Monthly Tax Newsletter - FEBRUARY 1998

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CPAs specializing in Health Care Professionals

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Itemizing Your Deductions

Each year, taxpayers are given the option of claiming the standard deduction or itemizing their deductions. For that reason, a person will only itemize their deductions for years that the total of all of their deductible expenditures incurred during the year will exceed the applicable standard deduction. Taxpayers who itemize must complete and attach a Schedule A to their tax returns. For 1997, the allowable standard deduction is as follows:

Single individuals: $4,150
Married couples: $6,900
Heads of household: $6,050

Allowable itemized deductions

Medical expenses (that exceed 7.5% of adjusted gross income):

Medical expenses paid on behalf of yourself and your spouse
Medical expenses paid on behalf of your dependents
Medical expenses paid on behalf of a parent or any other individual for whom you provide more than one half of their support during the year

According to the IRS in the Publication 502, "Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. The expense must be primarily to alleviate or prevent a physical defect or illness. Expenses for solely cosmetic reasons generally are not expenses for medical care. Also, expenses that are merely beneficial to one's general health (for example, vacations) are not expenses for medical care."

Taxes paid during the year:

State and local income taxes withheld during the year
Balance due from prior year's state and local tax returns paid during the year
State and local estimated tax payments remitted during the year
Other state and local tax payments made
Real estate taxes paid on ALL properties owned by you
Auto excise taxes
Other personal property taxes

Interest paid during the year:

Mortgage interest paid on your primary residence and second home
Points paid in connection with the purchase or improvement of principal residence
Interest paid on up to $100,000 of an outstanding home equity loan
Allowable investment interest expense (See Form 4952)

Gifts to charities:

Charitable contributions made by cash or check
Non-cash charitable contributions (See Form 8283)

Casualty losses:

Non-business casualty losses are deductible to the extent they exceed 10% of adjusted gross income (See Form 4684)

Miscellaneous itemized deductions (that exceed 2% of your adjusted gross income):

Unreimbursed employee business expenses (see below)
Investment fees and expenses
Tax preparation fees
IRA and Keogh fees
Certain legal fees
Gambling losses to the extent of gambling winnings reported on line 21 of the Form 1040; (not subject to 2% floor)

(IRS Publication 529 includes the complete list of Miscellaneous Itemized Deductions.)

Phase-out of Itemized Deductions

High income taxpayers are required to phase-out their itemized deductions. The amount of the reduction is equal to 3% of the excess of adjusted gross income, as reflected on line 32 of the Form 1040, over a certain threshold. For 1997, the threshold which applies to single individuals as well as married couples is $121,200.

For example, if a married couple's adjusted gross income is $200,000, they would have to reduce their itemized deductions by $2,364; which was calculated as follows: [($200,000 - $121,200) * .03]

Deducting Unreimbursed Business Expenses

During the course of a year, young health care professionals incur a wide variety of expenses in connection with practicing in their respective fields. In many instances, these professionals are not reimbursed for many of their business related expenditures. The following table reflects the unreimbursed business expenses commonly incurred by young health care professionals.

