By: S.L. Severin


You can only deduct medical expenses that exceed 7.5% of your adjusted gross income, but the IRS and court decisions have expanded the definition of deductible medical costs. Plan ahead to take advantage of as many medical expenses as possible.

Medical deductions can be taken for the costs of diagnosis, the treatment or prevention of a disease, or for affecting any structure or function of the body. Limitation: Treatment must he specific and not just for general health improvement.

Example – The IRS successfully, denied taxpayers deductions for the cost of weight-control and stop-smoking classes that were designed to improve general health, not to treat a specific ailment or disease. On the other hand, a person with a health problem specifically, related to being overweight, such as high blood pressure, might be allowed the deduction.

If an employer tells an overweight employee to lose weight or leave, and the boss has previously enforced such a rule, the plump employee can deduct the cost of a weight-loss program, because money spent to help keep a taxpayer’s job is deductible. The IRS says it will allow a deduction if a physician prescribes a weight-reduction program for the treatment of hypertension, obesity or hearing problems. The same could go for a person whose doctor certifies that a stop to cigarette smoking is necessary for a specific medical reason (such as emphysema).

The same logic applies to home improvements. The cost of a swimming pool might be deductible if it is specifically necessary for a person who has polio, as would the cost of an elevator for a heart patient.

Caution: Only the actual cost is deductible. The IRS makes taxpayers subtract from the cost of an improvement the amount that the features add to the value of the residence.

Example – If a swimming pool costs $10,000, but adds $4,000 to the value of the property, only $6,000 would be tax deductible. To determine the value, have the property appraised before and after the improvement (The appraisal fee is deductible as a miscellaneous itemized deduction to the extent allowed by the Tax Reform Act of 1986.)

Medically unproven treatment is generally deductible, since the IRS has taken the position that it cannot make judgments in the medical field. Example; Laetrile treatments are deductible if the taxpayer receives them legally.

Deductions for nondependents are sometimes possible. How it works: The daughter of a highly paid executive ran up medical bills of more than $5,000. She married later that year and filed a joint return with her husband. Nevertheless, her father was allowed to deduct the cost of treatment on his return for the year, even though the daughter didn’t qualify as a dependent.

Education: The IRS draws a hard line on deductibility of special schooling for children with medical problems. Not deductible: The cost of attending a school with smaller classes, even for a child with hearing or sight problems. To be eligible to make such a claim, the school would have to offer special programs for the children with specific disabilities. Approved by the IRS: A deduction for the full cost of sending a child to a boarding school equipped to handle deaf children with emotional problems. Denied by the IRS: A deduction for extra costs, including travel, that was claimed by a parent who sent his deaf child to a distant public school that was better equipped than the local public school to handle such students.

Other deductible costs – Birth-control pills and other prescription drugs, vasectomies, legal abortions.

No longer deductible – Unnecessary cosmetic surgery solely to improve one’s appearance.

Source: Sidney Kess, retired, KPMG Peat Marwick, Suite 1465, 630 Fifth Ave., New York 10111.


Only prescription drugs and insulin can be deducted now as medical expenses. Tip: Many over-the-counter drugs can also be bought (in prescription. Ask your doctor for prescriptions for patent drugs you use. Trap: The price, as a prescription, may be higher.

Source: Edward Mendlowitz, partner, Mendlowitz Weisten, CPAs, New York,


* You can deduct medical bills paid for another person, provided that you paid more than half that person’s support in either the year the hills were run up or the year they were paid. A similar rule applies to married couples. You can deduct bills paid now for a former spouse, so long as you were married when the bills were incurred.

* A transplant donor call deduct surgical, hospital, and laboratory costs and transportation expenses. So can a prospective donor, even if found to be unacceptable. If the recipient pays the expenses, the recipient gets the deduction.

* Removing lead-based paint and covering areas within a child’s reach with wallboard to help prevent and cure further lead poisoning are deductible expenses. But paint removal and wallboard for areas beyond the reach if the child are not – nor is the cost of repainting.

* A clarinet and lessons are deductible medical expenses when prescribed to cure teeth defects.

* A hypoglycemia patient was put on a special diet requiring six to eight small, high-protein meals daily. The Tax Court allowed a deduction of 30% of her grocery bills – the amount spent in excess of the cost of her normal diet.

* A taxpayer who was given power of attorney over his mother’s bank account had all of her funds deposited into his own account. He used the funds for her support and claimed her medical expenses on his return, The IRS and the Tax Court claimed that he shouldn’t be allowed the deduction because the money belonged to his mother. Court of Appeals: For the son. His mother had
made a gift under state law, and the money belonged to him.


Swiss bank accounts are mysterious and secret. Only multimillionaires and Arab oil sheiks have them. And they’re illegal. Right! Wrong – on all counts. Neither US nor Swiss law puts any restrictions on American citizens’ opening Swiss bank accounts. Many Swiss banks accept modest accounts (some have no minimum). And they’re no more complicated to open
than an American account.

