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Are Your Tax Deductions Legitimate?

By: Investor Solutions

By: Investor Solutions, Inc.

It’s important that you know what deductions are available, since you could significantly reduce your tax liability with a little preparation on your end. This year more than ever, accountants, tax advisors, and financial advisors phones are ringing with clients requesting their advise on particular tax issues. Many of these questions are regarding the deductibility of certain expenses while some are concerning specific tax forms (i.e. Form 1099′s) received from their custodian. It seems each year the IRS is requiring custodians to report more and more details about your investments. So what’s new for 2003, and what expenses should you track to prepare to file and minimize your tax bill?

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) is responsible for many of the new tax changes in 2003. Starting in 2003 some of the new tax developments will include the following:

  • New tax brackets are 10%, 15%, 25%, 28%, 33%, and 35%
  • The basic standard deduction was increased to $4,750 for the single filer and $9,500 if married filing jointly
  • The Child tax credit for each qualifying child is increased to $1,000 (from $600)
  • Lifetime Learning Credit is 20% of the first $10,000 of qualified tuition and fees ($5,000 in 2002)
  • Capital Gains tax rates are reduced:

For long-term gains on sales after May 5, 2003, the maximum tax rate is reduced to 15% down from 20% (taxpayers in the 25% + bracket), for those taxpayers in the 10% or 15% bracket, the LT gain rate is reduced to 5%

  • Qualified Dividends are now taxed at the taxpayers long-term capital gain rate
  • IRS mileage rate for business travel is decreased down to 36 cents per mile (36.5 cents in 2002)
  • Retirement Plan elective deferrals are increased:

401K, 403B, 457, and salary-reductions SEP’s – $12,000 (add $2,000 if age 50+)

Simple Plans – $8,000 (add $1,000 if age 50+)

These are just a few of the more popular changes that will effect a majority of taxpayers, there are many other new changes that I have not mentioned that might effect your personal tax situation, check with your accountant to see if any might apply to you.

Now that you are aware of some of the major tax changes for 2003, let’s take a more focused look at the deductions that you can take directly from your Gross Income (wages, salary, tips, business income, dividends, etc.) to arrive at your AGI (Adjusted Gross Income). These deductions are listed as items 23-32 on the front page of Form 1040 tax form under the section titled “Adjusted Gross Income”. The following deductions are generally referred to as “above-the-line” deductions, since they are allowed in figuring AGI and do not have to be claimed as itemized deductions.

  • Educator Expenses – If you were a teacher (or other educator) in a elementary or secondary school for at least 900 hours during 2003, you may generally deduct up to $250 for out-of-pocket books & class supplies
  • Traditional IRA Deduction - Contributions to a Traditional IRA for 2003 are fully deductible up to the $3,000 limit ($3,500 if applicable), provided you meet the deduction phase out rules (see your tax advisor to determine the deductibility of your contributions)
  • Student Loan Interest Deduction- If your income does not exceed $65,000 (not married) or $130,000 (married filing jointly), you may deduct up to $3,000 of qualifying higher education tuition and fees on your 2003 return.
  • Moving Expenses – You may deduct un-reimbursed expenses of moving your household goods and traveling to a new job location provided you meet the following tests:

50-mile Distance Test- The distance between your new job location and your former home must be a t least 50 miles more than the distance between your old job location and your former home.

A 39-week or 78-week Work Test – As an employee, you must work 39 weeks during a 12-month period immediately following your arrival at the new location (78 weeks during the first 24 months, if self-employed or partner)

  • 50% of Self-Employment Tax – After computing your self-employment tax on Schedule SE, you may deduct 50% of it here as an income tax deduction
  • Health Insurance Deduction – If you were self-employed in 2003, you may deduct 100% of the health insurance premiums paid on you, your spouse, and your dependents. General and limited partners may also use this deduction, some limitations may apply.
  • Keogh, SEP, and Simple Plan Deductions- Generally, under the self-employed retirement plan (Keogh), SEP, and Simple Plan, you may deduct the full amount of your contribution for 2003.
  • Penalty on Early Withdrawal of Savings- If you are imposed an interest penalty from your bank for early withdrawal of funds from a savings certificate before the maturity date; you may deduct the full amount of the penalty-forfeited principal as well as interest.
  • Alimony Paid- Only payments of cash, check, and money orders payable on demand qualify as taxable and deductible alimony. The payments qualify for the deduction if they are made under the terms of the divorce decree or separation agreement.

The listing above covers a majority of the “above-the-line” deductions that are available to US taxpayers. It’s a safe bet that you’ll encounter many expenses throughout the year that will raise a deductibility question for you. File all your receipts & cancelled checks for anything in question, then let your tax advisor or tax software direct you whether or not the expense will qualify for the deduction. My next article will take a deeper look at the abuses and missed opportunities when itemizing your “below-the-line” deductions.