American College of Physicians: Internal Medicine — Doctors for Adults ®

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Giving Uncle Sam his due should be less taxing this year

The IRS now allows residents to write off textbooks, job expenses and more interest from student loans

From the March ACP Observer, copyright 2004 by the American College of Physicians.

By Christine Kuehn Kelly

For once, the financial news was good. G. Phil Hemstreet, ACP Member, had consulted an accountant for help with his taxes. To his delight, the cardiology fellow at the University of Texas, Houston, found he could write off $700 in deductions that he hadn't even known about.

"My accountant more than paid for his fee with the deductions he found," Dr. Hemstreet said. "My advice to residents is to get professional help."

Even if you do get professional help, it's good to know what types of deductions you can take. And as the April 15 tax deadline looms, residents and interns have new options to help reduce their 2003 tax burden. To start, there's a reduction in 2003 income tax rate brackets, including a drop from 27% to 25% (for single payers earning between $28,400-$68,800; more for joint filers) and from 30% to 28% for those who make more.

Student loan deductions are also now more generous and allow you to deduct many unreimbursed expenses related to your residency. Here are some tips from tax experts to help you make the most of this year's deductions.

Student loan interest

As of last year, the IRS now allows you to deduct up to $2,500 for the interest you pay on student loans. The government no longer limits this deduction to payments made within the first 60 months of the loan.

In addition, individuals in higher income brackets can qualify for this deduction. Single taxpayers with modified adjusted gross incomes of up to $65,000 can now write off interest from student loans, and so can married taxpayers filing jointly with modified adjusted gross incomes up to $130,000.

Claiming the deduction is easy. If you paid at least $600 in interest on education loans in 2003, you'll receive a 1098-E Form from your student loan lender or servicer listing the amount of the interest you paid.

You simply write that amount on line 25 of Form 1040 or line 18 of Form 1040A (if you don't itemize). The amount is subtracted directly from your taxable income.

In addition, the IRS has increased its lifetime learning credit—the amount of tuition eligible for a federal tax credit—to $10,000. You can apply the credit to net tuition and fees (less grant aid) you have paid for post-secondary enrollment.

You can receive a 20% tax credit for the first $10,000 of tuition. The maximum dollar amount of the credit would be $2,000.

The credit is phased out for joint filers with modified adjusted gross income between $80,000 and $100,000, and for single filers between $40,000 and $50,000.

Work-related expenses

Lab coats, journal subscriptions, professional society dues and cell phones are all commonly unreimbursed job expenses that you can deduct when you itemize on Schedule 1040.

To be eligible to itemize, these miscellaneous itemized deductions must exceed 2% of your income. If your adjusted gross income is $35,000, for instance, you can deduct any unreimbursed job expenses in excess of $700.

Keep in mind that Schedule A deductions replace your standard deduction. As a result, to really take advantage of itemizing, your combined Schedule A deductions must total more than $4,750 if you're single or $9,500 if you're married and filing jointly.

Eligible deductions include unreimbursed job expenses, mortgage interest, and state, local, real estate and personal property taxes. A tax professional can help you determine whether you have enough deductible expenses to justify itemizing.

If you moonlight, you will also have to file a separate form, Schedule C (sole proprietor). You must use this form to report any expenses incurred while moonlighting. The advantage of filing a Schedule C is that you can deduct allowable expenses without meeting the 2% requirement for Schedule A deductions.

Here are some job-related items you can deduct:

  • Communication expenses. You can deduct fees for beepers, pagers and cell phones that you use in connection with your job. You can also write off your Internet connection, but not the cost of a personal phone line even if you receive patient calls at home. The IRS considers a phone line a personal expense.

  • Publications. You can take depreciation based on either the cost of books and publications purchased during 2003, or the fair market value of books purchased in prior years and used for a business purpose during the current year.

    Because medical books are initially purchased for "personal" reasons—your education—the IRS does not consider them a deductible expense. "However, the tax law states that something bought for personal use can later be converted to business use and then depreciated," said Law Lamar, a certified public accountant (CPA) with Lamar and Associates in Birmingham, Ala. For example, a moonlighting resident may bring medical books to work—and thereby convert those educational textbooks to reference books for his or her business, making them depreciable over a number of years.