Why a Swiss Bank Account

* Privacy. Under Swiss law, it’s a crime for a bank or bank employee to disclose information – even to the Swiss government. Indeed, French tax inspectors tried to obtain information on French depositors but could not. In America, many government agencies can get information. Even private investigators, such as credit bureaus, can usually find out a great deal about your financial affairs. Swiss law and tradition make leaks nearly impossible. A “numbered account,” identified by code number, is the most private. The owner’s name is locked in the bank vault.

* Currency restrictions. We have none now, but who knows about the future! Many governments have imposed heavy restrictions on the movement of currency in bad times. The worse the economy, the greater the restrictions.

* Convenience. If you travel or live in Europe, or have business interests there, a Swiss account is useful for European dealings.

* Services. Swiss banks are universal banks. A single bank can perform all the services performed in America by a commercial bank, a savings bank, an investment bank, a brokerage house and other financial institutions. Many private, unincorporated banks specialize in portfolio management and handle international investments especially well.

The Limits of Secrecy

Banks may disclose information needed to investigate or prosecute crime. During the Howard Hughes autobiography hoax, it was disclosed that an endorsement had been forged on a check deposited in a Swiss account. By treaty, the US government can get information in some cases involving organized crime. A recent treaty covers violations of Securities and Exchange Commission insider-trading regulations. The Swiss authorities make the final decision on disclosure in each case.

There can never be disclosure in cases of tax evasion, currency exchange violations or political offenses. These are not crimes under Swiss law. Disclosure may be made to courts (not the public) in bankruptcy cases and in some inheritance cases.

How to Open an Account

It’s best to open an account, especially, a large one, in person. However, you can easily open an account by mail. Just write to the bank, asking for forms and information (Type your letter. Swiss bankers complain of illegible mail from America.)

You must have your signature verified at a Swiss consulate or bank or by a notary public. The bank will provide forms.

You should execute a power of attorney over the account (unless it’s a joint account). Under Swiss law, the power of attorney remains in force even after the depositor’s death. If you have qualms about a power of attorney, you don’t have to deliver it to the person. Leave it with your attorney, to be delivered only in case of your death or disability.

If you take or send more than $10,000 in cash or bearer securities out of the US, you must notify the government. However, you can send checks or money orders. Bank money orders are most private.

Swiss banks offer current accounts (checking), deposit accounts (saving) and custodial accounts (the bank will hold your stock certificates, gold or other property for a fee).

As in America, there are demand deposits and time deposits. Some accounts require notice to withdraw more than a specified amount. Interest varies with the type of account. The rates are not high, however, compared with those of American banks. The appeal of Swiss banks lies in safety and the soundness of the currency.

Accounts may be in Swiss francs, American dollars or another stable currency (depending on economic conditions when the account is opened).


Taxes and Regulations

Although there are no US restrictions on Swiss bank accounts, your income tax form asks if you have any foreign bank accounts. If you answer yes, you must fill out Form 90-22.1 and file it by June 30.

Interest on foreign accounts is taxable like any other income. You can take a credit for foreign taxes paid.

If you have an account in Swiss francs, and the franc increases in value relative to the dollar, you may be liable for a capital gains tax when you withdraw money and reconvert it to dollars. Losses arising from decreases in value may not be deductible in regard to personal accounts.

Switzerland imposes a 35% withholding tax on interest. But Americans can get 30% refunded by showing they are not Swiss residents. Your bank will send you the forms. (Note: The bank sends in the tax without disclosing depositors’ names, To claim the refund, however, you must, of course, disclose your identity.)

The Swiss formerly, imposed severe restrictions in foreign accounts. Only the first 50,000 francs of an account could draw interest, and accounts above 100,000 francs were charged “negative interest” of 40% – nearly a confiscatory rate. All these restrictions have been dropped. They could conceivably be reinstated if economic conditions change.

Even when the restrictions were in force, however, they were not retroactive. They did not apply to existing accounts – only to deposits made after the rules were adopted (another reason you might want to act now).


Choosing a Swiss Bank

The Big Five among Swiss banks are the Swiss Credit Bank (Zurich), the Union Bank of Switzerland (Zurich), Bank Leu (AG) (Zurich), the Swiss Bank Corporation (Basel) and Swiss Volksbank (Berne). All are accustomed to doing business with American depositors.

Books listing the names and addresses and other pertinent information for these banks and others are in your library. Check in the card catalog under Banking-Switzerland.



Gambling winnings are taxable, and winnings over $600 are reported to the IRS.

But gambling losses are deductible up to the amount of gambling winnings for the year. Problem: Few people document their losings. Result: A person who scores a big win may wind up paying tax on the gain without getting any benefit from his losses. He may wind up paying extra tax even if he lost more than he won over the entire year.

Better way: Keep tabs on your gains and losses. The IRS recommends wagering tickets, cancelled checks, credit records, bank withdrawal statements and credit receipts as proof. An accurate diary is also recommended.

