IRS Publication Provides Answers To Tough Tax Questions

In a recent column regarding the Barrett Law
("Cost of switching from septic to sewer system is deductible," December 1,
1997), you said that the interest expense relating to a switch from septic to
sewer is deductible as real estate taxes. The IRS telephone representatives I
spoke with weren't knowledgeable about this rule. Can you point me in the
direction of IRS documentation for this deduction?

M.D., Indianapolis

Information regarding deductions for interest paid on
improvements of this type can be found in IRS Publication 530, "Tax Information
for First-Time Homeowners," under Real Estate Taxes. You can order this
publication by calling the IRS at 1-800-TAX-FORM (1-800-829-3676). You can also
download this publication (along with tax forms and other publications) from the
IRS' web site on the Internet at http://www.irs.ustreas.gov  

I currently work as an independent contractor for
a local courier company. I drive 80,000-90,000 miles a year delivering various
items. In November, 1997, I purchased a used 5-year-old vehicle for $7,800 to
replace my previous vehicle. My question is: Can I take the entire $7,800 as a
Section 179 expense? I will probably only drive this vehicle about 2-3 years.
Therefore, it seems to me it would be more beneficial to take this as a one-time
deduction as opposed to actual expenses and taking depreciation over several
years.

L.H., Indianapolis

First, I'm going to assume that you plan to use your car 100% for business purposes. If this is not the case, you will need to apportion your deduction between business and personal use of the car. At 80,000 to 90,000 miles per year, your standard mileage deduction for 1997 at $.315 per mile is $25,200 to 28,350. This sizeable deduction is much nicer than the relatively tiny Section 179 deduction and won't result in adverse tax effects down the road (such as a taxable recapture of part of the Section 179 deduction if you don't keep the car for five years). I'd recommend sticking to the mileage deduction.

If, for some reason, you still feel compelled to take the Section 179 deduction rather than taking a standard mileage deduction, consider the fact that there is an annual limit to how much depreciation expense you can take on a vehicle. Since Section 179 expense is considered depreciation, this limit applies to the Section 179 deduction as well.

For a vehicle purchased in 1997, you are limited to a maximum of $3,160 for your 1997 depreciation deduction. So you could take a Section 179 deduction of $3,160 in 1997. The balance would carry over to your 1998 tax return. Please keep in mind that you must continue to use this car at least 50% for business for five years in order to avoid recapturing part of this Section 179 deduction.

My granddaughter is a freshperson at I.U. this
year. Her mom wants to know if any tuition or other costs are deductible. We're
numb from all the credits and deductions promised by the
politicians!

F.B., Indianapolis

You're right to be numb. The new education credits are much more confusing than they ought to be. The two tax credit options that might apply in this case are the Lifetime Learning Credit and the Hope Scholarship Tax Credit. The credits are mutually exclusive, so only one may be used per student.

The Hope credit is a $1,500 credit, calculated by taking 100% of the first $1,000 of tuition and related expenses paid and 50% of the next $1,000 paid. The student must be at least a half-time student. The credit only applies to expenses incurred in the first two years of college and is effective for expenses paid on or after 1/1/98.

The Lifetime Learning Credit is a $1,000 credit, calculated by taking 20% of the first $5,000 of tuition and related expenses incurred. There is no half-time enrollment requirement for this credit, nor does it apply only the first two years of college education. The Lifetime Learning Credit is available for expenses incurred after 6/30/98.

The credits are available to parents of a qualifying student who claim the student as a dependent, or to the student himself if he (or she) is not being claimed as a dependent on someone else's tax return. The credits are phased out if the parent's income exceeds $40,000 for single parents or $80,000 for married filing jointly parents. There is no credit allowed for married filing separately taxpayers.

copyright © 1998 - Gail
Perry

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