|Latest questions and answers:
(updated March 25)
Q: I am single, over 50, and do not have any children. I only earned $302 in 2003. Can I make a contribution to my Roth IRA? I also have a traditional IRA and wonder if I would be wise to convert some of it to my Roth IRA and if I do will I have to pay any taxes on it? Would I also qualify for Earned Income Credit?
Helen Huntley: 1. You can contribute $302 to a Roth IRA. The maximum is $3,500 or your total compensation, whichever is less. By the way, taxable alimony counts as compensation for IRA purposes if you have that as a source of income. You have until April 15 to make your 2003 contribution.
2. Converting from a regular to a Roth in a year with low income is a great idea. However, you would have had to have done it by Dec. 31 for it to be reported on your 2003 return. If you do it for your 2004 return, the amount of your conversion will be added to your other income, then you calculate your taxes. The standard deduction and personal exemption are subtracted, so only the amount in excess of that will be taxed.
3. Based on $302 in earnings, your Earned Income Credit would be $25. You might as well claim it if you are filing a tax return to get a refund anyway. However, you are not eligible for the EIC if you have investment income of more than $2,600.
Q: If i start a business, can I deduct the part of the cost of medical insurance I pay even though some of it is paid by a previous employer?
Helen Huntley: The insurance plan must be established under your trade or business. As a self-employed person, you cannot take a deduction for health insurance premiums for any month in which you were eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. If you were under your employer's plan for half the year, then started a business and got your own plan, only the premiums paid under the second plan would be deductible.
Q: I sold a second home in Spring Hill this year, after owning in for 14 years. I made a profit of about $20,000. I built and moved into a much more expensive new home in Spring Hill this year. I used the proceeds from the sale of the old home to finance the new home. I see it as a rollover. Do I have to pay federal taxes on the profit?
Helen Huntley: Probably. Your gain is tax-free only if this house was your primary residence for at least two of the five years before you sold it and if you did not take a tax-free gain on the sale of another home during the previous two years. The fact that you bought another house is irrelevant since the tax law no longer has a provision for rolling over the gain when you sell a home.
Q: I am 26 years old and have worked very little in 2003. Am I entitled to any earned income credit?
Helen Huntley: I assume that you are single and do not have a qualifying child living with you. If those assumptions are correct, you probably qualify for the credit if you cannot be claimed as a dependent on someone else's return and your income was less than $11,230 last year.
The maximum Earned Income Credit for a single person with no qualifying children is $382.
Q: I am a graduate student pursuing a PhD. Part of the payment for my tuition comes from a federal scholarship and part is paid by my department. Last year I was issued the 1098T form from my university, and it showed the amount paid on my behalf by the university. This year I did not recieve a 1098T, but the money for tuition comes from the same place. I did not last year, but I am wondering if I am able to take the Lifetime Learning Credit?
Helen Huntley: Expenses that were paid for by a tax-free scholarship cannot be used to claim the Lifetime Learning Credit. I assume that the money your department paid was not taxable to you. If that's the case, forget about the credit.
Q: Later this year, I expect to receive payment on a claim from a company I used to deal with which filed for a Chapter 11 bankruptcy. The anticipated payout is in the range of 4%-9% of the claim. What are the tax implications of this? Can I claim a loss for the remaining 91%-96% on my 2004 return?
Helen Huntley: Since you did not specify, I am going to assume that this is money owed to you as an individual, not as a company. The general rule is that a nonbusiness bad debt is deductible in the year it becomes totally worthless. However, the nature of your claim makes a difference. If you gave this company cash, you probably have a deductible debt and the money you receive through the court will be considered return of your own money. However, deductions are generally not allowed for unpaid rent, salaries, fees and the like. With that type of claim, the money you receive might be considered taxable income.
Q: My wife and I are both retired and our only income is Social Security. We remortgaged our house and used the cash we received to pay off debts. How should we handle this on a tax return?
Helen Huntley: A loan is not income, so it is not reported on your tax return. You have some potential itemized deductions - real estate taxes and mortage interest, including a portion of any points paid when you refinanced. However, that's irrelevant if your income is too low to pay taxes.
Q: I would like to know if you have more than two children why you can only claim two and not all of them?
Helen Huntley: You can claim all of them for some things, such as the personal exemption and the Child Tax Credit. However, the maximum amount for the Earned Income Credit and the Dependent Care Credit is based on two children. That's just the way Congress wrote the law. Giving more credit for additional children would have cost the government more money in the form of lost tax revenues.
Q: I was told by a tax preparer that Florida Intangible Taxes paid in 2003 were deductible on Schedule A of the 2003 Federal return. Which line should they be shown on and how identified?
Helen Huntley: The intangibles tax is classified as a personal property tax, and the amount of tax you pay is deductible on Schedule A, Line 7, of your federal Form 1040 if you itemize deductions.