    "This can amount to a deduction of $700 each year," said Mr. Lamar. "This is a valuable deduction because tax returns can be amended for up to three years." Interns who moonlight can't convert their libraries to business use, he added, but residents can during their second and third years—if they work outside their residency programs.

  • Supplies and equipment. You can deduct necessary supplies such as a stethoscope, otoscope and medical bag.

  • Professional organization and licensing fees. You can deduct fees for professional organizations and the costs of exams and licenses.

  • Clothing. The cost of purchasing and cleaning clothing such as lab coats and scrubs, as long as they are required by your employer and not considered everyday street clothing, is deductible.

  • Malpractice insurance. When moonlighting, you may need to pick up additional malpractice insurance, which is a deductible expense.

  • Equipment. You can write off your computer, chair, desk, lamp, filing cabinets and office supplies purchased during the current year. (Depreciation applies to these deductions for purchases made the prior year.)

  • Moving expenses. If you established a residence during medical school and then moved more than 50 miles away to your residency or fellowship program, you may be able to deduct the cost of moving, including movers and any overnight stays you made during the move.

Travel and meal expenses

Experts say to be careful when taking travel and meal expense deductions. Although travel and meals are legitimate deductions in some circumstances, they represent "one of the areas the IRS closely scrutinizes," said Joseph D. Rose, CPA, president of Desert Rose Tax & Accounting PC in Tucson, Ariz.

You can deduct a portion of automobile expenses if you travel between two work places or between your principal residence and a temporary job site such as a community-based rotation. While you can't deduct expenses incurred during travel to your primary place of work, Mr. Rose said you can write off expenses of traveling between your primary employer and another facility.

You can write off all travel and lodging expenses and 50% of the cost of your meals during a job rotation outside of the general vicinity of your residence. The rotation must last for less than one year, and you must intend to return to your primary residence. You can apply this deduction to moonlighting if you are away from your primary residence overnight.

Home office issues

You may have heard that a home office deduction raises red flags with the IRS, but experts say that doesn't mean you should shy away from the deduction.

"The IRS made several advantageous changes to the tax law in recent years, bringing it back in favor as a viable, bona fide deduction," said Glenn Kempa, a CPA and partner in Kempa and Company CPAs, LLP. The firm has offices in Hauppauge, N.Y., and Cleveland.

You must meet two requirements to write off expenses such as rent, utilities, insurance, repairs and depreciation allocated to that part of your residence related to business use.

First, you must use that area (it can be a room or a separate, identifiable but unpartitioned space) exclusively for your business, and you must also use it regularly. Second, that part of your residence must either be your principal place of business (used exclusively and regularly for business administration or management activities), a place where you meet with patients on a regular basis or a separate structure not attached to your home.

While Mr. Kempa pointed out that the IRS does not consider seeing patients an administrative task, a variety of other activities qualify. "Activities such as calling patients and colleagues, preparing and researching treatments and presentations, maintaining patient records, reviewing medical literature and undertaking continuing education all count," he said. "They can qualify you for the home office deduction without ever seeing a patient on the premises."

If you are employed by someone else, you must meet an additional test. You must be using your home office for the convenience of your employer, and you may not receive any compensation for using that space.

Future and past issues

While you're just getting started, the financial decisions you make early in your career can benefit you in retirement. Ask your advisor about contributing to a traditional IRA or Roth IRA.

And if you learn about deductions that you didn't take in previous years, you can amend you returns for up to three years. The government will even pay interest on the amount you're owed.

Instructions for filing an amended return (form 1040X) are on the IRS Web site.

Christine Kuehn Kelly is a Philadelphia-based freelance writer specializing in health care.

The information included herein should never be used as a substitute for professional financial assistance.

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Where to look for professional help

While do-it-yourself software can help you with the basics of tax preparation, consulting an expert can be the best way to fine-tune your tax liability—and hang onto more of your hard-earned dollars.

To find an expert, ask colleagues for recommendations or consult a listing of local financial advisors. Certified financial planners can help you develop a plan for your current and future finances, including how to manage investments, debt and tax liability.

You can find a certified financial planner through the Financial Planning Association.

Certified public accountants (CPAs) can help with tax issues, life insurance and investments. Expect to pay $195 an hour and up for advisory services, and several hundred dollars for tax preparation, depending on the complexity of your return.

To find a CPA in your area who is a personal financial specialist, go online.

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