Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 11, 1991 TAG: 9102090093
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
SOURCE: By JIM LUTHER ASSOCIATED PRESS
DATELINE: LENGTH: Long
Only about 29 percent of returns filed in 1990 were itemized, down from more than 40 percent in 1985.
It's not just a search for simplification that has led millions to stop itemizing and claim the standard deduction. The new law has simply taken away all or parts of some deductions that made itemizing pay for middle-income people.
At the same time, the standard deduction has been increasing gradually and will continue to rise each year to offset inflation.
Even so, itemizing is still the way to go for anybody whose deductions exceed the value of the standard deduction. For a single person under age 65, that is $3,250. For a couple filing a joint return, it is $5,450.
For most itemizers, the biggest deduction remains interest on a home mortgage. That interest is fully deductible if:
The mortgages on a principal home were taken out on or before Oct. 13, 1987, or;
Any mortgages taken out after that date were used only to buy, build or improve a principal home and, together with the loans in Rule 1, they totaled $1 million or less; or if;
Home-equity loans taken out after that date were used for something other than buying, building or improving a home and totaled $100,000 or less in 1990.
If you refinanced a pre-Oct. 14, 1987, mortgage to get a lower interest rate and ended up with a new loan that is no larger than the balance of the old, all the interest on the new mortgage is deductible. But if you increased the balance, the second or third rules apply.
Similarly, borrowing from a line-of-credit mortgage dated before Oct. 14, 1987, will bring the second or third rules into play.
If you paid points in 1990 to obtain a mortgage, they may be deducted fully on your 1990 return only if the loan was used to buy or improve your main home, and if the points were in line with what is customarily charged in your area.
Points must be deducted over the life of the loan if either of those tests is not met.
Publication 936, free from the IRS, offers considerable detail on mortgage interest and points.
Other considerations about itemized deductions include:
\ Medical expenses: Deduct unreimbursed expenditures for medical expenses, including prescriptions, doctors' and dentists' fees, medical insurance premiums, eyeglasses, hearing aids and transportation - but only those expenses that exceed 7 1/2 percent of your adjusted gross income.
\ Taxes paid: Income and real-property taxes paid to a state or local government are fully deductible. So are personal-property taxes on cars and boats if they are based on value and not on weight.
\ Interest: Only 10 percent of the personal interest - such as for credit cards and car loans - paid in 1990 is deductible. Interest on money you borrowed to make a taxable investment is partially deductible; the limit is equal to your total net investment income plus (in most cases) $1,000.
\ Contributions: Donations to recognized charities are deductible, generally up to half your adjusted gross income. If you received a benefit in return, only the part of your contribution over the value of the benefit is deductible. Out-of-pocket expenses of helping a charity are deductible, but the value of your services is not. If you gave goods, as opposed to money, report those contributions on Form 8283 if their total value exceeds $500.
\ Losses: You may deduct non-business losses caused by fire, theft, storm or other casualties. Breaking or misplacing a valuable item doesn't count. Subtract the first $100 of the loss and deduct only the portion of the remainder that exceeds 10 percent of your adjusted gross income. You will need Form 4864.
\ Moving: Some expenses of a job-related move may be deducted if your new job is at least 35 miles farther from your old home than was the old job. You qualify, for example, if your old job was five miles from home and your new job is at least 40 miles from the old home. See Publication 521.
\ Miscellaneous: Certain expenses relating to your employment or investments, such as union dues, tools and investment advice, are deductible but only that part of the total exceeding 2 percent of adjusted gross income. A few miscellaneous expenses may be written off without regard to that limitation, including gambling losses that do not exceed winnings and some work expenses of a handicapped person.
\ Home sales: If you sold your home last year, you must file a Form 2119 reporting the sale whether you made a profit, took a loss or broke even. Depending on what you did with proceeds from the sale, you could face a hefty tax bite.
In general, any profit from the sale of your principal home is considered a capital gain and subject to taxation like most other kinds of income. However, the law has two big tax breaks for home-sellers, one allowing tax-free treatment of some of the profit if you are 55 or older, and the other offering some tax deferral for most other people.
Here are details:
If you sold your home in 1990, tax on the entire profit must be deferred if you bought a new home costing at least as much as what you sold the old one for. But you must buy and move into the new home within two years - before or after - of the date you sold the old one. There are special rules that benefit military personnel.
If you pay less for the new home than you got for the old one, then you will have to pay tax now on part of the gain.
If the sale of your home marked your first encounter with capital gains, three definitions may be helpful:
Basis: In general, this is the price you paid for the old home. The figure can be adjusted over the years, depending on what you do to the home. For example, adding a room increases the basis. A tax-deductible uninsured casualty loss, such as a fire, lowers the basis. When you eventually sell your home, the higher the basis, the less taxable gain.
Fix-up costs: Money spent for work done to make it easier to sell your home. The work must be done no more than 90 days before you sign a contract to sell and paid for within 30 days after the sale. These costs are considered when you calculate how much profit from the sale is tax-deferred.
Adjusted sales price: This is the price for which you sell your old home, minus such expenses as broker commissions and attorney fees, minus fix-up costs.
Publication 523, also free from the IRS, gives a complete rundown on how to calculate and report the gain on the sale of your home. Here, in condensed form, is how the process works:
You bought a home in 1984 for $85,000 and added a $5,000 fireplace, resulting in an adjusted basis of $90,000. You sold that home in June 1990 for $125,000. Subtracting $8,000 of selling expenses nets a realization of $117,000 on the sale. Subtracting the adjusted basis leaves a realized capital gain of $27,000.
Go back to the $117,000 realization and subtract $1,000 for painting that qualified as fix-up costs. That leaves an adjusted sales price of $116,000.
The new home you bought in July 1990 cost $108,000, which is $8,000 less than the adjusted price of the old one. You owe tax on the smaller of the gain realized from the old home ($27,000) or the amount by which the adjusted price of the old home exceeds the cost of the new one ($8,000).
That means you report a $8,000 capital gain on Schedule D. The $19,000 that is not taxed as 1990 income is subtracted from the $108,000 cost of your new home, leaving an adjusted basis on that home of $89,000.
The process will be repeated when you sell the new home.
If the price of the new home in the above example had been higher than the $116,000 adjusted sales price, taxation on the entire capital gain would have been deferred.
If you or your spouse were 55 or older on the date you sold your old home, the first $125,000 of gain from the sale is tax-free forever. However, this benefit is available only once in your lifetime. And the property must have been your principal home for at least three of the last five years before the sale.
Taxation of the portion of any gain exceeding $125,000 may be deferred.
These complexities should drive home one point: Keep forever any records pertaining to the sale, expansion or purchase of a home.
by CNB