Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 22, 1993 TAG: 9302220019
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
SOURCE: JIM LUTHER ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Long
FOR MOST, ITEMIZING IS A WASTE OF TIME
Nearly three-quarters of taxpayers don't have to worry about finding deductions to itemize when they file their tax returns. They simply take the standard deduction.Before the 1986 tax overhaul took away deductions for interest and state and local sales taxes and restricted writeoffs for medical care and most miscellaneous expenses, more than 40 percent of couples and individuals itemized.
As a result, only about 28 percent itemized on returns filed in 1992.
In general, don't bother to itemize unless your deductions exceed the standard.
For 1992 earnings, that is $3,600 for a single person; $6,000 for a couple filing a joint return; $3,000 for a married person filing separately, and $5,250 for a head of household. The figures are higher for those who are blind or past their 65th birthday.
Nevertheless, more than 31 million couples and individuals are expected to itemize on returns filed this year, and the chief reason is the deduction for interest on a home mortgage.
You may deduct all interest on mortgages taken out before Oct. 14, 1987, so long as they then did not exceed the market value of the home.
Interest on mortgages signed on or after that date is fully deductible if the money was used to buy, build or improve the home. Another condition: The loans, when combined with earlier outstanding mortgages, must have totaled $1 million or less.
In addition, interest on another $100,000 of home-equity loans for any purpose is deductible.
Regardless of the date of the loans, you may divide your deductible mortgages between your principal home and a second home.
If you refinanced a pre-Oct. 14, 1987, mortgage to get a lower interest rate and the new loan is no larger than the balance of the old, all the interest on the new mortgage is deductible. But if the refinanced loan is bigger, the $1 million and $100,000 limitations apply.
A new rule: A buyer using a seller-financed mortgage must report the seller's name on Schedule A.
Points - loan-origination fees - paid in 1992 may be deducted in full on your 1992 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. The points must be paid directly to the lender and listed specifically on your closing statement.
If those tests are not met, points must be deducted over the life of the loan.
In general, points paid to refinance a mortgage must be deducted gradually over the life of the loan. See Publication 936, which is free from the IRS.
Other itemized deductions, some of which may be limited for higher-income people:
Medical. Deduct unreimbursed expenditures for medical expenses, such as prescriptions, doctors' and dentists' fees, medical insurance premiums including Medicare Part B, eyeglasses, nursing care, hearing aids and transportation - but only those expenses that exceed 7 1/2 percent of your adjusted gross income.
Taxes. Income and real estate 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 rather than weight.
Investment interest. The deduction is limited to an amount equal to total net investment income.
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 worth more than $500, report those contributions on Form 8283.
Losses. Deduct non-business losses caused by fire, theft, storm or other casualties, but not by breakage or misplacing. Subtract the first $100 of the loss and deduct only the portion of the remainder that exceeds 10 percent of your adjusted gross income. See Form 4684.
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.
Dependents. In general, each dependent claimed reduces the amount of 1992 income subject to tax by $2,300. The most obvious dependent is your child under the age of 19 who relies on you for more than half his or her support. Then come the complexities.
A dependent must meet five tests:
Relationship: He or she must have lived with you throughout 1992 except for being temporarily absent due to school, military service, vacation or illness, OR must be a relative. That can be a child, grandchild, stepchild, parent, grandparent, brother, sister, aunt, uncle, nephew, niece or in-law. An unmarried mate counts unless having a live-in lover violates your state law.
Income: In general terms, a dependent must have had 1992 gross income under $2,300. That does not include tax-exempt income, such as welfare benefits and the nontaxable part of Social Security. There is no income limit if the dependent is your child and:
Was under 19 at the end of 1992, or
Was a full-time student and under 24 at year end. Full-time means a full class load for at least five months of the year. A government-supervised on-farm training course also counts.
Citizenship: The dependent must be a U.S. citizen or resident alien or a resident of Mexico or Canada.
No joint return: You generally may not claim an exemption for any person who files a joint return with someone else.
Support: You must have provided more than half the dependent's financial support last year. This includes food, shelter, clothing, transportation, medical expenses, education, child-care services, recreation and spending money. Insurance premiums, scholarships or Social Security or income taxes that you paid for the person do not count as support.
If you and others join to pay more than half the support of a dependent - such as an elderly parent - but nobody alone pays more than half, you may claim the full exemption by contributing more than 10 percent. But the others must give up their right to the exemption by signing Form 2120, a Multiple Support Declaration.
A divorced parent who does not have custody of a child may take an exemption if the other parent agrees in writing to give up the claim, or if the claim was authorized by a pre-1985 court order or agreement. IRS Publication 504 has details.
Kiddie tax. A child with investment income can complicate a family's taxes.
In general, the investment income over $1,200 - interest, dividends, capital gains and the like - of a child under the age of 14 is taxable at the parents' top rate. That could be as high as 31 percent; most children who are taxed normally pay at a top rate of 15 percent.
You, the parent, may qualify for an option.
If the child's total 1992 income was more than $500 but less than $5,000 and consisted solely of interest and dividends, that income may be included as part of the parents' return. In this case, Form 8814 must be completed and attached to the return.
This option is not for everyone. For one thing, it will result in additional taxes of up to $47.
Worse, rolling your child's investment income into yours will raise your adjusted gross income and could reduce any deduction you claim for medical expenses, contributions to Individual Retirement Accounts and miscellaneous job-related expenses. If your income is high enough, filing Form 8814 could subject you to the phaseout of personal exemptions and the limitation on itemized deductions.
Remember that the kiddie tax refers only to investment income. It does not apply to wages, tips or other money that your child earns for personal services.