Losses from one kind of gambling (e.g. horse betting) are deductible against gains from another kind (e.g. lotteries). So if you are planning to be lucky at all this year, keep records for the entire year.

Source: Dr, Robert S. Holzman, professor emeritus of taxation at New York University and the author of Encyclopedia of Estate Planning, Boardroom Books, Springfield, NJ 07081.



A home office can generate extra tax savings. Use it to convert nondeductible commuting costs into deductible travel expenses.

Key: While the cost of commuting between home and work is normally not deductible, the cost of traveling between different job sites is a deductible travel expense. And a home office can have the effect of converting your home into a job site.

That’s what the Tax Court ruled in the case of an insurance salesman who deducted all his auto-travel expenses. The IRS allowed the salesman’s deduction for trips from one client to another but disallowed his deduction for daily travel from home to his sales area. The home office saved the day. The Tax Court found that the salesman’s home was a place of business, so all his travel costs were deductible.

Source: Carl F. Worden, TC Memo l98l-366.



Though the money you spend pursuing a hobby is usually considered a personal expense, it becomes tax deductible if you make a profit from the hobby in a given year. If you sell off one of your Ming vases or vintage comic books for a good price, you can deduct hobby-related expenses such as insurance premiums, safe-deposit box rent and appraisal fees, up to the amount of your profit for the year.

Normally, the only way you can use losses from your hobby to offset taxable income from other sources is when you’re conducting your hobby as a profit-making activity.

The cost of trying to make your hobby turn a profit is deductible, even if you fail. Case: An accountant fancied himself a songwriter. The Tax Court said he could deduct the cost of hiring musicians and a singer to publicize his songs. Although the songwriting was only a hobby, the publicity had a real profit motive.



There is a way for owners of closely held companies to use company funds to get a charitable deduction on their personal income tax returns. The owner gives the charity stock in his company. Subsequently, the company redeems the stock from the charity. Advantage: A 100% owner would not give up any ownership interest in the company, since his interest in the company after
the charity is redeemed would still be 100%. How a bailout works: The owner makes an informal agreement with the charity to offer the stock for redemption shortly after the charity receives it. The owner gives the stock to the charity. He takes a deduction on his personal return for the fair market value of the stock. Later, the company redeems the stock from the charity. If the transaction is properly handled, the stock’s redemption will not be taxed as a dividend to the owner. Caution: The agreement with the charity must be informal. The charity must not be under a binding obligation to let the company redeem the stock or to sell it to an outsider. Tax rule: Normally, if a 100% shareholder in a closely held company has some of his stock redeemed, income from the redemption will be taxed to him as a dividend. But the IRS has agreed that a redemption will not be considered a dividend if it is handled by an informal prearranged plan with a charity. Such a transaction must be structured properly to ensure the desired tax results. Check with your accountant or attorney.

Source: Tom C. Klein, CPA, 231 W. 29 St., New York.



While a home – office deduction can save you money on your tax return, it can also cost you two big breaks when you sell your home. Namely: Tax-deferred treatment of profits that are reinvested in a replacement residence… and the $125,000 tax exclusion for sale proceeds received by home sellers age 55 or over.

Trap: A home office is treated as business property, not as part of your personal residence. So the portion of house sale proceeds attributable to the office does not qualify for these residential property tax breaks.

What to do: The IRS has ruled that a house does fully qualify for residential property tax breaks if the seller isn’t entitled to claim a home-office deduction in the year of sale, even if the deduction was claimed in previous years. So if you have a home office, don’t use it exclusively for business or claim a deduction for it in the year in which you want to sell your home.


Married couples can file a joint return or separate returns. Usually, a joint return works out better, especially if one spouse has appreciably higher income than the other.

Nevertheless, filing separately can be advantageous in some situations:

* Deductions for casualty losses must be reduced by 10% of adjusted gross income (AGI). On a joint return, combined AGI is reduced even if only one spouse suffered the loss. If separate returns are filed, the loss is reduced by only 10% of that spouse’s income.

Example: A husband has AGI of $70,000; his wife, $20,000, The wife’s jewelry, worth $25,000 is stolen. On a joint return, the loss must be reduced by $9,000 (10% of combined income); on a separate return, by only $2,000 (10% of the wife’s income).

* The same considerations apply if one spouse, but not the other, has heavy medical expenses, since you can deduct only expenses in excess of 7.5% of AGI-or heavy miscellaneous expenses, which can only be deducted to the extent they exceed 2% of AGI.

Other options: If married persons live apart for the entire year, either spouse may file as head-of-household (with reduced rates) if he or she has an unmarried child or dependent living with him or her for the entire year. The other spouse would then have to file separately (higher rates) unless that spouse also had a child or dependent in his or her household. Or: They
could file jointly, if that works out better.

Caution: The only way to tell for sure whether it’s better to file jointly or separately is to take pencil and paper and figure the tax both ways.

