can deduct your interest as investment interest. The only problem is that deduction is limited to your net investment income. Investment income includes interest and dividends (but only non-qualified dividends or qualified dividends that you elect to forgo the 15% max tax rate). For many taxpayers this means the interest is just accumulated and deferred.

You may want to do a little reading up on investment interest. IRS publication 550 would be a good place to start.

If this is a personal purchase, the interest is not deductible.

In either case, the property taxes are deductible currently. Surveys and permits related to constructing a house would add to the cost of the property and reduce the gain whenever the property is ultimately sold.

Best wishes,

Gina

Debbie writes:I can pay my property taxes in 2007 and claim them in 2007, or pay them in January and claim them for 2008. In 2007 we are in a higher tax bracket than we will be in for 2008. So, it makes sense to use the property tax (and state income tax) deduction this year, but only up until the point when it would trigger AMT, right? In other words, the most efficient way to work it would be to pay as much of the property tax bill in 2007 as would bring our AMT amount close to the regular tax amount, right? Or, do I go ahead and pay the whole property tax bill and state tax in 2007 because I’m in a higher bracket? Thanks!

My reply: Hello Debbie! Assuming they do not change the law, and they are working on it, so they might, then you have the right idea.

Ideally, you’ll time matters so that you reduce the amount of your 2008 regular tax liability precisely down to your 2007 AMT liability. Anything higher wastes some of the available deduction, because payment of state taxes does not reduce your AMT liability. Anything less causes you to pay more than necessary in 2007, because you have failed to reduce your regular tax liability to the AMT amount.

By the way, to the extent you overshoot, and end up “wasting” some of your state income tax deduction, keep track of that. If you get a state income tax refund, some of it will be attributable to the “wasted” deduction, and therefore won’t be taxable.

Again, all the above is assuming they do not change the law.

Best wishes,

Gina

Olivia asks: What are some sample miscellaneous deductions? I have an investment newsletter scheduled to renew on the 31st and I might let it renew or cancel it…but I don’t know if it’s even deductible to me. My AGI should be around $75,000 for 2007, so I’d need Misc. deductions of at least 2% before I can get a benefit, correct? Are charitable contributions counted as misc. deductions? What types of things are? Thank you, Olivia

My response: Miscellaneous deductions as they pertain to Form 1040, are part of your itemized deductions an are generally deductions for expenses incurred for the production of income - but not in a trade or business, or rental property. Those go on schedules C,E, or F, as the case may be.

Miscellaneous deductions on Form 1040 include employee business expenses, which also involve Form 2106, and investment expenses. The newsletter you mentioned would be an example. Also union and professional dues, job-hunting and related expenses, and tax return preparation and planning expenses.

Charitable deductions are not included as part of miscellaneous deductions, but are deductible as a separate category of itemized deductions.

With the figure of $75,000 AGI you mentioned, you need $1,500 (2%) of miscellaneous deductions to get any tax benefit against your regular taxes assuming you itemize your deductions. If you do not itemize your deductions you will get no benefit regardless of the amount of your miscellaneous deductions.

In addition, miscellaneous deductions subject to the 2% limit are added back for AMT purposes. So if you know you’re not going to itemize your deductions or that you’re subject to AMT, you probably don’t need to dig through your check registers and receipts too hard, looking for miscellaneous deductions.

There are a few specified items of miscellaneous deductions which are not subject to the 2% floor. These include gambling losses (to the extent of winnings); estate tax on items of IRD (income double taxed for income and estate tax); a “loss” on an annuity policy; repaid items of income; and a few other odd things. The IRS Pub 17, Your Federal Income Tax, and the instructions for Schedule A, cover this topic.

Best wishes,

Gina

Craig asks:I was told that my investment newsletter services tax-deductible, but I don’t know where to put them on my tax return? Do I spread the cost over the investments I bought based on the news services’ advice?

My reply:The cost of your investment newsletters are considered a miscellaneous itemized deduction on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion. The cost of these newsletters does not affect your basis in your investments. You can read more about this in IRS Publication 550.

Important note: Many tax deductible expenses do not end up providing a tax deduction. Salespeople will rightfully tell you when something they are selling MAY be tax deductible, only they always seem to say it as it definitely IS deductible and failed to mention the various exclusions that apply. The most painful of these is usually related to a home purchase that they have been told will result in a big annual tax savings, which for many people does not. It is always a mistake to purchase something because you believe it will provide you with a tax deduction without first asking your tax adviser if it is true in your case.

Best wishes, Gina www.GLGcpa.com

Ben asks:My question is regarding my subscription to investment newsletters and paid subscriptions to investment websites. Can I deduct that when i do taxes, if so what documentation will i need. I also have a sharebuilder account and pay a monthly fee for that. What about any losses i have incurred? Also, how would i go about getting the standard 30 for the spanish american war? Ben

My reply:Hello Ben! The costs of your investment subscriptions are deductible as miscellaneous itemized expenses on Schedule A, provided that you itemize deductions and that the total of your miscellaneous itemized deductions exceeds 2% of your Adjusted Gross Income (AGI). You should retain your receipts to prove this deduction, if necessary.

