Money Management Q&A
Q I work as a part-time employee on an irregular schedule at threecounty medical facilities. I'm paid by the hour and receive no employeebenefits. Would I be able to write off more of my unreimbursed job-relatedexpenses if I were to claim them as an independent contractor?
A Yes. Employees must claim such expenses as miscellaneous deductionson Schedule A and subtract 2 percent of adjusted gross income from the total.As an independent contractor, you'd deduct your business expenses on ScheduleC, where the 2 percent floor doesn't apply. You could also deduct part ofyour health insurance costs (60 percent this year), and you may qualifyfor home-office and auto expense deductions, which an employee can seldomdo.
Be aware, though, that the regulations lay down complicated rules fordistinguishing between independent-contractor and employee status. If you'reunable to persuade your employers to go along with you, suggest that theyask the IRS to decide your status by filing Form SS-8.
Q When I signed a contract to buy a home for $305,000, I expectedto put down 20 percent, or $61,000, and get a 30-year mortgage for the remaining$244,000. But I find that I can shave at least a quarter of a percentagepoint off the interest rate by increasing my down payment to $65,000. Whyshould the extra few thousand up front make that big a difference?
A The additional cash will reduce the loan amount to $240,000, the currentlimit set for most states by Fannie Mae and Freddie Mac. These two government-charteredagencies buy residential mortgages from lenders to encourage home financing.Larger mortgages, known as jumbos, tend to carry a higher rate than thoseconforming to the limit, because the lender doesn't have the option of sellingthe loan. Fortunately for you, the limit was recently raised from around$227,000 to reflect rising home prices.
Q I can't contribute to a deductible IRA, because I have a pensionplan. My high income also makes me ineligible for a Roth IRA. But I couldmake nondeductible contributions of $2,000 annually to a traditional IRA.Assuming I were to do this for the next 20 years or so, would it be worthwhile?
A It depends partly on how you'd invest your IRA money. If you put itinto growth stocks, for instance, most of the IRA's earnings will be capitalgains, but you'll pay tax at ordinary-income rates on all your future earningswhen you withdraw them. That tends to nullify the IRA's advantage over along-term non-IRA investment program, where gains would be taxed at only20 percent when realized.
If you put the annual contributions into fixed-income securities ratherthan growth stocks, tax-free compounding under an IRA will give you moreof an edge over similar, nonsheltered investments. But even then, the IRA'sadvantage won't likely add more than $10,000 after 20 years. That mightnot be enough to compensate for the bothersome restrictions and paperworkan IRA entails.
Q I get monthly account statements from two brokers, but the figuresare outdated by the time I receive them. Is it possible to have currentdata transferred directly to my computer?
A Yes, but it's not the best idea to let a third party update your investmentrecords automatically. For one thing, that may encourage you to be lessdiligent about reviewing your statements. Allowing direct access to yourhome computer also raises privacy and security issues.
A better idea: Review the current account data via the Internet, andupdate your personal computer files yourself. Major brokerage firms willlet you view your account information online. You'll need a password andsecure browser. You may have to pay a small setup fee--Merrill Lynch OnLinecharges $25, for example--but the service itself is typically free. Youcan continue to receive periodic account statements in the mail, or youcan print out the ones you view on the Web.
Q I'm thinking about buying the fixtures and other big-ticket itemsneeded for an extensive home remodeling project myself, rather than lettingthe contractor supply them at a hefty markup. Good idea?
A Generally not. Someone has to make sure the materials will conformto the job specs and arrive at the site on schedule and in good condition.Unless you have the time and expertise to take on that responsibility, betterleave it to the contractor. Chances are, when it comes to price, deliverydate, and quality control, he'll have more clout with suppliers than youwould. By paying the contractor's markup, you put the entire burden of assuringa satisfactory job on his shoulders, instead of sharing it with him.
Q Now that we're getting on in years, my wife and I plan to graduallygive family members some of our valuable possessions. In many cases, theirappraised value for insurance purposes is a good deal higher than what weoriginally paid. Can we use our cost to figure the gift taxes we'll owe?
A No. The IRS says you must use fair mar- ket value at the price a willingand knowledgeable buyer would expect to pay in an unforced sale at the timeyou make the gift. However, that may be substantially less than the insuredvalue, if the appraisal was based on replacement cost. Before giving awaya big-ticket item, you might be wise to have it reappraised by a professionalwho will value it appropriately.
For lists of accredited personal-property appraisers, contact the AmericanSociety of Appraisers (800-272-8258; www.appraisers.org)or the International Society of Appraisers (888-472-5587; www.isa-appraisers.org).Make sure the person you hire knows the market for the type of propertyinvolved and understands the tax issues.
Also bear in mind that currently you and your spouse can jointly giveup to $20,000 a year to as many individuals as you please without incurringgift tax liability. For instance, if you give your daughter and her husbanda $40,000 diamond necklace, your present is tax-free, even if your son-in-lawnever wears it.
After a prolonged argument, my bank admitted it had charged me toomuch interest on my adjustable-rate home mortgage in 1998, and I receiveda $1,500 refund this year. Since I claimed an itemized deduction on my 1998return for the amount I actually paid, do I have to amend the return?
No. Simply report the $1,500 as income on your 1999 return, unless youdidn't get full tax benefit from the deduction in 1998. This would be thecase, for example, if your total itemized deductions weren't at least $1,500more than the standard deduction you could have claimed that year. If thedifference was only $1,000, say, you'd have to report only that much ofthe refund as 1999 income.
Do you have a money management question that may be stumping other doctors,too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive,Montvale, NJ 07645-1742, or send an e-mail to firstname.lastname@example.org(please include your regular postal address). Sorry, but we're not ableto answer readers individually.
Diane Weber. Money Management. Medical Economics Oct. 25, 1999;76:194.