Whole Ball of Tax 2003

Eligible educators can deduct up to $250 per year for unreimbursed expenses incurred in connection with books, supplies (other than nonathletic supplies for courses in health or physical education), computer equipment and supplementary materials used in the classroom.

Alimony is deductible, including back alimony, in the year when it is actually paid. However, not all checks made out to a former spouse count as alimony. Amounts that are actually property settlements or child support are normally non-deductible – although different rules apply to pre-1984 divorces.

If you earned interest on a time savings account or deposit that you later forfeited because of a premature withdrawal penalty, you can use the loss to reduce your gross income. Although you don’t have to itemize, you do have to use the long Form 1040 to take the deduction.

If you are among the relative few who take advantage of the opportunity presented by medical savings accounts, you can deduct your contribution to the account whether you itemize or not. MSAs have been extended through 2003 (or until the 750,000 cap is reached).

The expenses of a job-related move are deductible even if you don’t itemize. To qualify, your new workplace must be at least 50 miles farther from your old home than was your previous workplace.

If you’re self-employed, you can deduct one-half of your self-employment taxes. For tax year 2002, you also can deduct 70 percent of the health insurance premiums you paid as a self-employed individual. (If you do itemize, the remaining 30 percent can be taken as a medical deduction on Schedule A.) The deduction will increase to 100 percent in 2003 and after.

Self-employed individuals also can deduct their contributions to Keogh, SEP and SIMPLE retirement plans from their gross income.

The law allows the deduction of wagering losses to the extent of the taxpayer’s gambling winnings. If gambling is conducted as a business, the costs of gambling are directly deductible in reporting gross income. Recreational or social gamblers can offset their reported winnings only by taking an itemized deduction.

Restrictions on deducting home business expenses have been relaxed in recent years, but strict limits still apply, according to Paul Gada, JD, LLM, a small business analyst and contributor to CCH Business Owner’s Toolkit ™ Tax Guide 2003. To take full advantage, a taxpayer generally must set aside a specific area that is used exclusively on a regular basis as his principal place of business or as a place to meet clients, etc., or is entirely separate from the home. It is worth the time to find out if these separate deductions can be taken.

Even if a taxpayer fails to qualify for the so-called "home office deduction," additional expenses related to the business are still fair game. There are a variety of deductions ranging from depreciation of office equipment to meal and entertainment expenses and general business expense deductions that should not be overlooked. It’s worth determining if these separate deductions for business expenses can be taken on Schedule C or C-EZ, and reduce the "business income" reported on your return. Although different restrictions apply, computers, fax machines and other equipment also can produce tax savings. For complete information about small businesses and taxes, visit toolkit.cch.com.

Most losses associated with disasters have to be taken as itemized deductions. In the case of presidentially declared disaster areas, though, taxpayers have the extra option of amending their previous year’s tax return to take the deduction.

For some taxpayers, deducting the casualty loss in the tax year before the disaster can generate an immediate tax benefit and help to minimize the financial trauma flowing from a disaster. It also gives the taxpayer the chance to choose the tax year in which an itemized deduction will produce the greatest benefit.

Taxpayers can now take the above-the-line clean-fuel vehicle deduction of up to $2,000 for hybrid vehicles that meet certain eligibility requirements. The deduction can be taken for the year in which the vehicle is first used. The amount of the deduction depends on the vehicle the taxpayer uses. Once set, the deduction would apply not only to returns filed for the 2002 tax year, but also for the previous two years for which such hybrid vehicles were available. The deduction is currently scheduled to phase down starting in 2004 and then fall to zero after 2006.

The child tax credit is allowable for each child under age 17. If you are married, filing jointly, with an income below $110,000 ($75,000 if filing single), you may claim a credit of $600 per child in 2002. The credit is reduced by $50 for each $1,000 of income in excess of the threshold. Over time, the new law also raises the credit to $1,000. The increases, however, will not be fully implemented until 2010.

At least a portion of the child credit is refundable for all taxpayers with qualifying children. For tax year 2002, the credit is refundable to the extent of 10 percent of the taxpayer’s earned income in excess of $10,000, up to the per child credit amount. That amount increases to 15 percent in tax year 2005 and after. Taxpayers with three or more children can calculate the refundable portion of the credit using the excess of their Social Security taxes over the earned income credit (instead of the 10-percent amount) if it results in a greater refundable credit.

You can now offset your tax by up to $10,000 in qualified adoption expenses, per eligible child, including special needs children, as a result of EGTRRA. The credit begins to phase out for those with modified adjusted gross income over $150,000. Both the dollar and income limitation amounts are subject to cost-of-living adjustments for tax years 2003 and beyond.

The adoption credit for non-special needs children was made permanent under EGTRRA. For a special needs child, the credit is allowed for the tax year in which the adoption is completed and the $10,000 is allowed regardless of whether the taxpayer has qualified adoption expenses, effective tax year 2003. For children who do not have special needs, if adoption expenses are paid before the year in which the adoption is finalized, the credit is allowed for the tax year following the year in which the expenses were paid or incurred.

The earned income credit has a special place in the tax code because it is refundable – it applies even if the individual owes no tax against which it could be applied. In these cases, a refund is made unless the credit already was collected through an advance arrangement with an employer.

Many people with low incomes are entitled to an earned income credit, even individuals without children. The credit is available to single filers with 2002 adjusted gross incomes of less than $11,060 if there are no dependent children, $29,201 if there is one child and $33,178 if there are two or more children. For joint filers, $12,060 if there are no dependent children, $30,201 if there is one child and $34,178 if there are two or more children.

The credit focuses on earned income and can be taken regardless of certain non-earned sources of income such as disability pay, pensions or Social Security.

Also, individuals and families can qualify if they receive only modest amounts of investment income, rents and interest. The limit for this "disqualified income" for 2002 is $2,550.

Expenses that qualify for the Hope Scholarship Credit and the Lifetime Learning Credit are tuition and required enrollment fees, equipment fees and those course materials that must be purchased directly from the educational institution.

The Hope Credit is targeted fairly narrowly at the expenses of the first two years of post-secondary education. The student must be taking at least half the normal, full-time course load for at least one academic period during the year and must be in a program that leads to a degree, certificate or other "recognized educational credential." If the conditions are met, the Hope Credit can be as much as $1,500 per student per year, figured as 100 percent of the first $1,000 in eligible expenses and 50 percent of the second $1,000.

Like the Hope Credit, the Lifetime Learning Credit also can directly lower tax bills, but it covers more types of education. The Lifetime Learning Credit is calculated as 20 percent of eligible tuition expenses up to $5,000 – a maximum credit of $1,000 on 2002 returns. In 2003, eligible expenses will increase to $10,000 so the maximum credit will be $2,000.

As its name suggests, the Lifetime Learning Credit is not limited to the expenses of the first two years of college. It can be applied to the expenses of any post-secondary education – undergraduate, graduate or vocational training.

In addition, students are not required to take a specific course load or pursue a degree. A single course taken to acquire or sharpen job skills can qualify. If there are two or more students in a family, it’s possible to take both credits, but the expenses of any single student can only be covered by one of the credits, not both.

In addition to figuring out which credit to take, families often also must consider who should claim a credit – the parents or the child. That’s because neither credit can be claimed in full if AGI is above certain levels. Both credits begin to phase out as AGI rises above $41,000 for 2002 and are not available to single filers with AGI at $51,000 or above. The phaseout range is $82,000 to $102,000 for 2002 for joint filers.

A new health insurance credit is available to taxpayers who were an eligible trade adjustment assistance (TAA), alternative TAA, or Pension Benefit Guaranty Corporation pension recipient.