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
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.
How to calculate the 2% deduction limit
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
Work-related employee 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
• 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
• 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
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
• 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
• 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
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
• 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.)
* * *
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
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
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
• 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
• From an IRA for health insurance premiums if you are
• From an IRA to the extent of your higher education
• From an IRA for first home purchases.
Tax on excess accumulation
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.
* * *
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.
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.
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
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.
All businesses. File Forms 1098, 1099, and W-2G with the
IRS. This due date applies only if you file electronically (not by magnetic
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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