Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com
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Office Supplies
Office supplies are deductible if you
use them for a deductible purpose:
Offshore Investments
Investments and other assets you hold in foreign countries are taxable to you as a U.S. taxpayer
just as if you held in the United States. The Tax Code taxes you on
all of your income from all worldwide sources, so there's no tax advantage
to moving investments offshore. And Schedule B of Form 1040 requires you to
disclose interests in foreign financial accounts or trusts, as well as any
income from an offshore trust you establish with U.S. beneficiaries.
There's a limited exception to
these general rules for offshore private-placement variable
Life Insurance and
Annuity and contracts,
taxed the same as their U.S. counterparts, to manage your own investments.
A "self-directed" annuity lets you manage the underlying investments
yourself, rather than choosing from a commercial annuity's existing
portfolios. You can also transfer appreciated assets to the annuity
without gain. (You can set up similar "private placement" annuities and
variable universal life insurance contracts with some domestic insurers.
The problem is, you'll generally need to invest at least $1 million to do it. Some
insurers who serve this market look for as much as $20 million to justify
the special effort required.)
Offshore asset protection
Trusts and
Limited Liability
Companies in jurisdictions
such as the Bahamas and the Cook Islands (the Cook Islands?) have become
increasingly popular among doctors, entrepreneurs, and other high-risk
professionals. The theory is that U.S. creditors, faced with extra legal
hurdles, will be deterred from bringing suit to collect trust assets.
These entities offer no income tax advantages to U.S. citizens. And recent court
decisions threaten offshore trusts as asset protection tools. In fact, some
attorneys who previously specialized in establishing offshore trusts have
now switched sides and specialize in cracking them. Today, the main
advantages of moving offshore are privacy and freedom from U.S. securities
laws. If you're really looking for offshore investment exposure, your best bet is
probably a good, tax-efficient international equity fund.
Oil &
Gas
Oil and gas programs take advantage of
generous tax breaks to profit from oil and gas resources. There are four
main types of oil and gas programs:
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Exploratory programs search for
new resources in unproven areas. They offer the highest risk, but also the
highest potential reward.
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Development programs drill in
areas with proven deposits. They offer less risk than exploratory programs,
but also less potential return.
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Income programs generally
purchase existing reserves for steady, tax-advantaged income.
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Finally, combination programs
offer some combination of these risks and rewards.
Regardless of which type program
you choose, you'll enjoy four main tax advantages:
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You can write off "intangible
drilling and development" costs, such as labor, fuel, and supplies
involved in drilling a well. These are deductible as current expenses even
if there's no income against which to deduct them. The deduction is
limited to your amount at-risk in the program.
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You can
Depreciate the cost of
capital equipment you use to extract the resources.
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You can deduct the interest
you pay on money you borrow to finance the program.
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Finally, you can deduct part
of the income you earn from the program as a depletion allowance to
reflect the economic reality that someday the well will run dry. There are
two methods allowed. With "cost depletion," you divide the estimated total
barrels of oil or cubic feet of gas recoverable from the property into its
adjusted basis to figure a per-unit allowance, then multiply that
allowance by the number of barrels or cubic feet sold in a year. With
"percentage depletion," you simply deduct 15% of the gross income from the
property, up to 50% of net income or 65% of your taxable income. You can
claim whichever depletion allowance is greater.
Most oil and gas programs are
organized as Limited Partnerships,
subject to the Passive
Activity rules. These are generally structured so that
your entire investment is deductible the first year (in the form of
intangible drilling & development costs) and a portion of your income is
returned in the form of tax-advantaged depreciation and depletion. The
general partner will supply you with a Schedule K-1 reporting your share
of income and deductions. (Alternatively, you can buy a "working interest" in an
oil or gas well to avoid the passive loss rule and deduct program expenses
against ordinary income.)
Online Services
Online access providers
such as America Online, MSN, and other Internet providers, may be deductible
to the extent you use the internet for deductible purposes:
Optician
Deductible Medical
Expense subject to the 7.5% floor.
Optometrist
Deductible Medical
Expense subject to the 7.5% floor.
Organ Donor Costs
Deductible Medical
Expense subject to the 7.5% floor. (Sorry, no deduction for the value of the organ!)
Organ Transplants
Deductible Medical
Expense subject to the 7.5% floor.
Original Issue Discount
Original issue discount, or "OID," is a discount from par value at the time a bond is issued. OID is
taxable as ordinary income as it "accretes," over the life of the bond, even
if no interest is actually paid. This accretion increases your basis for
figuring gain or loss on a sale.
Example:
In 2003, you pay $900 for a bond paying $50 per year and
maturing in ten years at $1,000. You'll owe tax each year on $50 of
ordinary interest plus $10 of accreted OID. If you sell the bond in five
years for $960, you'll owe tax on $10 of capital gain: $960 (your sale
price) minus $900 (your original basis) minus an additional $50 (the
cumulative accreted OID).
Orthodontics
Deductible Medical
Expense subject to the 7.5% floor.
Orthopedic Furniture
Deductible Medical
Expense, subject to the 7.5% floor, to the extent it costs more than regular furniture.
Orthopedic Shoes
a
Deductible Medical
Expense, subject to the 7.5% floor, to the extent they cost more
than regular shoes.
Osteopath
Deductible Medical
Expense subject to the 7.5% floor.
Over-the-Counter Drugs
Over-the-counter drugs are a nondeductible personal expense, even if your doctor writes a
prescription for the drug. However, they qualify for tax-free reimbursement
from a
Medical Expense Reimbursement Plan or
Health Savings Account.
Oxygen Equipment
Deductible
Medical Expense subject to the 7.5% floor.
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