Question

Taxation question:

A married couple living in Manhattan in the USA. The husband Gregg owns five dry cleaning stores in NYC. The wife Sheila writes cookbooks and volunteers regularly for the Help Center, a suicide hotline. They have one son, David, who is studying engineering at NYU. You are preparing their income tax return for the current tax year. In September of the current year, you call Gregg and Sheila to find out if they have questions about year-end tax planning. The following scenarios pertain to transactions they engaged in this year:

1. Gregg is self-employed and this year he spent $1,800 on suits, shirts and shoes to wear while meeting with investors in his franchise of dry cleaners. Sheila is a writer and on her book tour the publisher requires that she wear suits, high heels and appropriate jewelry. The cost of those items for Sheila this year was $6,750. Under what circumstances may this couple deduct the cost of these work clothes?

2. Their son David is a junior at NYU. For his first two years he was eligible for scholarships which paid all of his tuition and expenses. Beginning in Fall of the current year, however, Gregg and Sheila are paying for his tuition and fees, though he will still receive a scholarship for room and board. In addition, they paid for a study abroad trip to Oxford for David in June/July of the current year, which included tuition and fees for the course he took there, as well as travel costs, room and board. They would like to know the tax treatment of these items. Also, their friend Helen told them they could have avoided this issue to begin with by saving in advance through other tax beneficial options. Gregg does not believe him and wants to know what they could have done differently.

Answer 1

1. DEDUCTION OF EXPENSES ON CLOTHES:

As per law, one can deduct the expenses on clothing only if that clothing is requied as per the Job of the individual. The apparel that one wears as apart of the non-job related or for any meetings or those which will be wore as a part of the daily routine are not allowed for deduction.

Therefore, in the given question, Cost of Clothing for Gregg for Meetings with the Franchise of Dry-cleaners, CANNOT be allowed as an expense, as there is no mandatory requirement and they are wore also as a daily routine.

Incase of Sheila, the Publisher requires that she wear suits, high heels and appropriate jewelry on her book tour and it therefore it comes under a job-specific clothing. Hence Sheila is ALLOWED to deduct the cost of the work clothes.

THEREFORE, GREGG IS NOT ALLOWED TO DEDUCT THE EXPENSES OF CLOTHES &

SHEILA IS ALLOWED TO DEDUCT THE EXPENSES OF CLOTHES. i.e, $6,750

2. DEDUCTION OF EXPENSES ON EDUCATION OF CHILD:

As per LAW, Education fees on child are allowed if the education is taken in an ELIGIBLE INSTITUION and the fees is paid to the institution for ELIGIBLE EDUCATION.

The Institute provides the Form which includes the tuition fees paid.

But the scholarships and any other fee reimbursements received are not allowed as deduction under education expenses. They are excluded from the tuition fees.

Therefore, in present case, David is receiving scholarship for his education which includes tuition and expenses. Gregg and SHeila are still paying him for the tuition fees.

Even though they are paying, since David is receiving Scholarship, these expenses are not eligible for deduction.

Also they paid to GRegg when he went to abroad for education. In such case, the Tution Fees paid to the Oxford is allowed for the Deduction. and expenses paid to travel, room and board are not eligible for deduction.

since,

Qualified education expenses don't include amounts paid for:

• Insurance;

• Medical expenses (including student health fees);

• Room and board;

• Transportation; or

• Similar personal, living, or family expenses.

Hence GREGG AND SHEILA can go for other Tax Saving options, such as

1. Invest in Municipal Bonds

2. Contribution to Retirement schemes

3. Using HEalth Saving accounts

4. Contribution to charitable organsations etc.