Don’t Overlook ’87 Tax Deductions

Worried about another big tax bill?

Unfortunately, there is virtually nothing you can do now to reduce your 1987 tax liabilities retroactively except contribute to a deductible individual retirement account or Keogh plan.

But you can cut your 1987 taxes by making sure to take all deductions and credits that you’re entitled to. Many people won’t this year, especially if they’re confused by tax reform.

“There are a lot of deductions that people miss,” says Stephen P. Kunkel, tax partner for the accounting firm of Pannell Kerr Forster. “They pull out their forms from last year, and if they didn’t take the deduction last year, they may not think of taking it this year.”

Here’s a last-minute reminder of deductions and credits that many taxpayers could overlook this year:

* Expenses for charitable work. Don’t forget that you can deduct 12 cents per mile plus parking fees and tolls for traveling in your own car for charity or volunteer work. Also don’t forget non-cash contributions such as gifts of used books to libraries.

* Mortgage-related interest. Don’t forget to deduct points (loan origination fees or prepaid interest) on a mortgage or refinancing if you paid the points separately instead of having them wrapped into the loan amount. If the points are for the original purchase of your primary home or for a refinancing to pay for home improvements, they generally are fully deductible in the year paid. But if the points are for a refinancing to lower your interest rate, they are deductible only over the life of the loan. Also deductible: prepayment penalties on refinanced loans.

* Non-mortgage consumer interest. Some taxpayers forget to include credit card interest partly because it is not listed on a separate statement from their lenders. Look for it instead on your last billing statement for 1987 borrowings. Other finance charges not to forget: interest on car insurance payments, car loans and student loans. Non-mortgage consumer loan interest is 65% deductible.

* Medical expenses. These are hard to claim now because they must exceed 7.5% of your adjusted gross income. But don’t forget to include such things as health insurance premiums, eyeglasses and contact lenses, hearing aids, prescription drugs, psychiatric counseling, birth-control pills, plastic surgery, wheelchairs, in-patient care for alcoholism and special schooling for the mentally or physically handicapped.

Also remember to include the cost of transportation to and from medical visits, deductible at 9 cents per mile or actual cost. Also include parking fees and tolls for visits as well as lodging (not exceeding $50 per night) while away from home principally for medical care.

* Self-employed health insurance. If you are self-employed, your business is profitable and you can’t qualify for benefits under your spouse’s health plan, you get a new tax break. You may fully deduct 25% of the health insurance premiums that you paid. The remaining 75% is subject to the 7.5% threshold for medical expenses.

* Miscellaneous expenses. You probably will remember to include union dues, tax preparation fees, education expenses, unreimbursed business expenses and professional journal subscriptions, all now deductible only to the extent that they exceed 2% of your adjusted gross income.

But don’t forget such things as job-hunting expenses (transportation to job interviews, for example), work-related telephone calls from your home, fees for safe deposit boxes if used for investments, gambling losses to the extent of gambling winnings and IRA custodial fees if you pay them separately rather than having them deducted from your account.

Also deductible is that portion of legal fees (in anything from divorces to estate planning) devoted to tax matters.

* State income taxes. If you paid additional state taxes last year, on top of what you already deducted for 1986 returns, be sure to deduct them from your 1987 federal taxes, says Torrance accountant Gary Kuwahara.

* License fees on autos, motor homes, boats or other vehicles. This annual fee, payable to the Department of Motor Vehicles, amounts to 2% of the value of the vehicle. (You cannot deduct the $23 registration fee, however.)

* California state disability insurance (SDI) payments. This tax, listed on your W-2, is deductible, as a state tax, on your federal return.

* Social Security or SDI credit. If you held two jobs during 1987 and your combined earnings for the year exceeded $43,800, too much Social Security (FICA) tax or SDI payments may have been withheld from your salary.

Check your W-2s. If the combined FICA tax exceeds $3,132, claim the excess as a tax credit on line 58 of federal Form 1040. If the combined SDI payments top $263, claim the excess as a credit on line 37 on your California Form 540.

* Child-care credit. Many people don’t know that expenses of a housekeeper, maid or cook may qualify toward the credit, as long as some of their services are provided for a dependent, Pannell Kerr Forster’s Kunkel says.

* IRAs. You may still be eligible for a fully deductible IRA even if you work for a company with a retirement plan and your adjusted gross income exceeds $35,000 for singles and $50,000 for couples filing jointly.

That’s because you and your spouse may not yet be an “active participant” in the company plan. Many firms have one-year waiting periods before new employees become eligible for pension plans. So if you and your spouse changed jobs last year and were not at any time active participants in a company plan, you both may still be eligible for a deductible IRA.

Ask your employee benefits department if you are an active participant. Even if your W-2 form shows you as an active participant, “don’t take their word for it. I would still ask,” says John R. Woodford, partner at Mercer & Woodford, a Torrance accounting firm.

* Keogh plans. If you are self-employed and have not opened a Keogh plan, it’s too late to open one now and have contributions deductible for 1987 returns. But if you opened a Keogh by last Dec. 31, you can make a deductible contribution for 1987 as late as when you file your return.

If you have already filed your return but think you have missed key deductions that could significantly change your tax liability, consider filing an amended return. But be wary, warns accountant Woodford. The IRS looks more carefully at amended returns, and the chances of them being audited are greater, he says.