Wednesday, April 2, 2003

Know the right deductions at tax time

With the April 15 tax deadline looming, here are some tax tales provided by the Georgia Society of CPAs to help you understand the tax law and get the tax breaks you deserve.

Don't ask the IRS to foot all your business entertainment expenses, no matter how well-known your group or your purpose. As a general rule, only 50 percent of qualified business entertainment expenses are deductible and these expenses must be well-documented.

Churchill Downs, the Kentucky Derby venue, asked for an exemption and got denied. It had spent almost $400,000 over a two-year period to host dinners, cocktail parties, press breakfasts and other promotional events. It then claimed it was not required to reduce the expenses by 50 percent. Churchill Downs took on the IRS and lost. (Sixth Circuit Court of Appeals, Churchhill Downs, Inc.: CA-6, No. 01-1274)

The tax law provides some relief to low-income wage earners, but the rules are complex. In one case, a child living with his mother supported his younger siblings on his machinist's wages of $14,100.

He claimed an Earned Income Credit (EIC) with respect to the children. Generally, to qualify for the credit you must work and have earned income below certain thresholds, be between the ages of 25 and 65, and be a U.S. citizen. If you are claiming qualified children, you must have lived in the primary residence with the children for at least six months.

The sibling claiming the EIC met the age, residency and income tests. However, the IRS claimed that his brothers and sisters were not "qualifying children." The Tax Court disagreed and ruled in the sibling's favor. The Tax Court pointed out that the working sibling shared parental duties, including financial ones, with his mother and assumed the role of a father figure. (Your Income Tax, 25.12, Rafael Barajas, TC Summary Opinion 2002-59)

The IRS has strict rules regarding medical deductions. You can only deduct qualified medical expenses that exceed 7.5 percent of your adjusted gross income. Qualified expenses typically do not include cosmetic surgery. One taxpayer was able to claim a deduction for liposuction, but only because she convinced the IRS she had a valid medical reason.

The taxpayer was employed as a hospital emergency room nurse. Without surgery, she lost more than 100 pounds. But as a result of her weight loss, she had a "mass of loose-hanging skin" which interfered with her ability to bend and perform her professional responsibilities. She had three liposuction surgeries and then claimed the cost as a medical expense.

The IRS disallowed the write-off, saying it was "cosmetic." However, the Tax Court overruled that decision and allowed the deduction, stating that "obesity is well recognized in the medical community as a serious disease." The surgeries qualified under tax law. (Al-Murshidi, TC Summary Opinion 2001-185)

Generally unreimbursed employee education expenses that help you perform your current job are deductible as a miscellaneous itemized deduction. If you try to deduct the expenses associated with preparing you for a new job, the IRS will ask you to pay for the cost.

In a recent case, a law librarian, with 25 years of experience in the field, obtained a law degree. She deducted the expenses associated with law school saying it was relevant to her work as a legal librarian. However, the IRS did not allow the deduction as the education qualified her for another line of work.

During tax season you may hear lots of stories about large tax breaks given to some taxpayers. CPAs point out that in many cases these are just "tall tales" and the truth is somewhere in between. If you have questions about the tax breaks you deserve or think you have a case to dispute the IRS, contact a CPA for professional advice.

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