Source: Mahoney, Cohen & Co., 111 W. 40th St., New York 10018.



* You can claim a dependency exemption for unrelated individuals. But these dependents must live with you for the entire year, and your relationship can’t violate local morality laws. You must provide more than half of the person’s support and he or she must earn less gross taxable income than the personal exemption ($2,150 in 1991).

* If you and other members of your family share the cost of supporting a dependent relative, and no one person contributes more than half the support, you can decide among yourselves who gets the dependency exemption. Requirements: The person who claims the exemption must have furnished more than 10% of the support. The group must have furnished over 50%. You must
sign a multiple-support agreement (IRS form 2120). Each year, a different member of the group can claim the exemption by changing the agreement.

* A parent who provides over half of a child’s support can claim a dependency exemption if the child is under 19 or a full-time student. (Beginning in 1990, the full-time student provision applies only to those under age 24.) The cost of a child’s wedding is considered support. So even if the child lives with a spouse after marriage, the wedding may push the parent’s support cost over the 50% mark and entitle the parent to the exemption. Drawbacks: The child cannot file a joint return for the year. And the child cannot claim a personal exemption on his or her own tax



If you’ve suffered a loss on an investment property, you can’t deduct it while keeping the property in the family by selling it to a spouse, brother, sister, parent, grandparent, child, or grandchild. It doesn’t matter if the sale is perfectly legitimate. The Tax Code prohibits any loss deduction from a sale to one of these relatives.

Loophole: The Tax Code does not consider in-laws to be relatives under this rule. So don’t sell to your son or daughter-sell instead to your son-in-law or daughter-in-law (or some other in-law). You’ll keep the property in the family and get a deduction, too.



Traditional year-end planning won’t work if you’re liable for the alternative minimum tax.


The alternative minimum tax (AMT) is designed to insure that high-income taxpayers don’t use preferential tax provisions to avoid paying tax, You pay the AMT only if it is greater than your regular tax, Likely AMT candidates; People with sizable tax-favored “preference” items, such as tax shelter deductions and gains on the exercise of incentive stock options. But the AMT can also apply in modest situations where you wouldn’t ordinarily expect it to apply. It can, for example, be activated by a small amount of preferences in combination with significant itemized deductions
and credits.

The Tax Reform Act of 1986 introduced new tax preferences included in the AMT (i.e., addbacks that must be included in AMT calculations).


* The gain on appreciated property donated to charity.

* Interest on certain “private purpose” tax-exempt bonds issued after August 7, 1986.

* Tax shelter losses allowed during the phase-in period for regular tax.

Planning for the AMT

If you’re going to be liable for the AMT, your year-end strategy should be to defer deductions and take in extra income-the reverse of traditional year-end planning. Some deductions will give you only a 24% tax benefit, rather than a 28% or 31% benefit in a non-AMT year. Other deductions will give you no tax benefit at all. State and local income taxes and some types of interest expense are not deductible for AMT purposes. Deduction strategies for AMT victims:

* Put off paying deductible expenses until after the end of the year.

* Defer until next year those deductions that you’ll lose out on entirely. Do not prepay real estate tax installments or state and local income tax.

* Defer payment of miscellaneous expenses, such as investment expenses and professional fees.

Income strategies: Because the AMT rate is 24%, your year-end strategy should be to accelerate as much income as you can into this year. Benefit from the bargain rate.

Planning opportunities:

* Collect interest early on mortgage loans you hold as investments. The incentive for the debtor to pay early is that he gets tax deductions for interest payments this year, rather than next.

* Make arrangements with your company to have bonuses paid in December, rather than January.

* Urge major clients or customers to pay bills before year-end.

* Take capital gains. In an AMT year, they’ll be taxed at a top rate of 24%.

* Cash in certificates of deposit and US Treasury bills.

* Exercise nonqualified stock options that will produce taxable income. Do not, however, exercise incentive stock options.

* If you’re a shareholder of a closely held corporation, arrange to pay bonuses or dividends before the end of the year.

Source: Stanley H. Breitbard, national director, executive financial services, Price Waterhouse, 400 South Hope St., Los Angeles 90071-2889.



A personal bad debt must be completely worthless to be deducted. It must be deducted in the year that it becomes worthless. A business bad debt may be deducted when it is partially worthless, though you can delay claiming the deduction until it becomes completely worthless. But, in either case, you need proof of the debt’s worthlessness. Accepted proof: A debtor’s bankruptcy, apparent insolvency, or disappearance. The debtor’s failure to respond to a demand for payment is also evidence of worthlessness.

Beat the rules: It is possible to get a deduction for a personal debt that is only partially worthless. How: Sell the debt.

Source: Irving Blackman, a Partner in the firm of Blackman Kallick Bartlestein, CPAs, 300 S. Riverside Plaza, Chicago 60606.



Big charity deductions with a comparatively low income. Hint: The magic number for an unsubstantiated charitable deduction is $78. Even if you don’t have proof you are unlikely to be audited for a gift of $78 or less.



