ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, February 10, 1997 TAG: 9702120002
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: WASHINGTON
SERIES: Tax Season
SOURCE: DAVE SKIDMORE/Associated Press
Tax-reform advocates denounce deductions because they complicate the system and push tax rates higher. But taxpayers looking to save money cherish them.
The higher your tax-bracket, the better they are. A taxpayer in the 28 percent bracket, for example, saves $28 for every $100 deducted; in the 15 percent bracket, the savings is $15.
The first step is to figure whether you need to itemize your deductions on Schedule A of Form 1040 or if it's better to take the standard deduction.
If your itemized deductions total more than your standard deduction - and they probably will if you have a home mortgage and pay state income tax - then itemize.
This year, for married couples filing a joint return and qualifying widows and widowers, the standard deduction is $6,700. For single people, it's $4,000; heads of household, $5,900, and married people filing separate returns, $3,350.
If either you or your spouse were age 65 or older on Jan. 1 or were blind at the end of 1996, check your instruction booklet, or see Publication 501. You're eligible for a bigger standard deduction.
Some deductions may be limited if your income was more than $117,950 ($58,975 married filing separately).
A few deductions, such as health insurance for the self-employed, moving expenses, Individual Retirement Account contributions and alimony paid are taken on the front of Form 1040. You get them whether or not you itemize. Most of the rest, you list on Schedule A.
Here's an overview:
Medical and dental expenses: You can deduct out-of-pocket medical and dental expenses and health insurance premiums for yourself, your spouse and your dependents. But you can deduct only the amount that exceeds 7.5 percent of your adjusted gross income (line 32 of Form 1040).
Deductible expenses include hospital, doctor and dental fees; prescription drugs including insulin and birth control pills, and certain home renovations such as the addition of a wheelchair ramp or removal of lead-based paint. If you're self-employed, you can count the 70 percent of health insurance premiums that you weren't able to deduct on the front of Form 1040.
You can't deduct health insurance premiums if they've already been shielded from tax through an employer-sponsored cafeteria plan. Premium payments listed in box 1 of your Form W-2 weren't shielded and can be deducted.
You can't deduct the cost of health club membership, smoking cessation and weight loss programs, nonprescription medicine and surgery for purely cosmetic purposes.
Publication 502 has the details.
Taxes: State income taxes and local real estate taxes are deductible. Annual personal property taxes, such as those charged on cars and boats, also are deductible if based on the value of the vehicle but not deductible if based on weight. Sales taxes on personal (as opposed to business) purchases aren't deductible, neither are trash pickup fees, water and sewer bills and fees and fines.
Interest: You generally can deduct all of your home mortgage interest if the loan totaled $1 million or less and was used to buy, build or improve your home. You also may be able to deduct interest on home equity loans of up to $100,000, for any purpose. If any of your loans were taken out on or before Oct. 13, 1987, you might be able to deduct more.
Most lenders will send you a Form 1098 detailing how much you paid in 1996. See Publication 936 for more information.
You can deduct ``points'' - advance interest - you paid to buy a home, if charging points is the general practice of lenders in your area. You also can deduct points paid on your behalf by the seller of the home you purchased. However, points paid to refinance a mortgage generally must be deducted over the life of the loan.
Personal interest isn't deductible. But interest incurred for investment purposes, such as on a margin account at a stock broker, is. Publication 550 explains.
Charitable contributions: Contributions of money or property to qualified charities are deductible. These include churches and synagogues; nonprofit schools and hospitals; groups such as the Salvation Army, Red Cross, Goodwill Industries and scouting organizations. Expenses you incur when serving as a volunteer also may be deductible.
You can't deduct the value of blood you donate or contributions to individuals, lobbying or political groups, or contributions made in exchange for raffle and lottery tickets.
You must obtain a written acknowledgment for all charitable contributions of $250 or more. A canceled check isn't good enough.
If you get something in exchange for a contribution, such as dinner or a sweat shirt, the value must be subtracted from the amount of the contribution. If your contribution was more than $75, the charitable organization must give you a statement stating you can deduct only the amount exceeding the value of the goods or services you received.
You must attach a Form 8283 if you claim a noncash contribution over $500. See Publication 526.
If you donated stock to a private foundation after June 30, you can deduct its full market value, rather than the original cost of the stock.
Casualty and theft losses: Losses that aren't covered by insurance from theft, disasters, storms, fires and accidents are deductible. You need to fill out Form 4684. Publication 547 explains the rules. Publication 584 is a workbook to help you list your damaged goods and figure the loss.
Moving expenses: Moving expenses are subtracted from income on the front of Form 1040. You'll need Form 4782, from your employer, and Form 3903. Your new workplace must be at least 50 miles farther from your old home than your old job was. See Publication 521.
Job expenses and miscellaneous: You can deduct a variety of expenses to the extent that, when combined, they exceed 2 percent of your adjusted gross income. These include: unreimbursed employee expenses for travel, education, professional publications and tools; union dues; tax-preparation fees, and safe-deposit box rental.
For job expenses, you may need to fill out Form 2106 or the simpler, 12-line Form 2106-EZ. See Publication 529.
Self-employed health insurance: The self-employed can deduct 30 percent of the cost of their health insurance, up to an amount equal to their net profits and other earned income. On 1997 returns, the amount will rise to 40 percent.
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