Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com
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Labor Union Dues
Union dues are a deductible
Employee Business
Expense, subject to the 2% floor on
Miscellaneous Itemized
Deductions.
Laboratory Tests
Deductible
Medical Expense subject
to the 7.5% floor.
Lamaze Classes
Deductible as a Medical
Expense subject to the 7.5% floor.
Lasik
Deductible Medical
Expense subject to the 7.5% floor.
Laundry (See Uniforms and Work Clothes)
Lawyer
(see Legal Fees)
Lead-Based Paint Removal
Deductible Medical
Expense, subject to the 7.5% floor, if advised by a doctor.
Legal Fees
Nobody really likes paying a
lawyer. Fortunately, legal fees
may be deductible if they're related to your trade or business, production
of income, or determination of your tax. Here are specific rules:
-
Legal fees related to buying
or selling property, including your home, aren't deductible. However, you
can include them in the property's
Basis for figuring
Depreciation and
Capital Gains or losses
when you sell.
If your legal service doesn't
fall entirely within one of these categories, ask your lawyer itemize the
bill so that you can deduct whatever specific percentage is appropriate.
For example, if your attorney prepares a sophisticated will with a marital
deduction bypass trust to eliminate estate taxes, the portion of the fee
relating to the tax planning is deductible.
Licenses
Professional and occupational
licenses
you maintain in order to carry on a trade or business are deductible as a
Business Expense on
Schedule C,
Form 1065, or
your corporate return. These include professional licenses,
vendors licenses, commercial drivers' licenses, and the like.
Licenses you
maintain on behalf of your employer are deductible as
Employee Business
Expenses subject to the 2% floor on
Miscellaneous Itemized
Deductions.
Life Insurance
Life insurance
policies that include a cash value can offer several significant tax breaks
to investors who need the death benefit protection:
-
Cash values grow tax-deferred,
just like in an
Individual Retirement Account or
Qualified Plan. There's no up-front
deduction, but your gain isn't taxed unless you let the policy lapse and
cash out for more than you paid in. Your gain, or profit, equals your cash
value minus premiums paid.
-
Death benefits pass tax-free
to your designated beneficiary (unless the policy has been "transferred
for value," or sold to anyone not falling into five specific
business-related exceptions).
-
Some policies let terminally
ill insureds take "accelerated benefits" for payment of final expenses.
These benefits are tax-free.
-
Also, some states allow
terminally ill patients to sell their death benefits in tax-free viatical
settlements. This is a sale of a life insurance policy for less than its
death benefit to an unrelated third party in anticipation of the insured's
death. When the insured dies, the buyer collects the entire death benefit
and profits from the gain above the purchase price. Sale proceeds are
tax-free to the original owner; while gain at death is taxable as ordinary
income to the buyer. Viatical settlements would seem to offer potentially genuine benefits
for the terminally ill. However, the viatical settlement industry is full of
misleading claims and even out-and-out fraud. Be very careful before you
invest.
You can withdraw money from
your policy, tax-free, by withdrawing your original premiums and borrowing
against the rest of the cash value. When you borrow from the policy, the
insurance company will charge you interest, but it will credit the policy
with earnings as well. Depending on the size of the loan, your interest
may cost as little as 0.25%.
Life insurance premiums aren't
deductible for individuals. However,
Group Term Life
Insurance premiums you pay for employees of your trade or business
are a deductible Business Expense on
Schedule C,
Form 1065, or
your corporate return.
Life Insurance Dividends
Life insurance dividends paid on whole life policies are
treated as a return of your premium. They're not taxed as income unless the cumulative total of dividends paid exceeds
the premiums paid into the policy.
Lifetime Learning Tax Credit
The Lifetime Learning tax credit is a credit for parents of college
students (if the student can be claimed as a dependent) or students
themselves (if they can't be claimed as a dependent on a parent's return).
Here are the rules:
-
The credit is available for
qualifying tuition and related expenses of you, your spouse, or your
dependents enrolled in any year of college or graduate education, plus any
course of instruction at an eligible institution to acquire or improve job
skills. (The Hope
Scholarship Tax Credit is available for students enrolled at least
half-time in the first two years of college.)
-
The credit is equal to 20% of
qualifying expenses up to $10,000, for a maximum credit per student of
$2,000. (The Hope
Scholarship Tax Credit is equal to 100% of the first $1,200 of
costs plus 50% of the next $2,400 of costs, for a maximum credit per
student of $2,400.)