By using a technique known as a deferred giving, you can get an immediate income tax deduction for a charitable gift that won’t be completed until some time in the future, And, in the meantime, you or your beneficiaries can enjoy the income that the donated property generates.

The Basic Concept

You make a gift of cash or securities to your favorite charity. The gift is divided into two parts. You get the income for life (or for a period of years-not to exceed 20). On your death, or at the end of the specified period, what is left passes to charity. Tax impact: You get an income tax deduction now for the present value of the charity’s interest. This value is calculated from actuarial tables that determine how long the charity will have to wait before receiving the remainder.

Another tax advantage: If you give securities that have increased in value, there is no tax on the gain (unless you are subject to the alternative minimum tax). Your deduction is based on the full market value of the securities at the time you give them.

Example: A man of 55 makes a gift of securities that he purchased for $25,000, but that are now worth $50,000, He reserves an income of $3,000 a year for life from the securities. Tax bonus: A charitable deduction calculated on the basis of the securities’ current value.

Caution: There are strict technical rules controlling deferred gifts. They must be complied with or the deduction won’t be allowed. In no case should you try to make such a gift without consulting a qualified tax lawyer. The gift to the charity must be irrevocable. It must also be in the form of either (1) a charitable remainder annuity trust, (2) a charitable remainder unitrust or (3) a pooled income fund.

Charitable Remainder Annuity Trust

The donor reserves an annual income of a specified amount, not less than 5% of the original value of the property put in trust. If income from the property is not sufficient to pay that amount, part of the property itself must be sold to make the payment. Advantage: The income the donor or his beneficiary receives is certain. Disadvantage: There is no hedge against inflation, since the income is fixed. Also, the trust can’t be added to after it’s set up. Solution: Establish an entirely new trust.

Warning: The IRS has ruled that if there’s more than a negligible chance that the fund will be used up by payment of income, the deduction will be disallowed.

Charitable Remainder Unitrust

Under this arrangement the donor reserves income equal to a specified percentage (at least 5%) of the value of the trust. The property in the trust is revalued each year to determine the amount of the payment. Advantage: Revaluing protects you against inflation. And you can add to the trust at any time.

To make the trust more flexible, you can put in a wake-up provision limiting the income payment to the actual earnings of the trust (if actual income is less than the stated percentage). Deficiencies in distributions (i.e., where trust income is less than the stated percentage) are made up in later years, if trust income then exceeds the stated percentage.

Pooled Income Funds

Many charities maintain these funds. They are similar to mutual funds. The fund “pools” the contributions of all donors and pays out its earnings in proportion to the contributions. On the death of the beneficiaries, the contribution passes to the charity.

Pooled income funds are especially suited for relatively modest contributions ($5,000-$50,000). Funds are diversified, and donors get the benefit of professional management without the costs of establishing and administering a trust.

Disadvantage: If you’re looking for tax-free income, a pooled income fund won’t do, as the funds are not allowed to invest in municipal bonds or other tax-exempt securities.

Caution: There’s no restriction on the purchase of tax-exempt securities by charitable annuity trusts or unitrusts. However, the IRS has ruled that a transfer of appreciated securities to a charity under an express or implied agreement to sell and reinvest in tax-exempts results in a tax being imposed on the donor. This ruling hasn’t been tested in court and it’s not known whether it applies to charitable annuity trusts or unitrusts. But it must be kept in mind when planning a trust with your tax adviser.

Source: Bernard Rosner, Director, Committee on Deferred Giving, Federation of Jewish Philanthropies of New York, 130 E. 59 St., New York 10022.



The general rule is that you only get a tax deduction in the year you actually pay for a deductible expense. But there’s an important exception when you pay with a credit card. For tax purposes, payment is considered made on the date of the transaction, not on the date you pay the credit card company. Expenditures charged at the end of this year can be deducted this year even though you don’t pay for them until next year.

But if you charge a deductible expense on a credit card issued by the company supplying the deductible goods (or services), you can’t take a deduction until the credit card bill is paid. Example: If you have a prescription filled at a department store pharmacy and charge it on a credit card issued by the store, you can’t deduct the cost of that medication until you get the bill and pay it. But if you charge the same prescription on a credit card issued by a third party, such as MasterCard or Visa, you can deduct it right away.



For the alert taxpayer, the family home can be a major source of tax savings. Federal tax law is studded with provisions that encourage and enhance home-ownership, as opposed to other forms of investment.

Breaks When You Buy

Mortgage points. For borrowers other than homeowners, mortgage points (a prepayment of interest represented by a percentage of the loan) have to be capitalized and deducted over the life of the loan. But points charged on money borrowed to buy a principal residence are fully deductible by homeowners in the year they’re paid. Required: The points must be paid out of the homeowner’s own funds and not simply deducted by the lender from the loan proceeds.

