Thanks to three new tax laws and a couple of edicts by the IRS, employees and self-employed workers will find a handful of tax breaks have been expanded for 1997 income tax returns.
A valuable tax-exemption was revived for employees who received tuition assistance from their employer to take college courses on the side.
Self-employed workers will benefit from increases in the amount of business equipment and health insurance premiums they can write off.
Workers who use their car for business will be able to deduct a bit more as a result of a small increase in the IRS standard mileage rate. And business travelers will have the option of claiming a larger per-diem allowance for business trip meals.
While most of the tax changes are relatively modest, a couple will yield significant savings. The restoration of the tax exemption for employer-provided educational assistance could mean more than a thousand dollars in tax savings for many employees. The increase in the self-employed health deduction is likely to produce several hundred dollars in additional tax savings for many sole proprietors. The biggest beneficiaries will be the hundreds of thousands of employees who received financial assistance from their employer to attend night school last year.
The tax-exemption for employer-provided educational assistance, which expired June 30, was reinstated retroactive to July 1 and extended through the spring semester of 2000.
As before, the first $5,250 a year in employer assistance is tax-free to the employee.
The bad news for grad school students is that the tax exemption continues to apply only for courses at the undergraduate level. Even so, a separate section of the tax code might protect some grad students from being taxed on their employer assistance.
Specifically, the educational assistance is considered a tax-free "working condition fringe benefit" if the course work helps maintain or improve skills in your current job but isn't part of a program of study that can qualify you for a new career.
This "working-condition" exception also can be of help to undergraduate students who receive more than $5,250 a year in employer assistance. There is no dollar ceiling on the amount of educational assistance that you can receive tax-free if it's considered a working condition fringe benefit.
If you weren't lucky enough to be covered by an educational assistance plan at work, you might still be able to claim a tax break on your 1997 return for job-related education expenses.
The tax law allows deductions for courses that maintain or improve skills in your current job. Or the courses must be required by your employer or by law to keep your current job, position or salary. So if you're a genetic engineer and you decided to take a course on cloning to keep up with the latest science in the field, you'd be eligible to deduct tuition, books, supplies, lab fees and certain transportation expenses.
If the courses were needed to meet the minimum requirements for your job, however, none of the costs is deductible. Nor can you deduct courses that are part of a program of study that can qualify you for a new trade or profession.
Health deduction
Many self-employed individuals will be able to write off more of their health insurance premiums without having to itemize deductions or qualify for the itemized medical deduction.
Congress increased the special self-employed health insurance deduction to enable eligible business owners to deduct 40 percent of their health coverage costs for 1997, up from 30 percent in 1996. For those who are eligible, the deduction can be an important benefit for the self-employed who don't enjoy the kind of subsidized group-rate health coverage that most employees receive.
"The premium the self-employed are paying is large," said David Rhine, national director of family wealth planning at the accounting firm of BDO Seidman in New York. The deduction is also becoming relevant to a growing segment of the labor force, he said, as more and more workers are being classified as self-employed independent contractors rather than employees, such as in the software industry.
The special health deduction can be claimed for any month you weren't eligible to participate in a subsidized health plan of another employer or through your spouse's employer.
The deduction is claimed on the front of Form 1040. As a result, the deduction can be a salvation for many self-employed workers who otherwise wouldn't be able to write off any of their health coverage costs because the itemized medical deduction is so difficult to qualify for. (Itemized medical expenses are deductible on Schedule A only to the extent that they exceed 7.5 percent of your adjusted gross income.)
Self-employed workers who do qualify for the itemized medical deduction should remember to write off the other 60 percent of their health insurance costs on Schedule A.
Equipment write-offs
Self-employed individuals also might find that they can write off a bit more of their business equipment purchases.
As much as $18,000 of 1997's equipment purchases can be immediately written off without having to depreciate the equipment's cost over a period of years. Previously, the limit on this first-year "expensing" method was $17,500.
The expensing method is subject to a number of restrictions. For one thing, write-offs are limited to the amount of taxable income you had from the business. So if your business income was meager, your write-offs will be meager, too. One exception: Employees with sideline businesses are allowed to count salary they earn from their regular job as business income when figuring their limit on expensing deductions.
If you have more equipment to write off than expensing allows, use expensing for items subject to the longest depreciation period. For example, use expensing for equipment that would otherwise have to be written off over five years rather than those with a three-year depreciable life. By so doing, you'll maximize your deductions.
Car deductions
For workers who used their car for business last year, the IRS standard mileage rate was raised to 31.5 cents a mile for 1997, up from 31 cents in 1996. The IRS periodically raises the mileage rate to reflect increases in the cost of owning and operating a car.
When writing off business use of a car, individuals often have the option of deducting actual expenses or claiming the IRS mileage allowance plus parking and tolls.
Although toting up actual expenses can often produce a bigger deduction, most workers use the IRS mileage rate because of the simplicity.
The increased mileage rate won't just benefit self-employed individuals and other workers who didn't get reimbursed for their car expenses. It can also be of help to many employees who did get reimbursed by their employer.
If you were reimbursed for car expenses at a rate of less than 31.5 cents a mile, you are eligible to write off the difference as an employee business expense. For example, if your employer reimbursed you at a rate of 25 cents a mile, you can deduct the 6.5-cent-a-mile difference on your 1997 tax return.
Business trip meals
Most business travelers have a couple of options for figuring their deduction for meals and certain incidental expenses on business trips.
Instead of adding up all your receipts, the IRS offers the option of using a fixed-rate allowance, ranging from $30 to $42 a day, depending on the destination. That compares with $26 to $38 a day on 1996 returns. The allowance covers food and certain incidentals, including tips and dry cleaning.
If you claim the IRS "standard meal allowance," you won't need any receipts to substantiate your meal expenses, although you still need to keep a record of the time, place and business purpose of your travel.
The fixed allowance can be an appealing option if you didn't hang on to your restaurant receipts or you tended to dine frugally on the road.
But if you took liberal advantage of hotel room service and frequented finer restaurants, you'll probably find that $30 to $42 a day doesn't go very far. In such cases, toting up your actual expenses will usually produce a much bigger deduction.
Whichever method you use, you'll need to reduce the total by half when computing your deduction. Only 50 percent of business meal expenses are deductible.
