Expenses You Can Claim as Miscellaneous Itemized Deductions

"Nanny Tax" Must Be Reported

Retirement Plan Distributions—What You Need to Know

Tax Calendar

Do You Know. . .

That the Federal Reserve is not an agency of the U.S. Government? It is a corporation, owned by banks that have purchased shares of stock in it, but accountable to the government. The Federal Reserve was created in 1913 by Congress to stabilize the nation’s financial system. It is run by a seven-member board of governors appointed by the President and confirmed by the Senate.

If you itemize your deductions, you can deduct certain expenses as miscellaneous itemized deductions on Schedule A of Form 1040. Many taxpayers feel that because you can only claim the amount of expenses that is more than 2% of your adjusted gross income, it is not worth taking the time to itemize these expenses. But there are some expenses that can be listed as miscellaneous itemized deductions and are not subject to the 2% limit. Taken together, both types of miscellaneous deductions may add up to a significant amount that can help reduce your taxes. Below are lists of items that can be claimed; take the time to review the lists to see whether itemizing these deductions is worth your while.

You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Even if each individual expense is not a significant amount, together the expenses might surpass the 2% threshold. (Generally, apply the 2% limit after you apply any other deduction limit). Deductions subject to the 2% limit are usually categorized as work-related employee expenses , tax preparation costs, and investment expenses.

You can deduct only un-reimbursed employee expenses that meet the following requirements: 1) expenses paid or incurred during your tax year, 2) for carrying on your trade or business of being an employee, and 3) ordinary and necessary business expenses. (An expense is ordinary if it is common and accepted in your type of trade or business. An expense is necessary if it is appropriate and helpful to your trade or business.)

The following are some items you may be able to deduct as work-related employee expenses:

• Business liability insurance premiums.

• Damages paid to a former employer for breach of an employment contract.

• Depreciation on a computer or cellular telephone your employer requires you to use in your work.

• Dues to a chamber of commerce if membership helps you do your job.

• Dues to professional societies.

• Education that is employment related.

• Home office or part of your home used regularly and exclusively in your work.

• Job search expense in your present occupation.

• Laboratory breakage fees.

• Licenses and regulatory fees.

• Malpractice insurance premiums.

• Medical examinations required by an employer.

• Occupational taxes.

• Passport for a business trip.

• Repayment of an income aid payment.

• Research expenses of a college professor.

• Subscriptions to professional journals and trade magazines related to your work.

• Tools and supplies used in your work.

• Travel, transportation, entertainment, and gift expenses related to your work.

• Union dues and expenses.

• Work clothes and uniforms if required and unsuitable for everyday use.

Other deductible expenses subject to the 2% limit

You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. These are the expenses you pay 1) To produce or collect income that must be included in your gross income, 2) To manage, conserve, or maintain property held for producing such income, or 3) To determine, contest, pay, or claim a refund of any tax.

You can deduct other expenses you pay for the purposes of one and two above only if they are reasonably and closely related to these purposes. These other expenses include:

• Appraisal fees for a casualty loss or charitable contribution.

• Casualty and theft losses from property used in performing services as an employee.

• Clerical help and office rent in caring for investments.

• Depreciation on home computers used for investments.

• Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust.

• Fees to collect interest and dividends.

• Hobby expenses, but generally not more than hobby income. (A hobby is an activity that is not considered a business, because it is not carried on to make a profit.)

• Indirect miscellaneous deductions of pass-through entities. (Pass-through entities include partnerships, S corporations, and mutual funds. Deductions of these entities are passed through to the partners or shareholders. If the deductions are miscellaneous itemized deductions, they generally are subject to the 2% limit.)

• Investment fees and expenses.

• Legal fees related to producing or collecting taxable income, doing or keeping your job, or getting tax advice.

• Loss on deposits in an insolvent or bankrupt financial institution.

• Repayments of income.

• Repayments of Social Security benefits.

• Safe deposit box rental. (You can deduct the rent if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers or documents. Rent is not deductible if you use the box only for jewelry, personal items, or tax-exempt bonds.)

• Service charges on dividend reinvestment plans.

• Tax advice and preparation fees, including fees for electronic filing, and

• Trustee’s fees for your IRA, if separately billed and paid.

Deductions not subject to the 2% limit

Some expenses that can be reported as miscellaneous itemized deductions are not subject to the 2% limit. These deductions are:

• Amortizable premium on taxable bonds.

• Casualty and theft losses from income-producing property.

• Gambling losses up to the amount of gambling winnings.

• Impairment-related work expenses of persons with disabilities. (These are ordinary and necessary expenses for attendant care services at your place of work and other expenses in connection with your place of work that are necessary for you to be able to work.)

• Repayments of more than $3,000 under a claim of right.

• Un-recovered investment in a pension.

• Federal estate tax on income in respect of a decedent. (This is income that the decedent would have received had death not occurred and that was not properly includible in the decedent’s final income tax return.)

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Alone, these expenses might not seem worthwhile to deduct, but added together, you may have enough to overcome the 2% limit and reduce your tax bill. If you have any questions regarding these expenses and to what extent they can be deducted, please contact our office.

If you paid $1,100 or more to a person 17 years of age or older for household services during 1999, you must report his or her Social Security and federal unemployment taxes on your personal tax return. (Schedule H of Form 1040.) If you paid total cash wages of $1,000 or more in any calendar quarter of 1998 or 1999 to household employees, you may also be liable for federal unemployment taxes. These employment taxes must be paid by the due date of the return, without extensions. Since these taxes are part of your income tax liability, make sure you’ve paid enough estimated or withholding taxes to cover them. The $1,100 limit applies to each household employee, but, remember, you can give your employee up to $65 a month for expenses to commute by public transportation without it counting toward the $1,100 limit, or being included in the employee’s gross income. Also remember that payments to household employees may be subject to state unemployment and other state taxes.