The monthly fee in your sharebuilder account is either another miscellaneous itemized deduction or a commission charged for the purchase of shares. If the fee is linked to the specific transactions it is a commission and adds to the cost basis of the shares purchased. If it is a flat fee that is charged whether or not you have any transactions or regardless of the number of transactions, it is a deductible investment expense.

Capital gains and losses don’t affect your taxes until you sell the investment. At that point you report the sale on Schedule D and calculate your gain or loss.

The $30 refund of the Spanish American War tax, also referred to as the Telephone Tax Refund, has a special line in the “payments” section of Form 1040 or its variants.

Steve writes: I co-own a house with my domestic partner. We live in California, but are not registered as domestic partners.

The value of the property has dobuled since we purchased it, and it is now worth approximately $1M. All costs related to the house have been split 50/50 (down payment, mortgage, taxes, improvement projects, maintenance). We are both disciplined Quicken users so we can recreate cash flows for the period we have owned the house. We are individually high net worth (over $1M).

The house is bigger than we need, so we may sell it at some point. Both of us are in good health, and hopefully will be so for another 25 years. The problem lies in that only one of our names is on the title and mortgage.

Under California law the property will not be reassessed if a new owner is added to the title (verified by our county tax assessor). We both have excellent credit (800+ FICO) so I don’t think adding a name to the mortgage would be a problem. My biggest concern is federal taxes.

We have met with several local lawyers and accountants, but I think we sometimes get answers they think we want to hear. We want to make sure this is handled properly so that we don’t have to deal with it again. We know this was a mistake, but years later what are our options for fixing the problem?

Thank you for your opinions on our situation.

My response: Hello Steve!

Just to be sure that I answer the question you are looking for I’ll answer several common questions regarding personal residences and the federal law.

First, real estate taxes are generally only deductible by the owner of the property [Regulation Section 1.164]. The owner would be the person who has title to the property; thus, if you add your partner’s name to the title both of you will be able to deduct, assuming you can itemize, the amount you pay for real estate taxes.

Second, mortgage interest payments for acquisition indebtedness after 10-13-1987 are deductible, assuming you can itemize, as long as the loan is less than $1 million.  You can usually use tracing rules to show the payments were made to pay off the mortgage interest and thus be allowed this deduction.

Third, single individuals can exclude up to $250,000 of the gain on the sale of their principal personal residence (IRC §121). If each of you wished to use your $250,000, then each of you must own and use the property as your principal residence for periods totaling at least two years out of the five-year period ending on the date of sale. You do not both have to be on the mortgage, you both just need to live there and own the home. Thus both of your names must be on the title to the house.

The problem with simply adding your partner’s name on the title is that tax law will automatically assume that you gifted your partner half of the house. This is where your impeccable records will be necessary to retain in case you are questioned about this at a later date. You may have to show this to document the fact that both of you actually purchased the house together and that there was just an error with the recording of the original title (at least that is how I read your email - if this is incorrect, so is my response).

If your records are as good as you claim, then although you may face a hassle or two, you should be alright. Adding your partner’s name to the title will make your partner half owner (joint tenancy) and his basis will be the same as yours.

Fourth, if you use your home for business purposes (home office deduction?) you may be able to take advantage of both the home sale-exclusion as well as a like-kind deferral (§1031) if you acquire a similar property. How to go about this is way beyond this medium, but I did write a general article about the tax free exchange of real estate, which you may find useful.

I hope I have satisfactorily answered your question.

Best wishes, Gina http://GLGcpa.com

Andy writes:I am an early retiree who has no wages, but I spend as much time as I can playing poker. I wouldn’t say I’m a professional poker player, but I play 2 - 3 days a week for about 10-15 hours. If I declared $2,500 in winnings, and my total income is under $95,000, could I contribute $2,500 in a Roth IRA? I’ve tried to research this on the web, but the sources were vague as to whether or not gambling income is acceptable. Thanks, Andy

My response:Hello Andy! I’m so glad you wrote as there seems to be more and more gamblers around now-a-days, many with similiar questions to yours.

In order to contribute to any type of IRA you need to have “earned income”. Earned income includes income from wages, net earnings from self-employment and alimony. Thus, in order to utilize your gambling winnings to contribute to a Roth IRA, you would have to be a professional gambler and report your earnings as self-employment earnings.

In my experience, reporting your gambling income as a professional gambler, especially the first year you report your gambling earnings in this fashion, your chances of receiving a letter from the IRS Automated Underreporting Unit is very high. Thus, I do not recommend that anyone file a return as a professional gambler without the assistance of a qualified tax professional.