Q: I was an international trainee at a hotel in Tampa and I received my W-2 tax form here in Argentina. I tried to get them done through H&R Block but it was impossible for me because I don't have a credit card and it's really difficult for me to get one as well. Is there any other way to get them done?
Helen Huntley: You might qualify for free online tax filing. Go to www.irs.gov and click on "Free file." If you find that you don't qualify for free filing, you can print out the forms you need from the IRS Web site and do your tax return by hand.
Q: I want to make sure it will be OK to file head of household. I am single and own my home. My son who is 25 returned home in the beginning of July from active military and now is going to college full time. He will have to file a tax form for the money he made while in the Navy. Can I still file head of household?
Helen Huntley: Most likely the answer is yes, assuming that your son is also single. (If he is married, qualifying is more complicated.) The general rule is that you must pay more than half the costs of maintaining a household for a qualifying relative who lived with you more than half the year. (A dependent parent would not have to live with you.) A temporary absence, such as serving in the military, does not count if your child lived with you before and after and you maintained the household in the meantime.
Q: Do you have to claim scholarships earned in high school on your taxes?
Helen Huntley: No. That's assuming that the amount is not greater than the cost of tuition plus any required fees, books, supplies and equipment.
Q: My girlfriend recently submitted her income tax by telefile and she owes money she doesn't have. She had gotten some bad advice not to itemize even though she tithes at church and is purchasing her condo. Is there a way she can ammend her tele-file? Also is it worth it?
Helen Huntley: Yes, your girlfriend can amend her return by filing Form 1040X. It is worth itemizing if her deductions are more than the standard deduction ($4,750 if she is single; $7,000 if she has a dependent and files as head of household.) Her charitable contributions, real estate taxes and mortgage interest all would be deductible. It sounds to me as though it would be worthwhile to at least review her return to be sure she really owes that money.
Q: I worked and drew Social Security in 2003. I received a statement of the amount of Social Security that I received in 2003 from the Social Security Administration. I recently received a notice that I had been paid $1,224 too much Social Security in 2003 due to the fact that my wages exceeded the amount allowed. The Social Security Administration plans to deduct this amount from the payment that I will receive in May 2004. My question is, can I deduct $1,224 from the amount of Social Security that I report on my income for 2003 or do I have to wait to report this on my 2004 taxes? I did not receive a corrected statement from Social Security.
Helen Huntley: Since you received this money in 2003, report it on your 2003 return. You'll be paid less this year so you'll have less to report for 2004. There really is nothing to deduct.
Q: I have a capital loss from sale of a mutual fund that I can't use because income is so slow. Is there a way to carry back to previous years?
Helen Huntley: No. But you can use $3,000 per year against other income and carry forward unused losses to future years. If you have $3,000 or less in income (before subtracting personal exemptions or the standard deduction), you can carry forward all or part of the $3,000 you would have used in 2003.
Q: I inherited an IRA from my mother in 2003. I have closed the account and have received the proceeds. What are the tax implications of this transaction and how do I report this transaction?
Helen Huntley: This is fully taxable unless your mother made nondeductible contributions to her IRA. If she did, the amount of those nondeductible contributions would not be taxed. If you are not sure about that, check her old tax returns to see if she filed a Form 8606 reporting a nondeductible contribution. IRA expert Ed Slott says the distribution of an inherited IRA is treated the same on your tax return as a distribution from your own IRA, except there is no penalty for early withdrawal if you happen to be younger than 59 1/2. He says the IRS will know this is an inherited IRA because of the coding in the 1099-R form you received.
Q: I know that when you reach 70 1/2, you must calculate the minimum amount of withdrawal using the balances in all IRA accounts, but you may withdraw the minimum amount from any one of them. You do not have to take a proportionate amount from each account. I have a traditional IRA and I also have a tax deferred 403b account from my years as a teacher. Can I combine the total of the IRA and the 403b to determine the minimum amount, and then withdraw from the IRA or the 403b account? Or do I have to take a proportionate amount from both the IRA and the 403b?
Helen Huntley: You have to take minimum withdrawals from both the IRA and the 403b. All your traditional IRAs can be lumped together in doing your calculations, but a 403b must be treated separately. If you had a 401k, it would have to be treated separately as well.
Q: My wife and I own a home in Florida and a home in New York state. We reside six months in each. We both work seasonal jobs in New York and pay New York state tax on the income. Our legal residence is Florida so we can get the homestead exemption. The question is if we sell the New York house how can we avoid paying capital gains tax?
Helen Huntley: To avoid paying capital gains tax, the house must have been your primary residence for at least two of the five years preceding the sale. If you spent slightly more time in New York than in Florida and filed your tax return from your New York address, that would help you establish New York as your primary residence. However, that might have other implications as far as your New York state income taxes are concerned. I recommend consulting a tax preparer in New York.