-
The credit phases out ratably
for taxpayers with adjusted gross incomes between $48,000 and $58,000
($96,000 and $116,000 for joint filers).
Figure the credit on
Form 8863
and carry the total to
Form 1040. For more information, see
IRS
Publication 970, "Tax Benefits for Higher Education."
Limited Liability Company
A limited liability company, or
LLC, is a new form of business entity that allows one or more individuals operate
a business similarly to a partnership, with limited liability for each
member, yet avoid tax as a corporation. LLC and LLP laws vary from state to
state, so consult a local attorney before choosing this form.
LLCs can generally choose how
they want to be taxed. Single-member LLCs are disregarded for tax purposes
unless they elect to be taxed as a C corporation or
S Corporation. Multi-member
LLCs are treated as partnerships unless they elect to be taxed as a C
Corporation or S Corporation.
Limited Liability Partnership
(See Limited Liability Company)
Limited Partnership
A limited partnership is a business organization involving one or more general partners
who actually run it and one or more limited partners who merely finance it
and assume no responsibility or liability for operations.
Partnerships generally don't pay
tax themselves. Instead, they report their income and expenses on
Form 1065,
then passes through all items of
income and loss, along with special items such as charitable deductions,
directly to the partners. The general partner supplies the limited partner
with a Schedule K-1 reporting these items. For more information, see
IRS
Publication 541, "Partnerships."
Since limited partners don't
manage partnership operations and don't assume liability for partnership
debt, limited partnerships are treated as
Passive Activities.
Here are
two strategies for taking advantage of these vehicles:
-
You can use your passive
losses to shelter income from passive income generators, or PIGs. PIGs are
simply investments that generate passive income for you. These can include
profitable real estate and limited partnership investments, S
corporations, and leasing arrangements. Buying passive income generators
lets you earn tax-free income because the passive losses will shelter your
passive income.
-
You can "unlock" suspended
losses by disposing of the partnership (except to a relative). You can
then use your unlocked losses to offset passive income from PIGs, gain on
the sale of the partnership interest, "portfolio" income (gains from
investments) and up to $3,000 of regular income. If your losses exceed
these totals, carry forward the balance until it's gone. Report your
losses on
Form
8582.
Example:
You're stuck with a limited partnership with a
Basis of $20,000 and suspended
losses of $10,000. In 2008 you sell your partnership for $10,000. You now
have a $20,000 loss ($10,000 of suspended losses and $10,000 from the loss
on the sale) to offset this year's income. If this year's portfolio income
totals $5,000, you can offset the full $5,000 of portfolio income, plus
$3,000 of ordinary income, then carry the remaining $12,000 forward as
long as it takes to erase the loss.
Liposuction
(See
Cosmetic Surgery)
Living Trust
(See Trusts)
Loan Participation Fund
Loan participation funds, also
called "prime rate" funds, are mutual funds that a special class of
corporate debt--syndicated bank loans. A bank underwrites the loan, then
splits it up into pieces, selling them to various buyers. This lets the
lender collect the fee for underwriting and syndicating the loan without
bearing all of the credit risk. There are several mutual funds that make
this class of security available to retail investors. Usually they are
closed-end funds or restrict withdrawals to certain specified periods, such
as the last two weeks of each calendar quarter.
Loan participations are
generally tied to the prime rate or London Inter-Bank Offered Rate. Your
interest income rises and falls with interest rate changes. This reduces
price volatility and nearly eliminates interest-rate risk. This price
stability makes loan participations a valuable hedge against rising
interest rates. But it also means that nearly all of your gains will come
in the form of current interest, taxable immediately at your highest rate.
This inefficiency, along with limited liquidity, makes loan participation
funds most appropriate for tax-deferred accounts.
Loans
Loan proceeds
aren't taxed as income because when you borrow the money, you have to pay it
back.
If a lender forgives a loan, the
amount forgiven is generally taxable as ordinary income in the year the amount is
forgiven. This may happen, for example, if a credit card issuer writes off part of a
balance as uncollectible.
Lobbying
Costs
Lobbying costs are generally considered nondeductible political contributions.
However, you can deduct up to $2,000 of lobbying costs as a
Business Expense for
costs of your business's own lobbying efforts (not for hiring a
professional lobbyist).