In order to legitimately report your gambling income in this fashion you must be in the business of gambling. If you’re considering doing this, you may wish to read a couple of articles I wrote about a Business vs. Hobby and Hobby Loss Rules.

If you are not a professional gambler then your gambling winnings are reported on line 21 miscellaneous income. Losses, limited to reported winnings, are a Schedule A miscellaneous itemized deduction.

Best wishes, Gina www.GLGcpa.com

Dales writes:Hello, Have a question about deducting property tax. I purchased property from my sister. I have been paying her property taxes for some time now, and I understand that I was not able to deduct this from my federal taxes (even though she could deduct what I paid since she owns the property). Since I purchased her property this year, I want to know if I can now deduct all payments made in 2006, or only payments made after the sale. Thanks very much!

My reply:Hello Dale! Thanks for visiting. I hope you sister did not deduct the property taxes that you paid on her behalf, because the only taxpayers who can deduct real estate taxes are those who are both legally obligated to pay the tax and actually pay the tax. Therefore, you are only able to deduct the taxes you paid after you owned the property. Best wishes, Gina

Brenda has a few questions:I have a doctoral degree and am a post-doctoral candidate at a local university. I am not a professor. I am an employee of the university. I have several questions regarding my ability to deduct (or partially deduct) my unreimbursed expenses. Do I qualify for the Educator Expense Deduction? Do I qualify as a “College Professor” as defined in Schedule A - Unreimbursed Employee Expenses: “Research expenses of a college professor.”? I have paid tuition to attend out of state courses, can I claim the Lifetime Learning Credit or the Unreimbursed Employee Expenses for this? Can I deduct my travel expenses for my out of state courses as business travel or is this combined and called education expenses? What about my travel expenses when I give talks at other universities? I do a lot of entertaining of potential sponsors, visiting professors, prospective students can I deduct these expenses in any way? What about when I organize events at the university? Thank-you very much! My reply:Brenda you are asking some very good questions and I highly recommend you hire a tax professional who is familiar with college faculty, to help you come tax time. You would not qualify for the educator expense deduction since you are a professor, but as of the writing of the post, no one can take this deduction anymore because it expired last year and has yet to be reinstated. As far as deductions on schedule A - you are eligible for them. Just because your university does not call you a “college professor” does not mean that you are not doing the work of a college professor. Your title does not make something deductible or not. If the expense is relevant to your job it is potentially deductible except for those expenses which are explicitly non-deductible. By the way, I can’t find the text in the instructions for Schedule A, that you are referring to, that define “College Professor”, but you should know that IRS Publications are not definitive statements of law and are not binding on either the IRS or the taxpayer. Generally, they are accurate representations of the tax code, but there are some well-known (within the profession) examples where the publications and instructions continue to disregard binding Tax Court decisions. When you take an out of state course, the course sponsor can tell you if the course qualifies for the lifetime learning credit. If they don’t qualify, you can take this as a Schedule A deduction. You can deduct your travel costs for business related travel. When you do talks at other universities, if they pay for your expenses directly and in their entirety, you can ignore them completely. If they do not pay for all your expenses, or you are not reimbursed completely, the difference would qualify as unreimbursed business expense. If your employer is not the one sending you to these other universities, then you may want to consider a more agressive position of claiming that you are self-employed (Schedule C) for the purposes of visiting lectures. Your income would be the amount of the reimbursement and your expenses would be what they are. By reporting your expenses in this way, you don’t have to exceed the 2% AGI threshold on Schedule A. You might also be able to deduct other related expenses on Schedule C that previously would have gone on Schedule A. When you entertain and have events for grant funding that is business related. If the grant is given to the university the expenses should be reported on Schedule A, if the grant is given to you personally, then you should report them on Schedule C. Perhaps now you can see why I suggested you see a tax professional. No offense intended, but the tax laws in this area have been changing frequently and an academic may not be up on the latest changes. Someone earning a living preparing tax returns has to be up-to-date if s/he wants to stay in business.

Tony asks: I paid $500 to an investment adviser and bought securities that should yield me about $4,800 in tax exempt interest and $1,200 in taxable interest. Do I get to deduct the amount I paid to the investment adviser? My response:Hello Tony! Expenses that are allocable to tax-exempt income are not deductible. You should try to ask your investment adviser to break out the fee between recommendation for tax-exempt interest and taxable interest. If he is unwilling or unable to do so, then you are allowed to allocate the expense between the two. In your situation you have a total of $6,000 of interest ($4,800 + $1,200) of which 20% is taxable interest ($1,200/$6,000). Therefore, using this allocation method you should be able to deduct $100 of his $500 fee as an investment expense. It should be noted that several tax professionals use other allocation methods which may yield a higher deductible amount. You should discuss this possibility with your tax professional.