This week we'll wrap up our discussion of Itemized Deductions by exploring "Miscellaneous Deductions." When people itemize deductions, the area called miscellaneous deductions is where they usually place the professional expenses they've incurred over the past year. These expenses might include out-of-town costs, lessons, photos, commissions to agents, and about 80 more deductions.
Items placed in this area are subject to a limitation of two percent of Adjusted Gross Income (AGI). For example, let's say that your total business expenses for 2000 totaled $7,500. Let's also assume that your AGI was $75,000. You would be allowed to deduct $6,000 in business-related expenses. (Two percent of $75,000 is $1,500. $7,500 minus $1,500 equals $6,000.) That $6,000 is then added to all of your other itemized deductions (i.e. medical, taxes, interest paid, contributions) to give you the total dollar amount of your deductions.
Standard vs. Itemized
If this total is more than the standard deduction allowed for your filing status, then choose to itemize your deductions. If the total is less than the standard deduction, then take the standard deduction, since it is more than what you have. Now wasn't that easy?
Obviously, if you are not familiar with this, the above discussion could prove to be overwhelming. If, on the other hand, you decide to go to a professional who is well-versed in the ins and outs of a theatrical tax return, what we just discussed is second nature.
You should have confidence in the return you submit to the government. You want to put that envelope in the mail and not have to worry about whether it will be returned to you, because you left out a form or used the wrong form. If you prepare the return yourself, acquaint yourself thoroughly with the rules and limitations as they apply to this filing season. If you decide to use the services of a professional, make sure you choose someone who is totally knowledgeable about all the regulations as they apply to taxpayers and, particularly, to actors.
If you settle for anything less, there is an excellent chance that you could cheat yourself out of additional refund dollars, or worse yet, you could pay more tax than is necessary.
By now, we should be familiar with the concepts of both the standard deduction and itemized deductions. There is, however, one other way that actors may deduct their expenses. Under a category called "Qualifying Performing Artist," actors, if they meet certain criteria, can deduct business-related expenses, dollar for dollar, from their income. In addition, they can also use the standard deduction. In past years, "QPA" has proved to be a real lifesaver to the struggling actor with regard to tax savings.
The criteria for meeting the "QPA" requirements are as follows:
1) Your adjusted gross income must be $16,000 or less.
2) You must have performed services in the performing arts as an employee (this means income received on a W-2 form) from at least two employers during the tax year, and received at least $200 from each of these employers. In other words, you must receive at least two W-2s from two different employers of at least $200 each. (We must stress again that for this to qualify for this category, the compensation you received must have been reported on a W-2—not on a 1099.)
3) You must have had allowable business expenses attributable to the performing arts of more than 10% of gross income in the performing arts.
If you meet these criteria and fall into the category of "QPA," make sure you take advantage of it. It usually ends up being a tremendous savings to people who need it the most.
Explaining FICA Withholdings
For the past few years, employers have been required to change the format of Social Security withholdings from your salary. Instead of withholding just F.I.C.A., they also withheld an amount for Medicare—or so it seemed. This led to considerable confusion in the past and is still confusing some people. Let us explain.
As your W-2s begin to arrive, refer to boxes 5 and 6. Box 5 is for Medicare wages, the figure on which Medicare withholding is based. Box 6 is Medicare tax withheld. This "Medicare" is simply a small portion of your Social Security tax that is allocated for Medicare. They have broken down the amount withheld with respect to F.I.C.A. and Medicare. The rate of F.I.C.A. withholding is 6.2%, while the rate of Medicare withholding is 1.45%. These add up to the exact same percentage that was withheld for F.I.C.A. in prior years—7.65%. They just broke down the two amounts for you. The amounts for F.I.C.A. (wages and withholdings) can be found on your W-2 in boxes 3 and 4 respectively. Basically, the end result is the same for you, dollar-wise, just more numbers.
Direct Refund Deposit
Did you know that it is possible to have your refund deposited directly into your account at a bank or other financial institution? The possible advantages: You could get your refund quicker; payment is more secure (there is not check to get lost); it is more convenient (no trip to the bank to deposit your check). To instruct the IRS to direct deposit into your account, you must fill in the required information on the refund lines of your tax return (lines 67 b, c and d on Form 1040, and lines 42 b, c, and d on Form 1040A). Just follow the instructions for these lines on your tax return to see if you qualify for this method of payment. (Don't forget to attach a voided check to the return.) This method of receiving your refund is also available on the New York State tax return.
Many people are confused about the Presidential Election Campaign Fund check-off on the tax return. This fund was set up to help pay for presidential election campaigns. It does not go to any particular party or candidate. You may have $3 of your tax liability go to this fund by checking the "Yes" box on Form 1040, 1040A. If you are filing a joint return, your spouse may also elect to have $3 go to the fund. If you check "Yes," it will not change the tax you pay or the refund you will receive.
Paying By Installment
Sometimes, no matter what methods are employed, due to the circumstances that exist, a person might end up owing taxes when his return is sent in. Now, if you have all the money available to send in right away, this ends up being painful, but not deadly. However, if you are in a bind and all the money is not available to you at the time you are required to file your return, you might want to consider requesting an installment agreement with the Internal Revenue Service.
This means that, if you cannot pay the full amount due with your return, you may ask to make monthly installment payments. However, you will be charged interest and may be charged a late payment penalty of the tax not paid by April 16, 2001, even if your request to pay in installments is granted. If your request is granted, you must also pay a fee. To limit the interest and penalty charges, pay as much of the tax as possible with your return. But before requesting an installment agreement, you should consider other, less costly alternatives, such as a bank loan. You can apply for an installment agreement by filling out IRS Form 9465, Installment Agreement Request. You can get Form 9465 by calling 1-800-TAX-FORM. You should receive a reply to your request within 30 days.