Answers to your questions...On personal exemptions and deductions

January 11, 2002

Personal exemptions and deductions


Answers to your tax questions . . .
On personal exemptions and deductions

By Lawrence Farber
Contributing Writer

I used my credit card to make a last-minute charitable contribution, and it wasn't debited from my account until this January. Can I still claim the deduction on my 2001 return?

Yes. You deduct such a gift in the year you make the transaction that results in the charge. But if the amount is $250 or more, you should obtain a written acknowledgment from the charity by the date you file your return. The acknowledgment should indicate how much you gave and whether you got anything of value in exchange.

I provided more than half the money needed to support my widowed aunt last year. Since her income was less than $2,900, can I claim a dependent exemption for her?

Yes, if she lives in your home. If she doesn't, you can claim an exemption only if she's a blood relative—that is, the sister of one of your parents (or your wife's, if you're married and file jointly).

I paid my income tax bill with a credit card last April, and the card issuer charged me a stiff fee. Can I write this off as a miscellaneous deduction?

No. Although you can deduct costs associated with preparing your tax return, the IRS considers credit card fees and other payment costs nondeductible personal expenses. The same would apply to loan interest if you'd borrowed to pay your tax.

I bought a vacation cottage in England last year and had to pay property taxes on it. Can I deduct them on my return for 2001 and, if so, how?

You can deduct all real estate taxes based on the assessed value of the property and charged uniformly by the taxing authority. Claim the amount you paid on Schedule A—add it to any state and local property taxes for your principal residence.

I'm subject to the alternative minimum tax, so I may not be allowed to claim some personal expenses that I could otherwise deduct. Might I do better to take the standard deduction instead?

You can't use the standard deduction in figuring your taxable income for the AMT. Chances are, though, that you won't lose your major itemized deductions. For example, home purchase loan interest isn't affected. Neither are deductions for charitable contributions, casualty and theft losses, or investment interest.

However, you can't deduct state and local tax payments or most miscellaneous expenses, and medical deductions will be trimmed. Interest on home equity loans is also disallowed, unless you used the money for home improvements.

The contract for the sale of my home required me to pay the buyer's costs to obtain a mortgage, including $4,000 in points. Can I deduct them as an interest expense on my return?

No. The buyer gets the deduction, not the seller. However, you can subtract your costs from the net sales proceeds. This will reduce your profit and could save you tax if your gain isn't fully covered by the home sale exemption.

My brother and I jointly own a vacation home and usually split the mortgage payments. Last year, however, he had financial problems, so I paid more than my share. Is my interest deduction limited to half the total due?

No. Even though you and your brother are equally liable, you each claim the amount of interest you paid. If the lender sent your brother Form 1098 reporting the payments, attach a statement to your return showing his name and address. If you got the 1098, he should list yours on his return.

Last year our home was burglarized, and we estimate that the personal property stolen had a value of $50,000. The insurance company wants to pay only $30,000. How should we handle this on our 2001 return?

Your maximum potential loss is $50,000 minus $30,000, or $20,000. From that amount, subtract 10 percent of your 2001 adjusted gross income plus $100, and claim the balance as a casualty loss. If the eventual insurance reimbursement exceeds $30,000, you'll have to include the excess in your income for the year you get it.

My father's estate had more deductible expenses than income when the executor closed the books last year. As a beneficiary, can I deduct the amount that the estate couldn't take advantage of on its income tax return?

Yes, provided the executor filed a return for the estate showing the details and allocating the unused amount among the beneficiaries, if you're not the only one. Include your share with the other miscellaneous itemized expenses on your return. If the total of your miscellaneous expenses exceeds 2 percent of your adjusted gross income, you can deduct the overage.

In 2000, my then fiance incurred enormous dental bills as the result of an accident. I paid most of them for him after we married last year. Can we deduct those expenses if we file a joint return for 2001?

Yes. In fact, you could claim them even if you were to file separate returns, because he was your spouse when you paid them. As you probably know, however, your medical deduction is limited to expenses above 7.5 percent of adjusted gross income.

Thanks to a profitable real estate sale, my 2001 adjusted gross income soared to $250,000. How will this affect my four exemptions?

For 2001, each exemption is worth $2,900, so four would come to $11,600. You lose 2 percent of that for every $2,500 (or fraction) of AGI above $199,450. Your $250,000 AGI exceeds that figure by $50,550, or 20.2 times $2,500. That will cost you 21 times 2—42 percent—of $11,600, or $4,872, reducing your exemption total to $6,728. Also, your itemized deductions will be trimmed by $3 for every $100 of AGI above the threshold of $132,950. So you'll be out another $3,512. For single filers, the phaseout threshold for both exemptions and deductions is $132,950.

In our next issue:
Answers to your tax questions on business expenses.


Lawrence Farber. Answers to your questions...On personal exemptions and deductions. Medical Economics 2002;1:62.