Warning: Pay the points by separate check. When negotiating a mortgage for a new house, make sure you tell the bank you intend to do this. If you don’t tell them, they’ll automatically take the points out of the funding, and you’ll lose the big upfront tax deduction you’re entitled to.

Deductions for interest paid on personal debts are limited and will be eliminated by 1991. But interest paid on mortgages on your primary residence and on one second residence will be fully deductible up to a total of $1 million in acquisition debt (to acquire, construct, or improve a residence) plus $100,000 in home-equity loans (for any purpose). Note: The dollar limits don’t apply to mortgages taken out before October 14, 1987.

The Glories of Giving

Homeowners who take advantage of a technique known as deferred giving can get a large immediate income tax deduction that will produce cash flow now without giving up their right to live in the house. How it works: The owners, a husband and wife, say, give what is called remainder interest in their house to charity. This is the right the charity has to take over the house on the owners’ death. But the owners reserve the right to live in the house until the survivor of them dies. Tax deduction: The owners get a current charitable deduction for the value of the charity’s interest. This
is computed from IRS tables and depends on how long the charity is expected to wait before taking over the house.

Joint Property Ownership

The tax law encourages couples to own the family home in the name of the spouse most likely to die first. Statistically, that’s the husband.

The unlimited marital deduction means that the first spouse to die can leave the house to the surviving spouse without incurring any tax at all on his death. And yet the property will get a stepped-up tax-basis (its cost for tax purposes) to the fair market value at the date of death. No estate tax will have to be paid on the house’s appreciated value. And when the surviving spouse sells, since she inherited the house at the increased value, the tax she will have to pay will be reduced.

Source: Ivan Faggen, a tax partner with Arthur Andersen & Co. in charge of the Tax Division for the South Florida offices, 1 Biscayne Tower, Suite 2100, Miami 33131. Mr. Faggen is co-author of Federal Taxes Affecting Real Estate, Matthew Bender, 235 E. 45th St., New York 10017.



Many taxpayers are refinancing their mortgages or taking out home equity loans… then using the money for consumer purchases or the repayment of existing consumer debt.

The reason: Within broad limits, the interest on most home mortgages is fully tax deductible. But personal interest (for example – on car loans, consumer purchases, student loans, back taxes) is not deductible. By using mortgage proceeds for these purposes, the taxpayer can continue to get his full interest deduction.

Sounds like a smart idea, doesn’t it! But think twice before rushing into any refinancing or home equity deal. You could be taking big, big risks for small tax savings… or none at all. Why…

Refinancing a mortgage or getting a home equity loan can involve heavy, non-deductible costs. You may have to pay “points” – as much as 3% of the amount of the loan. Unless the loan is for home improvement, points are not immediately deductible. The deduction has to be spread out over the entire length of the mortgage. Some other costs are not deductible at all.


* Legal fees.

* Title search.

* Bank charges.

* Appraisal fees.


To find out whether refinancing pays in your particular situation, compare the upfront costs with the tax savings from your interest deduction. Rules of thumb:

* If you’re paying moderate interest (say, 11%) on your consumer loan and a second mortgage or home equity loan is available in a range of 9% – 10%…

1. If the loan is to be paid off within two years, refinancing probably won’t pay.

2. For two- to three- year loans, refinancing may pay if upfront costs don’t exceed 2% of the amount of the loan.

3. For loans over three years, refinancing may pay if upfront costs don’t exceed 4%, of the loan.

4. For loans over five years, refinancing usually pays.

* On high-interest loans, such as credit cards (18% or more), refinancing usually pays even on short-term loans. If the loan won’t be repaid for two years or more, refinancing pays even if upfront costs run to 6% or 8%.

Remember, though, these are only rules of thumb. The only way to be sure whether refinancing pays for you is to get out paper and pencil and work out the figures mathematically.

Mortgage interest is an itemized deduction on Schedule A. If you don’t itemize, you get no deduction at all for mortgage interest. Even if you do itemize, you have to compare your deduction with the standard deduction (for non-itemizers), which has been increased by Tax Reform.

If you can’t pay your debts, you could hurt your credit rating; you might even risk having your car repossessed. But that’s trivial compared to the risk of being unable to pay your mortgage. You could lose your home… and for most taxpayers, that’s the biggest investment of their lifetimes, both financially and personally.

Variable rate mortgage trap. Most home equity loans are variable-rate loans. The initial rate is low. But a resurgence of inflation could shoot rates up, saddling you with heavier payments each year. And recent events on Wall Street show how volatile financial conditions can be.

Bottom line. Are you certain you’ll always be able to meet your mortgage payments? If not, think long and hard before risking your home for comparatively small savings on your tax bill.

Source: Pamela J. Pecarich, partner, and Jeffrey S. Hillier, tax manager, Coopers & Lybrand National Tax Services, 1800 M St. NW, Washington, DC 20036.



