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Tax Q&A: Second income
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March 30, 2001: 7:46 a.m. ET
Second incomes, medical expenses that the IRS counts as deductibles
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NEW YORK (CNNfn) - Are you so involved in trading stocks and funds at home that you have an office and equipment just for this purpose? Is it starting to feel like a second job? Chances are, taxwise, it counts as just that, so take advantage of your hobby's deductible potential.
Also, what kinds of personal medical expenses are considered deductible?
Got questions about filing your return? Here's your chance for some free advice. CNNfn has organized a panel of outside experts to answer your questions throughout the filing season.
Send your questions to: taxQuestions@cnnfn.com Not all questions can be answered and any information you provide may be used by one or more AOL Time Warner properties.
This week's answers are provided by Cindy Hockenberry, an enrolled agent with the National Association of Tax Practitioners.
Question: I have stock options from my old company, I exercised 300 shares of EPNY at $5 per share (total $1500) in July 2000. The fair market value of the stock on the day that I exercised my stocks is $90 per share. I believe that I have to pay AMT tax.
a.) If I didn't sell my shares last year, do I pay AMT tax? how much do I pay? Which form do I have to fill out?
b.) If I sold my shares last year at $50/share, do I have to pay AMT tax? Or do I pay the capital gain?
Thanks for your help. -- Andrew
Answer: I am assuming this is an incentive stock option (ISO). If you exercised your options in 2000, the difference between the exercise price and the FMV on the date of exercise is an AMT preference. That difference is reported on line 10 of Form 6251 in 2000.
If you sold your shares in the same year of the exercise, there is no AMT preference. The difference between the exercise price of $5/share and the selling price of $50/share is ordinary income and should be reported on your W-2. You do not report the gain as capital gain.
Question: My wife trades stock and options online and she has an office set up in the home with all the necessary equipment, including a computer, fax machine, extra phone line and necessary tools and supplies. Is the office a deductible business expense -- this being a second income for her? -- Elizabeth
Answer: If she conducts the trading activity on a regular and continuous basis, she is considered a trader. Her income (gains and losses) is reported on Schedule D and her expenses, including home office expense, is deductible on Schedule C even though you are not reporting her income on Schedule C.
Question: My chiropractor gave me a prescription to have massages for my back. Can I deduct them as medical expenses? -- Kathy
Answer: Medical expenses are deductible if they are for the cure, mitigation, treatment or prevention of a specific disease or for purposes of affecting the structure or function of the body. This would include massages for the cure or relief of your back problems. If the massages were for your general welfare and not for a medical purpose, they are not deductible.
Question: What kind of miscellaneous deduction are they talking about? I have seen people put expenses for painting the exterior and interior of their house and installation of doors plus other house repairs. Is this acceptable? -- David
Answer: No. Expenses you incur for the repair and maintenance of your principal residence are not deductible. They are capital improvements that increase the cost basis of your home.
Question: I live in Texas and pay $12,500 in child support to my ex-wife and two children. I make $45,000 per year without working overtime. My question is, is there some way I can get some tax break from this? It is very hard for me to make it these days with her claiming the children at tax time. Please help. -- Name withheld
Answer: Child-support payments are not deductible. Perhaps you could offset this expense by claiming a dependency exemption for the children on your tax return. This would require your ex-spouse to sign Form 8332 and give you the right to claim the children. Otherwise there is no tax relief for you. 
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