Taxpayers' priority: Finding deductions
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That was apparent in the questions that nearly 300 readers asked during The Atlanta Journal-Constitution's 14th annual tax hotline. The most popular topic: deductions.
Members of the Georgia Society of Certified Public Accountants provided the answers. Some readers were puzzled, particularly, about complications surrounding the lowered tax rates for investment dividends. But many simply asked whether a particular expense • aging student loans, medical care for kids and parents, worthless 401(k) investments • could be subtracted from their taxable income.
Here are answers to some of the most common questions:
Q: I have been repaying a student loan for more than five years. Can I deduct the interest paid on this loan?
A: There is good news. Prior to 2002, the deduction for interest paid on qualified student loans was limited to the first 60 months that interest payments were required.
This law changed, effective Jan. 1, 2002. Now you may be able to deduct up to $2,500 each year of interest you paid on your student loan, until the loan is paid off.
The maximum income limits for claiming the deduction have also increased. If your modified adjusted gross income is below $50,000, you can get the full deduction. Before the change, the limit was $40,000. For married people filing jointly, the limit for the full deduction is $100,000, up from $60,000.
You cannot take this deduction if your filing status is married filing separately or if you are claimed as a dependent on someone's (such as a parent's) 2003 tax return.
The deduction for student loan interest is claimed on Line 25 of Form 1040 or Line 18 of Form 1040A. For further information, see Form 1040 or 1040A instructions and IRS Publication 970. These are available at www.irs.gov.
— Larry W. Nichols
Q: My son gets private tutoring for dyslexia. Is that deductible?
A: Expenses paid for special schooling and treatment related to learning disabilities (including dyslexia) are deductible as medical expenses. However, medical expenses are deductible only in excess of 7.5 percent of adjusted gross income. So unless your combined medical expenses are very high or your gross income is low, you will probably not receive a tax benefit.
— Lori Evers
Q: My father-in-law has advanced Alzheimer's. Are the costs of his nursing home fully deductible as medical expenses?
A: The entire cost of maintenance in a nursing home or a home for the aged, including meals and lodging, is a medical expense if an individual is there because of a physical condition and the availability of medical care is a principal reason for the individual's residence.
If an individual is in such an institution primarily for personal or family reasons and not primarily to obtain medical care, then only that portion of the cost attributable to medical or nursing care (excluding meals and lodging) is deductible. Payments to perform both nursing care and housework may be deducted only to the extent of the nursing costs.
If you paid more than half of your father-in-law's support for the year and you file married filing jointly, then you get to claim the medical expense on your tax return.
— Bo Jackson
Q: My retirement account, a 401(k), is worthless. Can I take this loss as a deduction?
A: No, the loss is not deductible. You do not have any taxable basis in your 401(k) plan since you already received the tax benefit when you contributed to the 401(k).
— Mark Wyssbrod
Q: How much gift-giving is allowed before I have to start paying income tax?
A: The first $11,000 of gifts made by a donor during a calendar year to each donee are not included in the total amount of the donor's taxable gifts for the year. This annual exclusion is available to all donors for gifts immediately available to the donee. Spouses who consent to combine their exclusion may transfer a total of $22,000 per donee, even if given by only one of the spouses. For annual gifts that exceed the allowable limit, the gift tax is paid by the donor, not the recipient of the gift.
The tax is not an income tax. Gifts and inheritances are combined for tax purposes and are subject to a unified gift and estate tax. During a person's lifetime, a total of $1,000,000 may be given away to anyone other than a spouse before the gift/estate tax comes into effect. The annual exclusion discussed above is excluded from this total. Since this is a combined gift/estate tax, no tax is due until the donor exceeds this threshold. IRS Publication 950, Introduction to Estate and Gift Taxes, is available at www.irs.gov and gives an easily understandable explanation of these taxes.
— Nancy Motes
Q: Are broker fees and commissions on stock investments deductible?
A: There are three main categories of brokerage fees: commissions to buy the investment, commissions to sell the investment and "other" broker fees.
Commissions to buy a stock become part of the cost of the investment and are deducted in the capital gain calculation when the investment is sold.
Commissions on the sale reduce the gross proceeds used in calculating the capital gain or loss.
Account management, maintenance and investment advisory fees are deductible as a miscellaneous itemized deduction, subject to the 2 percent adjusted gross income limitation. Also included in this category are tax preparation fees, including tax preparation software if you do it yourself.
— Richard Stern