There are tax advantages for qualified realty rehabilitation expenditures -expenditures that are bound to increase in popularity under the latest incarnation of the tax code. There are two tiers of tax credit: 20 percent for rehabilitations of certified historic structures and 10 percent for rehabilitation of nonresidential buildings that were first placed in service before 1936. The expenditures during a two-year period must be more than the greater of $5,000 or the adjusted basis of the property. (The credits are phased out for taxpayers with adjusted gross income above $200,000 and disappear altogether when adjusted gross income reaches $250,000.)

Credits are even available for expenditures incurred by lessees, provided that at the time the rehabilitation is finished, the remaining lease term is at least 27 1/2 years for residential property or, for nonresidential property, at least 31 1/2 years.

There are tests, naturally, regarding just what qualifies as rehabilitation. For example, for structures other than those certified as historic, the test is whether at least three quarters of both the outside walls and the internal framework remain in place. If your building was standing even before Jesse Owens took all the gold at the ’36 Olympics, you may want to redo it for an extra 10 percent credit.

Source: New Tax Loopholes for Investors, by Robert Garber, Boardroom Classics, Springfield, NJ 07041.



A taxpayer borrowed money from his parents to buy a house, then rented the place to them. The IRS disallowed his deduction for rental losses, saying they were personal and family expenses. But the court allowed the deduction. The taxpayer kept good business records, paid a fair interest rate on the loan from his parents and charged them fair market rent. All this showed he had a profit motive, so his losses were deductible.

Source: Robert Kuga, 87-2 USTC 9449.



Many houses destroyed in a couple’s neighborhood during a flood had to be razed. Although the couple’s house was not damaged at all, its market value plunged because of the deteriorated condition of the neighborhood. The couple took a deduction for the decrease in the value of their house, but the IRS disallowed the deduction, stating that the decrease was only temporary. Circuit Court: The deduction was allowed, because the removal of the surrounding homes was permanent.

Source: G.W. Finkbohner, Jr., 788 F2d 723.



It’s possible to give a home to charity but continue to live in it for as long as either spouse lives. Then the charitable organization takes title and possession. It works for vacation houses or any other real estate, but not for personal property (paintings, jewelry, etc.).

The catch: The tax deduction for the charitable contribution is less than the full value of the property. It’s some fraction of the value, determined by an actuarial calculation according to life expectancy. Since the charity won’t get the property until sometime in the future, the present value of the gift is less than the full value of the property.

Example: Home is donated by 70-year-old man and 68-year-old wife, with provision that they keep the house as long as either one lives, then it goes to the charity. In the year of the gift, they would get a charitable deduction for 41.5% of the value of the house.



Employee business expenses-including the cost of business meals, driving your own car for work, dues for membership in professional organizations, subscription costs for business publications and the like-are deductible only to the extent that their total, when combined with other miscellaneous deductions, exceeds 2% of Adjusted Gross Income (AGI). This will eliminate the deduction for many employees. For example, a person with AGI of $60,000 will get no deduction for the first $1,200 of such costs.

Planning strategy: A deduction for these kinds of items can be preserved by having the company pay for them through an expense account or other reimbursement program. That’s because a corporation can deduct these kinds of costs as a business expense without reference to the 2%-of-AGI rule. (The company’s deduction for business meals and entertainment is, however,
limited to 80% of the cost.) And employees do not have to include the reimbursement as income.

A reimbursement program may be more valuable to many employees than additional salary because they get immediate use of the money.

Business meals: Under tax reform, no deduction is allowed for the so-called quiet business meal – one that furthers good business relations but doesn’t involve business directly. From now on, to get an 80% deduction for a meal, one must prove not only its cost, but also its specific business purpose.



Self-employed people are likely to have their returns audited if they take the standard deduction instead of itemizing personal nonbusiness deductions, especially if their business shows a high gross and a low net. The IRS will suspect that personal deductions have been charged to the business.


Common mistake: Letting emotional issues cloud the financial realities of divorce. Part of the solution: Forcing yourself to thoroughly understand the tax consequences of the arrangements you’re making. Key planning points…

* Alimony and child support. Alimony is deductible by the person who pays it and taxable to the person who receives it. Child support, on the other hand, is neither deductible by the payor nor taxable to the recipient.

Before Tax Reform, when tax rates were wide apart, the difference between alimony and child support played a key role in divorce planning. Deductions for alimony provided a significant tax benefit to the person who paid it and the recipient paid very little tax on the payments. Now, however, if any decent amount of alimony is being paid, the husband and wife end up in the same tax bracket, and it doesn’t matter whether support payments are alimony or child support.

Loophole: The distinction is still important in cases where the wife does not work and the disparity in the spouses’ combined federal and state tax rates is relatively great. (With today’s rates, there can be as much as a 20-point spread between the husband’s and wife’s tax brackets.) In such a case, it pays for the husband to have as much as possible of his support payments categorized as tax-deductible alimony. The husband can cover the wife’s tax and still save tax himself by paying alimony rather than nondeductible child support.

