Pretax Contributions Are Yours
Q: The combination of being unemployed and paying for my own health insurance this year will result in medical expenses exceeding 7.5% of my income for 1995, thereby making me eligible to itemize medical deductions on my income taxes. I know the insurance reimbursements I get must be taken out of the amount I deduct on my taxes, but what about the money I am reimbursed from my medical savings account set up by my former employer? --H.H.
A: Reimbursements from your flexible savings account, cafeteria account, Sect. 125 plan or whatever name your company gives this type of pretax, set-aside plan should not be a factor in your deduction calculations. Simply ignore them. Why? Because you also do not consider the money you contributed to that account as part of your taxable income. The money wasn’t taxed as it went into the amount and it doesn’t serve to reduce or inflate your actual medical expenses. For the purposes of this calculation, the money simply doesn’t exist.
Property Expenses May Be Deductible
Q: I own rental property that I do not directly manage. According to the IRS, I am allowed to deduct expenses associated with the property only to the extent that they meet the rental income generated by it. The property has been vacant for all of 1995. Does this mean I can take no deductions when I file my income taxes? --E.S.V.
A: Assuming that you own at least a 10% interest in the property, meet the definition (which follows below) of a “material participant” in the handling of the property and have an adjusted gross income of no more than $150,000, you are likely entitled to some sort of deduction against your ordinary income for your expenses on the property.
To be considered a “material participant” in the property’s management, you must partake in management decisions, including setting rental terms and approving capital expenses. If you can meet this definition and your adjusted gross income is under $100,000, you can deduct up to $25,000 of the property’s expenses against your income. The deduction is reduced proportionately for taxpayers with adjusted gross incomes of between $100,000 and $150,000 before phasing out completely.
Untaxed Money Doesn’t Qualify for Deduction
Q: As one of hundreds of employees of Orange County who belonged to the county’s deferred compensation plan, I have been told that between 10% and 23% of the money contributed to this plan from my pay has now been lost and/or deducted from my account due to the county’s bankruptcy filing. Are these losses deductible from my taxes? -- E.N.D.
A: You are not entitled to deduct the amount that has been removed from your account because that money had not been taxed prior to being credited to you. You are not entitled to a deduction for losses on income that has not been subject to taxation. You may consider your loss a retroactive pay cut.
IRS Rules Flexible on Selling Donated Assets
Q: Does the IRS have any requirements governing when a charity must sell appreciated stock that has been donated to it? I recently gave some appreciated shares to a charity. I valued my gift as of the date the donation was made. I told the charity the stock might rise if they held onto it. But were they required to sell it immediately? --M.D.
A: The charity can do whatever it wants with donations of appreciated stock it receives, assuming that it follows its own policies and procedures. The IRS imposes no overall guidelines on the charities; they could have held onto it, or they could have sold it. It was up to the organization’s management and/or board of directors. The subsequent movement of a stock is not a consideration in the valuing of the actual gift.
Couples Are Restricted in Using Tax Exclusion
Q: Following my wife’s death in 1978, I sold the home which we had shared and invoked my $125,000 profit exclusion available to homeowners over age 55. Several years later, I remarried and moved into my present wife’s home. She had never used her exemption. Is my current wife entitled to use her exemption when we sell this home? --T.M.
A: If you have already used your exemption at the time of your marriage, you and your new wife may not invoke her exclusion during the term of your marriage.
Each individual and each married couple is entitled to just one exclusion over a lifetime. If one spouse has already used his or her exemption while in another marriage or as a single person, the new couple is not entitled to another exclusion, even though the second spouse has never taken advantage of the tax break. However, if both taxpayers invoke their exclusions prior to getting married, there is no problem with the IRS. Should you die or get divorced, your wife would be entitled then to invoke her exclusion, since she would no longer be “tainted” by a spouse who had already used the deduction.
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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053. Or send e-mail tocarla.lazzareschi@latimes.com