The tax treatment of amounts you receive from different types of retirement plans (such as individual retirement arrangements (IRAs), employee pensions or annuities, and disability pensions or annuities) can vary depending on when you receive the amounts and the type of retirement plan. It’s important to know the rules regarding distributions so you can plan your distributions and rollovers and avoid unnecessary taxes and penalties.

Generally, you must include in your gross income distributions from a traditional IRA in the year you receive them. A traditional IRA is any IRA that is not a Roth, SIMPLE, or education IRA. (Exceptions to the general rule are rollovers, tax-free withdrawals or contributions, and the return of nondeductible contributions.)

Premature distributions. Generally, premature distributions (early withdrawals) are amounts you withdraw from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½. You must include premature distributions of taxable amounts in your gross income. These taxable amounts are also subject to an additional 10% tax unless the distributions qualify for an exception.

Distribution after age 59½ and before 70½. After you reach age 59½, you can withdraw assets from your traditional IRA without having to pay the 10% additional tax. Even though you can make withdrawals, you don’t have to withdraw any assets from your IRA until you reach age 70½.

Required distributions. If you are the owner of a traditional IRA, you must withdraw the entire balance or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. If distributions from your traditional IRA are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed.

Other types of retirement plans

Non-periodic distributions. Non-periodic distributions include cash withdrawals, distributions of current earnings, and certain loans. If you receive one from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. (If part is taxable, it may be subject to an additional 10% tax.)

Lump-sum distributions. If you receive a lump-sum distribution from a qualified retirement plan (a qualified employee plan or qualified employee annuity), you may be able to elect optional methods of figuring the tax on the distribution.

Tax on early distributions. Most distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59½ are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution. For this purpose, a qualified retirement plan is: 1) a qualified employee plan, 2) a qualified employee annuity plan, 3) a tax-sheltered annuity plan for employees of public schools or tax-exempt organizations, or 4) an IRA (other than an education IRA).

SIMPLE IRA plans. An early withdrawal from a SIMPLE IRA is generally subject to an additional 10% tax. However, if the distribution is made within the first two years of participation in the SIMPLE plan, the additional tax is 25%.

Annuity contracts. If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract, if, as of March 1, 1986, you had begun receiving payments under the election.

Exceptions to the tax on early distributions. The early distribution tax does not apply if the distribution is:

• Made as part of a series of substantially equal periodic payments (made at least annually) for your life or the joint lives of you and your beneficiary (or life or joint life expectancy.)

• Made because you are totally and permanently disabled.

• Made on or after the death of the plan participant or contract holder.

• From a qualified retirement plan other than an IRA, the exception applies only if payments begin after your separation from service.

• From a qualified retirement plan to the extent you have deductible medical expenses (those that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year.

• From an employee stock ownership plan for dividends on employer securities held by the plan.

• From a qualified retirement plan due to an IRS levy of the plan.

• From an IRA for health insurance premiums if you are unemployed.

• From an IRA to the extent of your higher education expenses.

• From an IRA for first home purchases.

The IRS wants to make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, and therefore may impose a tax on "excess accumulations." Therefore, the payments that you receive from qualified retirement plans must begin no later than your required beginning date unless the rule for 5% owners and IRAs applies. This is April 1 of the year that follows the later of: 1) the calendar year in which you reach age 70½, or 2) the calendar year in which you retire.

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These are just some of the rules regarding retirement plan distributions. Although these rules are extensive and sometimes confusing, remember that they do exist and that your age, the amount of the distribution, and the type of plan are all factors you should consider prior to contribution and distribution, as they could affect your taxes.

March 1

Individuals. If you are a farmer or a fisherman and owe estimated tax, file your 1999 income tax return by this date to avoid an underpayment penalty. However, you have until April 15 to file if you paid your 1999 estimated tax by January 18, 2000.

March 15

Corporations. File a 1999 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you want an automatic six-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.

S corporations. File a 1999 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic six-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.

S corporation election. File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation, beginning with calendar year 1999. If Form 2553 is filed late, S treatment will begin with calendar year 2000.

Electing large partnerships. Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership. This due date is effective for the first March 15 following the close of the partnership’s tax year.

Employers. For Social Security, Medicare, withheld income tax, and non-payroll withholding, deposit the tax for payments in February if the monthly rule applies.

March 31

All businesses. File Forms 1098, 1099, and W-2G with the IRS. This due date applies only if you file electronically (not by magnetic media).

April 17

Individuals. File an income tax return for 1999, and pay any tax due. If you want an automatic 4-month extension of time to file the return, file Form 4868.

If you are not paying your 2000 income tax through withholding (or will not pay enough tax during the year that way), pay the first installment of your 2000 estimated tax. Use Form 1040-ES.

Household employers. If you paid cash wages of $1,100 or more in 1999 to a household employee, file Schedule H of Form 1040 with your income tax return and report any employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 1998 or 1999 to household employees. Also report any income tax you withheld for your household employees.

Partnerships. File a 1999 calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic three-month extension of the time to file the return and provide Schedule K-1, file Form 8736. Form 1065 must then be filed by July 17.

Corporations. Deposit the first installment of estimated income tax for 2000.

Employers. For Social Security, Medicare, withheld income tax, and non-payroll withholding, deposit the tax for payments in March if the monthly rule applies.

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