Charitable Donations of Appreciated Stock

If you are planning to make a relatively substantial contribution to a charity, college, etc., you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock. This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is "gain" property, the donor does not have to recognize the gain on the donated property. These rules allow for the "doubling up," so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

For example: Ed and Mike each plan to donate $10,000 to a charity. Each also owns $10,000 worth of stock in ABC, Inc. which they each bought for just $2,000 several years ago. Ed sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock. Mike donates the stock directly to the charity. He gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The charity is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.

Caution: While this plan works for Mike in the above example, it will not work if the stock has not been held for more than a year. It would be treated as "ordinary income property" for these purposes and the charitable deduction would be limited to the stock's $2,000 cost. If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).

Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns.

Home Office Expense Deduction-New Rules

There are new principal place of business rules for home offices used, in '99 or later, for management or administrative activities. Under a provision in the Taxpayer Relief Act of 1997 ? which will go into effect in 1999 ? a home office will qualify as the taxpayer's "principal place of business" if the taxpayer uses the home office to conduct administrative or management activities of the business, so long as the taxpayer doesn't have another fixed location where the taxpayer conducts substantial administrative or management activities of the business. However, according to IRS, the office must be used exclusively, and on a regular basis, for the administrative or management activities.

Space for storing inventory or product samples. If you're in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly to store inventory or product samples. The space doesn't have to be used exclusively for business purposes. And you can do business at the fixed locations of your customers (e.g., retail stores, if you're a wholesaler), and non-fixed locations, such as flea markets or craft shows.

Exclusive and regular use requirements. As noted above, when you claim to be using your home office under any of the tests outlined above (except the "storage space" test for retailers and wholesalers), the home office must be used exclusively and on a regular basis in connection with your business. (For storage space used by retailers or wholesalers, the space must be used regularly for business purposes, but doesn't have to be used exclusively for those purposes.)

The exclusive use requirement means that you must use your home office solely for the purpose of carrying on your business. Any other use of the home office will result in loss of all deductions for your home office expenses. For example, a professional musician's home studio that's used only for rehearsal, recording demo tapes, etc., passes the exclusive use test. But a caterer's living room that's used to meet with clients and potential clients, but is also used for family entertainments and gatherings, won't pass the test. Neither will a spare bedroom that's used to work on and store business records, but that's also used to sleep occasional overnight guests.

The regular basis requirement means that you must use the home office in carrying on your business on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional,"once-in-a-while" business use won't do.

What you get if you qualify for home office deductions. If your home office is your principal place of business under the rules noted above, the costs of travelling between your home office and other work locations in the same trade or business, regardless of whether the other work location is regular or temporary, and regardless of its distance, are deductible transportationexpenses, rather than nondeductible commuting costs.

If your use of your home office qualifies under any of the rules discussed above, you may take business expense deductions for the following: the "direct expenses" of the home office ? e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and the "indirect" expenses of maintaining the home office ? e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

The amount you may deduct as home office expenses is subject to limitations based on the income attributable to your use of the home office, your residence-based deductions that aren't dependent on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren't attributable to your use of the home office.

For example: Say you operate your business out of a home office that occupies 20% of the space in your home. This year, your business grosses $50,000. The mortgage and real estate taxes on your home total $20,000, $4,000 of which is allocable to the home office. You have $5,000 of additional home office expenses (depreciation, utilities, etc.). And your business has $30,000 of expenses that aren't attributable to the use of your home office (secretarial and bookkeeping services, legal and accounting fees, advertising expenses, etc.). To figure out whether you can deduct your home office expenses, you first subtract the home-office business's gross income. This leaves you with $46,000. Then, from this, you subtract your business expenses that aren't attributable to your use of the home office, $30,000. This leaves you $16,000. If this figure exceeds the amount of your remaining home-office expenses, here $5,000, you can deduct all of those expenses. If this figure is less than your remaining home-office expenses, your deduction is limited. For example, if your remaining home-office expenses were $25,000 instead of $5,000, you'd only be able to deduct $16,000 instead of the full amount. Any home office expenses that can't be deducted because of the above amount limitations may be carried over and deducted in later years.

You should be aware that, if you claim any home office deductions with respect to a portion of your principal residence, when you sell the residence, any profit attributable to the portion used as a home office may not be eligible for the otherwise available $250,000/$500,000 exclusion for gain on the sale of principal residences.

Tax Aspects of A Parent Entering A Nursing Home

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. Qualified long term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services required by a chronically ill individual provided under a plan of care presented by a licensed health care practitioner.

To qualify as chronically ill, an individual must be certified by a physician or other licensed health care practitioner (e.g., nurse, social worker, etc.) as unable to perform without substantial assistance at least two activities of daily living (e.g., eating, toileting, bathing, continence, etc.) for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.). A victim of Alzheimer's disease qualifies.

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subjects to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. A qualified long term care insurance contract is insurance that provides coverage only for qualified long term care services, doesn't pay costs that are covered by Medicare, is guaranteed renewable, and doesn't provide for a cash surrender value. A policy isn't disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred during the specific payment period. Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: for individuals 60 to 70 years old, the1999 limit on deductible long-term care insurance premiums is $2,120, and for those over 70, $2,660.

Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. However, if a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. In that case, there is no deduction, for example, for the portion of the fee that is allocable to food or lodging.

If your parent qualifies as your dependent under the rules discussed below, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. If your parent doesn't qualify as your dependent only because of the gross income or joint return test (covered below), you can still include these medical costs with your own.

You may be able to claim your parent as a dependent, thus qualifying for an exemption, even though your parent is confined to a nursing home. To qualify, (a) you must provide more than 50% of your parent's support costs, (b) your parent must not have gross income in excess of the exemption amount ($2,750 in 1999, adjusted annually), (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Since your parent is related to you, your parent can qualify as your dependent even though your parent doesn't live with you, provided the support and other tests mentioned above are met. Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, discussed above, as well as amounts you pay to the nursing home for your parent's medical care, are included in the total support you provide. If the more-than-half support test can only be met by a group (you and your brothers and sisters, for example, combining to support your parent), a multiple support form can be filed to grant one of you the exemption, subject to certain conditions.