Answers to your tax questions

Tax Q & A

Answers to your tax questions

CME expenses • Limits on exemptions • Interest payments • Education credits •Home office deductions • Bank accounts abroad • Figuring capital gains

By Lawrence Farber, Senior Editor

Q: I attended a CME seminar on a cruise ship last summer. Are my expensesdeductible?

A: You can deduct a maximum of $2,000, if the vessel was of USregistry and called only at ports in the United States or its possessions.Your tax return must include a copy of the program schedule, as well asa statement signed by you indicating the total days of the trip and thenumber of hours you devoted to the seminar each day. An officer of the sponsoringprogram must also sign a statement outlining the schedule and the numberof hours you attended daily.

Q: Large stock market gains boosted my adjusted gross income to $260,000in 1999. I understand this will chop the exemptions I can claim for myself,my wife, and our two kids. What will my exemptions come to?

A: For 1999, each exemption is worth $2,750, so four would total$11,000. You lose 2 percent of that for every $2,500 (or fraction) of adjustedgross income above $189,950. Your $260,000 AGI exceeds that figure by $70,050,or 28.02 times $2,500. So you'll lose 29 times 2, or 58 percent, of $11,000,reducing your family's exemption to $4,620. Worse yet, your itemized deductionswill be trimmed by $3 for every $100 of AGI above the threshold of $126,600.That will set you back $4,002 more.

For single filers, the phaseout threshold for both exemptions and deductionsis $126,600.

Q: Last year, the IRS charged me interest because I underestimatedthe income from my unincorporated practice for 1998. Can I deduct the interestpayment as a business expense on my 1999 Schedule C?

A: No. Even though the expense was practice-related, the IRS maintainsthat it's nondeductible personal interest. The Tax Court disagrees, butthree appeals courts have ruled in favor of the IRS. So an auditor woulddisallow your deduction and probably assess a penalty. That wouldn't bedeductible either, the IRS warns.

Q: When my father died in December 1998, I immediately became theowner of one of his certificates of deposit, under a TOD (transfer on death)arrangement. The last quarterly interest payment for 1998 wasn't creditedto the account until January 1999. How do I handle this on my tax return?

A: You must report the entire payment with your other interestincome. However, your father's estate includes the part covering the periodthrough the day he died, and you can deduct any federal estate tax paidon it.

Claim the deduction as a miscellaneous expense on Schedule A. It's notsubject to the 2 percent of AGI floor that applies to most other miscellaneousitemized deductions.

Q: My mother paid $2,000 of my son's college expenses last year. Ifmy 1999 income turns out to be too high to let me claim an education creditfor him, can she do so? She's single, and her income is about $40,000 ayear.

A: No. Though your mother meets the income test, she can't qualify,because your son isn't her dependent.

Provided your adjusted gross income on a joint return is less than $80,000($40,000 for single filers), you can claim a Hope Scholarship Credit ofup to $1,500 for your son if he's a freshman or sophomore, or a LifetimeLearning Credit of up to $1,000 if he's a more advanced student. These amountsare phased out between $80,000 and $100,000 for couples and between $40,000and $50,000 for singles.

Q: I see patients at several nursing and retirement facilities. I'vebeen offered desk room at one of them, where I could write reports and doother paperwork in connection with my practice, but I prefer to do thisat home. Can I claim a home-office deduction?

A: Perhaps. Rules that took effect in 1999 allow such a deduction,provided you don't conduct "substantial" administrative or managementactivities at any other fixed location. It doesn't matter that you coulddo this work outside your home if you chose to.

Make sure, though, that the space you set aside for your office at homeis used regularly and exclusively for your business, not for personal purposesas well.

Q: I'm single but have been filing as head of household for severalyears, because my mother lived with me. At the beginning of 1999, she movedinto a home for the elderly. I foot the bill. Does that change my statusas head of household?

A: Not necessarily. Under a special rule, you can file as headof household even if a parent for whom you can claim an exemption doesn'tlive with you, provided you paid more than half the cost of keeping up hisor her main home for the year. A rest home or home for the elderly qualifiesas a main home.

It depends on the account's size. At the bottom of Schedule B, you'reasked if you have any type of financial account in a foreign country. Ifyou answer Yes, you have to file the form you mention (TDF 90-22.1) by June30, 2000, separately from your return. But you can answer No if the totalvalue of all such accounts never exceeded $10,000 during the year.

Q: I sold some of my Fidelity Magellan Fund holdings in 1998 and figuredmy capital gain by averaging the cost of shares bought at different times.Last year, I sold more shares of this fund, as well as those of anotherFidelity fund. Must I figure my gains the same way?

A: You must continue to base your gains from the sale of Magellanshares on their average cost, but you're free to choose a different methodfor transactions involving the other fund, even though it's in the Fidelityfamily. If you don't specify which shares of the second fund you sold, theIRS will assume they were the ones you acquired first.

Q: To guard against a year-2000 malfunction, our corporation gaveJanuary 2000 salary checks to employees on Dec. 31, 1999. Should those paymentsbe included in this year's income?

A: No. Assuming that bank funds were available to cover the checks,they count for 1999. This is true even if the employees received the checkstoo late to cash them or chose not to do so.

Lawrence Farber. Answers to your tax questions.

Medical Economics

2000;1:133.