Alternative Minimum Tax Alert.
More taxpayers will be subject to the Alternative Minimum Tax this year. Many normally deductible expenses are either not deductible at all or are only partially deductible when calculating the alternative minimum tax. Those with the following common expenses should meet with a tax specialist before year-end: Employee Business Expenses;  Home Equity Interest Expense (unless proceeds used to improve property); Medical expenses; State & local income taxes; Property taxes; Depreciation; Depletion.

Was ROTH IRA a tax mistake?
Many taxpayers are finding themselves in an unfortunate spot after rolling an IRA into a ROTH IRA that has now declined in value. The purpose of tax-free growth is to have GROWTH! For many, they have to pay tax on the higher rolled over value, only to see it decline in value with no possible loss offset. The good news is: People have until October 15 to convert back to a pension plan without owing a penalty. With a switch back to the deferred pension plan (and filing an amended 2001 tax return reflecting the change) one can roll over at the lower value in 2002.

Starting a Business?
"During this past year, many people were laid off. Some newly unemployed used the opportunity to create businesses or consulting companies, and they will find they pay less tax then when they were employees, IF they take full advantage of all their deductions right now!" says Kennedy. "The sad truth is there are very few legal tax deductions available for employees. But, as soon as you move into the business arena, it's a whole new set of rules," she said.

The most commonly missed first-time deduction for new business owners is for the items that are "contributed" by the owner into a business. This would include: Legal and accounting costs to set up the business; Contributed furniture & equipment such as computer, software, fax, desk, table, cellular phone and file cabinets; Cost to investigate the business (includes travel, research expense, financial analysis); Interest costs for financed items for the business.

Most Commonly Missed Deduction in 2002
In March 2002, President Bush signed a new bill into law that was retroactive for 2001. Most taxpayers missed it! This new law allows you to take an extra 30% depreciation for any personal property asset bought in your business after September 10, 2001.

"If you didn't take the extra deduction on your 2001 tax return, you can catch up in 2002," reassures Kennedy.
  
Most Misunderstood Deduction
The most avoided expense is for a home office. This is a completely legal tax deduction, but many people don't take this beneficial deduction. To qualify for a home office deduction, the space must be:

(1) Exclusively business. There is allowed a small, "de minimus" personal use, but this can be risky. It's better to set aside a separate room and call it a business room AND (2) Regularly used to conduct administrative or management for the trade or business OR 3) Regularly used to conduct client meetings OR  (4) A separate building structure.

Once qualified, business owners can take a pro-rata portion of their home expenses, such as home mortgage interest, property tax, mortgage insurance, insurance, utilities, janitorial and other home-related expenses.

DIANE KENNEDY is the founder and owner of DKA, a leading tax strategy and accounting firm based in Phoenix, AZ, and is the co-owner of TaxCents(TM), a tax education company that encourages tax-advantaged financial decisions. TaxCents(TM) provides do-it-yourself tools and education at www.legaltaxloopholes.com.