Caution: In order to be deductible as alimony, the husband’s payments must…

* Continue for at least three years, except for death or remarriage.

* Be roughly equal each year. (If payments change significantly, a portion may be recaptured and taxed to the husband.)

* Be made pursuant to a written separation agreement or court decree designating the amount.

* Filing status loophole. If the spouses have not lived together for the last six months of a year and have a dependent child, they can file their income tax returns as single or head-of-household taxpayers, rather than married individuals filing separately. Those tax rates are lower than for marrieds filing separately.

* Exemptions for dependents. The parent who has custody of the children is automatically entitled to claim dependency exemptions for them. But these exemptions can be signed over to the noncustodial parent on IRS Form 8332. The release of exemptions can be made for one tax year, a number of years, or all future years. Best: One year at a time.

Exemptions can also be granted to one spouse or the other in the divorce decree. But the exemptions may be of no use to the spouse entitled to take them. Reason: Under Tax Reform, when a person’s income goes above a certain level, the benefit of deductions for personal exemptions is taken away.

Loophole: Release the exemptions to the other spouse in return for a reduction in alimony.

Source: Edward Mendlowitz, partner, Mendlowitz Weitsin, CPAs, Two Pennsylvania Plaza, New York 10121. Mr. Mendlowitz is the author of several books, including New Tax Traps/New Opportunities, Boardroom Books, Box 736, Springfield, New Jersey 07041.



Cash alimony payments are tax deductible provided the payment is not treated as child support. No other payments are deductible. Exception: Either spouse can claim medical expenses for the children, subject to the 7.5% floor on the deductibility of medical expenses.

Second, if the husband deducts the alimony, the wife must declare it as income.

Child support, lump sum payments, wife’s legal fees, premiums on life insurance policies owned by the husband – all these are not deductible by the spouse paying them. And they need not be reported as income by the spouse who receives the payments.

In the still common case among executives where the husband has a large taxable income and the nonworking wife has little or none, it probably makes sense to make all the payments as alimony rather than something else. The result is to shift income from the husband’s high bracket to the wife’s lower bracket. It’s essential to prepare carefully several alternative plans, varying the mix among alimony and other types of payments, and figuring the available income from each other after taxes.

Keep in mind that:

The dependency exemption for a child of divorced or separated parents will be given to the custodial parent unless he or she agrees in writing to waive the exemption. Thus, the father probably can claim them even if they live with the mother. Of course, only one can claim them. (If the husband’s tax return is audited, they may track down the wife’s return, even if she lives in another IRS district.)

A parent having a child living with him or her may be able to file as a (tax-favored) head of household by claiming that child as a dependent.

Conceivably, both parents might have head-of-household status. This could happen if the younger children stayed with mother, but an older child away at college full time-stayed with father when home on vacation.

Child support normally stops when the children become independent. Alimony often goes on until the wife remarries.

If it’s agreed that the husband will pay for the wife’s divorce lawyer, estimate the fee and add this amount to the alimony that has been negotiated.

Then get a deduction for the amount. But don’t forget it’s income to the wife in that case.



You may be entitled to deduct all your state withholding taxes and estimated payments as an itemized deduction on your federal return. Suppose you overpay your state taxes. If you include the overpayment when you claim your state-tax deduction, you’ll have to pay income tax on the refund in the year you receive it. (If you don’t include the overpayment in your deduction, you won’t have to pay taxes on the refund.)

If tax rates are steady or declining and you’ll remain in your current tax bracket, it’s a good idea to deduct as much as possible.

However, if tax rates are increasing or you’ll be in a higher tax bracket when the refund is received, deduct only the amount owed, not the overpayment. For instance, let’s say you’re in the 15% bracket when you take the deduction, but when you receive the refund, you’re in the 28% bracket. The tax benefit of the deduction (15% of the overpayment) is worth less than the tax you pay on the refund (28%).

Another area to consider is the alternative minimum tax. If you become subject to the AMT, you don’t get any benefit of state-tax deductions. (For more information on the alternative minimum tax, see the item entitled “Making the Alternative Minimum Tax Work for You.”) Advice: Again, don’t claim all of your state taxes as a deduction on your federal return if you think you’re a candidate for the AMT. Limit your deduction to the amount that isn’t going to be refunded. In this way, when you receive the refund, it won’t be taxed as income.

Source: New Tax Traps/New Opportunities, by Ed Mendlowitz, Boardroom Classics, Springfield, NJ 07041.



Scholarships and fellowships for room and board are taxable income under tax reform. However, grantors do not have to report or withhold tax on these payments. Students should find out if their college reports these stipends to the IRS.

All scholarship money received by a non-degree candidate must be included in taxable income. A scholarship could be completely tax free. It won’t be taxed if the scholarship is used to pay for tuition and related expenses such as fees, books, supplies, and equipment. However, if the scholarship covers room, board, or incidental expenses too-those items are includable
in income.

(The above material was published by Boardroom Reports, 1991.)