Expense	Deductible	Non-deductible
Automobile expenses	The portion of automobile expenses attributable to traveling between two work places or between your principal residence and a temporary job site.	The portion of automobile expenses incurred while commuting between your principal residence and a regular place of business
Beepers and pagers	The rental fees paid by you for beepers and pagers used in connection with your job	Any costs associated with the personal use of these items
Books/library	Depreciation based on either the cost of books purchased during the year or the fair market value of your library purchased in prior years and placed into business use during the current year	Any purchase of books not related to your profession
Cellular telephone	The business use portion of the monthly bill and depreciation expense based on the business portion of the cost of the cellular telephone	Any portion of the cost of the cellular phone and the monthly bill relating to personal use
Computer purchases	Depreciation of the business use percent of any computer or peripheral purchased as a requirement of employment AND for the benefit of the employer	Any computer or peripheral not specifically purchased as a requirement of employment OR for the benefit of the employer.
Education, examinations, & licenses	Expenses that are incurred that are required as part of your employment AND maintain or improve professional skills	Expenses incurred that prepare or qualify a person for a new trade or business
Equipment & instruments	Depreciation expense based on either the cost of items purchased during the year or the fair market value of equipment purchased in prior years and placed into business use during the current year	The purchase of equipment and instruments not associated with your profession.
Insurance	Malpractice insurance and insurance paid on business assets	Life & disability insurance. Health insurance premiums paid by individuals who are not self-employed. Self-employed individuals will deduct 40% of their health insurance premiums as an adjustment to income
Interest on school loans	For 1998, up to $1,000 of student loan interest. Also, interest paid in connection with a home equity loan used to pay off student loans.	All other student loan interest paid.
Job search	All expenses associated with finding a new position in your current trade or business	Expenses associated with finding your first job or a job in a new trade or business
Meals & entertainment	50% of the cost of a meal either when there is a specific business purpose in connection with the meal or while temporarily away on business	Meals eaten while on call at a hospital in the general vicinity of your residence as well as all other non-business meals
Parking & tolls	Parking and tolls incurred in connection with traveling between two different workplaces or between your principal residence and a temporary job site	Parking and tolls incurred in connection with commuting between your principal residence and a regular workplace
Professionals dues, journals & subscriptions	Fees paid to join professional organizations or to subscribe to their journals	Dues paid to business, social or athletic clubs
Supplies	Supplies, such as slides for presentations, that are required in connection with your employment	Supplies which do not fall within the definition of being "ordinary" and "necessary" for a professional in your field
Temporary job assignments	All travel and lodging, as well as 50% of the cost of the meals, incurred during a job rotation outside of the general vicinity of your residence if the rotation will last for less that 1 year and you intend to return to where you lived before the rotation.	Any expense associated with a job rotation outside of the general vicinity of your residence which will last for more than 1 year or for an undetermined amount of time OR if you do not intend to return to where you lived prior to the rotation.
Travel & lodging	Most travel and lodging expenses incurred while outside of the general vicinity of your residence in connection with an activity that is deductible	Travel and lodging expenses incurred when the primary purpose of the trip is not business related
Uniforms & cleaning	The cost of purchasing and cleaning clothing, such as labcoats and scrubs, required by your employer and not considered "everyday street clothing"	Items such as suits, shirts, ties and wristwatches because they fit the description of "everyday street clothing"

How to Deduct Unreimbursed Business Expenses

How an individual deducts their allowable unreimbursed business expenses depends on how that person was compensated during the year as follows:

Individuals compensated as employees (having taxes withheld from their pay) are required to deduct these type expenses as a miscellaneous itemized deduction on their Schedule A. These individuals will also be required to complete and attach a Form 2106 or 2106-EZ, Unreimbursed Employee Business Expense, to their Form 1040.
Individuals compensated as independent contractors (having NO taxes withheld) will deduct their business expenses directly against their income. These individuals will be required to complete and attach a Schedule C or Schedule C-EZ, Profit or Loss From Business, to their Form 1040.
Individuals compensated as both employees and independent contractors will need to determine whether to reflect a specific expense on the Schedule C or the Form 2106. Items which are specifically related to a person's income as an independent contractor, such as malpractice insurance and directly related auto expenses, will be deducted directly against that income. Other items, such as job search expenses, are most likely related to a person's employment and should be reflected on the Form 2106.

MDTAXES ACRONYM of the Month

Q: How do your resuscitate that dismal family budget?

A: CPR, or course!

Communicate
Plan
Review

Most people earn pretty much the same amount of money each month. In addition, excluding vacations and big ticket items, most people spend the same amount of money each month as well. For those people, putting together a spending and savings budget is not too difficult of a task.

All you need to do is analyze your cash inflows and outflows for the last 6 months. If you use a program such as Quicken, this step won't take long at all. Then, project out your inflows and outflows for the next 6 months or so. At this point, you should also set an attainable savings or debt reduction goal. If you are married, you NEED to sit down with your spouse and get his or her input on the budget that you're putting together. The best scenario is when both spouses spend an afternoon or evening and work together to prepare the spending and savings budget.

Once the budget is in place, you (and your spouse) should review on a monthly basis whether you succeeded to sticking to the budget. If you weren't able to meet your goals, what happened? Will you be able to meet your goals the next month, or is your budget unrealistic? If you did meet your goal for the month, you should congratulate yourselves, then focus on meeting your savings and spending goals for the next month.

An index of our previous months' newsletters can be found at oldnews.html

1997 & 1998 Tax Facts

For 1997, the standard deduction for a single individual is $4,150 and for a married couple is $6,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unriembursed employee business expenses. For 1998, the standard deduction for a single individual has been increased to $4,250 and for a married couple has been increased to $7,100.
For 1997, the personal exemption is $2,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.
The maximum earnings subject to social security taxes has been increased to $68,400 in 1998 from $65,400 in 1997.
The standard mileage rate has been increased to $.325 per mile in 1998 from $.315 per mile in 1997.
The maximum annual contribution to a 401(k) plan or a 403(b) plan has been increased to $10,000 per year in 1998.

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