Long-Term Care Insurance
Long-term care insurance
may be deductible three ways:
Deductions for long-term care
premiums vary according to your age. For 2008, the limits are $310 up
through age 40; $580 for ages 41-50; $1,150 for ages 51-60; $3,080 for ages
61-70; and $3,850 for ages 71+.
To qualify, the policy has to cover long-term care for the
chronically ill. It has to be guaranteed renewable, and can't offer cash
surrender values. Policies sold before 1997 are deductible so long as there
is no material change in coverage; while policies sold or modified after 1996 may
qualify for the deduction. Your agent or carrier should be able to tell you
if your policy is "tax-qualified."
Deductible policies don't pay
benefits until you are unable to perform two or more of the following six
activities of daily living:
-
feeding
-
bathing
-
dressing
-
getting out of bed
-
toileting, and
-
continence.
These limits may be more
restrictive than some nondeductible policies. Before you choose a
deductible policy, consider which you value more: a current tax deduction
for your premiums (which may not mean anything if your total
Medical Expenses are
less than 7.5% of your adjusted gross income), or more generous benefits
should you actually need the coverage.
Currently, benefits you
receive from a tax-qualified policy are nontaxable so long as the daily
benefit does not exceed $270 (2008). Benefits above $270 per day are taxable only
if they exceed the actual cost of care. The IRS hasn't clarified how it
will treat benefits paid under a nonqualified policy. However, if the IRS
does tax benefits you receive under a nonqualified policy, you could
deduct benefits you pay to your long-term care provider.
Lottery Tickets
Lottery ticket winnings are
taxable as ordinary income in the year you actually receive the cash. Thus,
if you take your winnings in cash, you'll owe all your tax then. if you take
payments over time, you'll owe tax as you receive them over time. If you
sell your income stream to an investor, you'll owe tax on your sale proceeds
then.
Believe it or not, losing
lottery tickets are
deductible as Gambling Losses
-- but only up to the amount you report as gambling winnings, subject to the 2% floor on miscellaneous itemized
deductions. The deduction is not subject to the 2% floor and
does not phase out for adjusted gross incomes above $159,950. Keep your
losing tickets to prove your deduction.
Low-Income Housing Tax Credit
The low-income housing credit is
a credit against your tax designed to encourage private development of
low-income housing, usually suburban and small-town senior citizen housing.
Low-income housing investments
are usually organized as Limited
Partnerships, subject to the
Passive Activity rules.
The manager buys or builds apartments to operate as low-income housing for
15 years under strict federal rules. The Treasury Department pre-allocates
and pre-funds 10 years of tax credits equal to nine cents for each dollar
invested. Once the 15-year period expires, the manager's usual goal is to
sell the property and split any appreciation with the investors. Here are
the rules:
-
You can use low-income housing
tax credits to shelter up to $25,000 in taxable income. if you're in the
15% bracket you can cut $3,750 off your total tax; if you're in the 35%
bracket you can cut $8,750. (Multiply $25,000 by your marginal federal rate to
figure your maximum credit). Excess credits are wasted, so don't buy more
than you need to take the maximum credit. For example, if you're in the
285 tax bracket, you can shelter $6,250 (25% of $25,000). If you can buy a
tax credit partnership generating credits of 12%, the most that you should
invest is $60,416 (12% of $60,416 yields a $7,250 credit).
-
You can't use low-income
housing tax credits to reduce your tax below the
Alternative Minimum Tax.
(Taxable corporations don't face this limit; they can shelter a virtually
unlimited amount of income.)
-
Tax credit investments are
limited to qualified investors. Depending on state law, you may need a net
worth of $150,000, excluding your home and personal property, or a net
worth and annual income of $45,000.
-
Tax credits cut your $25,000
Rental Real Estate Loss Allowance by one dollar for each dollar you
claim in credits. For example, if you claim $2,000 in low-income housing
tax credits, your allowance is cut to $23,000.
-
Married couples filing
separately can't claim the credit.
-
Tax credits don't affect your
provisional income for purposes of figuring tax on
Social Security
benefits.
-
Low-income housing tax credits
distributed by a partnership may also generate passive income and losses
to offset other passive investments. This is usually the case when the
manager uses leverage to boost the tax credit for each dollar invested.
And this can make low-income housing credit partnerships even more valuable if
you have passive income generators. The passive losses from the
partnership can shelter your passive income, while the tax credits cut
your tax on other income.
Claim the credit on
Form
8586 and carry the total to
Form
1040.
Lunch Club Dues
(See
Country Club Dues)
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