Q: I filed a Chapter 13 bankruptcy in 2003 and I received a notice of deficiency for $139 for the tax year ending 12/31/01. Do I have to pay this? If not, what documents do I need to send to the IRS?
Helen Huntley: Either pay it or talk to your lawyer about it. Since it's a relatively small amount, the simplest thing would be to pay it. However, there is a chance you have an out. It depends on such things as when you filed your case, whether the IRS received notice of your filing and whether it still has time to file a claim that could be included in your repayment plan.
Q. I re-financed my house and I have to spread the deduction for the points over the life of the mortgage. Do I get any sort of deduction for the doc stamps?
Helen Huntley: No.
Q: I am retired and had no earned income except my pension. My wife earned $3,000 cleaning houses. Can we make a contribution into our existing Roth IRAs based on those earnings?
Helen Huntley: Yes, but your combined contributions cannot exceed $3,000. A pension is not earned income.
Q: My wife and I live at two separate addresses, although we are not legally separated. Can we file a joint return?
Helen Huntley: Yes
Q: I was visiting West Virginia and won a $5,000 jackpot. No taxes were taken out by the casino. Also, I've been playing the local Lotto (Cash 3). How do I claim this on my taxes? Normally I do my own taxes, but with the added income I'm at a loss. Any help you can provide will be greatly appreciated.
Helen Huntley: Gambling winnings are taxable as "other income." The $5,000 should be reported on Line 21 of Form 1040. If you itemize, losses up to the amount of your winnings can be deducted as miscellaneous itemized deductions. They are not subject to the same income limits as other miscellaneous deductions. You will need proof of your losses if your return is audited.
Q: In 2003 we sent our son $2,500. We thought this could be listed tax-free. On what tax form (and line) do you list as donor a gift to a relative?
Helen Huntley: You don't have to do anything. Gifts are not listed on income tax returns. Gifts of more than $11,000 are reported on a gift tax return.
Q: I lost $5,000 in my IRA when Worldcom stock went bankrupt. I eventually sold it for 2 cents a share. Can I deduct this as a capital loss?
Helen Huntley: The short answer is "no." The only way you can get a tax benefit from a loss in an IRA is if you meet all these conditions: 1. You made nondeductible contributions to your IRA and 2. You withdrew all your money from all your IRAs and 3. Your total withdrawals were less than the basis for your nondeductible contributions. The difference is your loss, which is only deductible as a miscellaneous itemized deduction.
Q: Are charitable contributions deductible even if I take the standard deduction?
Helen Huntley: No.
Q: Can a person who files "married, filing jointly" claim an exemption or credit for being legally blind? (Less than 20/200 vision, receiving Social Security disability for last 10 years.) If so, where does the entry go?
Helen Huntley: You qualify for a larger standard deduction. On Form 1040 check the box on line 36a and use the standard deduction chart for people age 65 or older or blind. It is also possible that you may qualify for the Credit for the Elderly or the Disabled.
Q: Can summer camp expenses be deducted as child care expenses?
Helen Huntley: Yes if it's a day camp. No if it's an overnight camp.
Q: I had a $7,000 capital loss that I claimed last year. How do I resubmit it this year?
Helen Huntley: I assume that you claimed the loss on your 2002 return but were only able to use part of it. Your unused loss can be carried over to your 2003 return on line 14 of Schedule D.
Q: My son received forms 1098-T and 1099-Q. He has received a Bright Futures scholarship. Do I need to account for those amounts received on my 1040?
Helen Huntley: Scholarships do not have to be reported so long as they do not exceed expenses for tuition, fees, required books, equipment and supplies. Also, the student must be a candidate for a degree at an accredited institution. Scholarships that pay for room and board are taxable.
Note that expenses that are covered by a tax-free scholarship cannot be used to qualify for any of the education tax breaks such as the Lifetime Learning Credit.
Q: Ordinary dividends vs qualified dividends? I have had my stock holdings for 20 to 30 years, and I still pay top tax dollar, at the ordinary dividend rate. Why?
Helen Huntley: Some dividends are "qualified" and entitle you to lower tax rates and some are merely "ordinary." If you own shares of stock in a company, call the company's investor relations department to ask why your dividends are not qualified.
If your stock holdings are in the form of mutual funds, the issue is more complicated. Even though your distributions are called dividends, some or all of them may come from capital gains or from interest earnings, neither of which would qualify for the special tax treatment. Sorting this out has been so confusing that some mutual fund companies and brokerage firms sent out wrong information and have been issuing corrected 1099 forms.
Q: In the past, on the advice of my tax preparer, my wife and I have always taken the standard deduction rather than itemize. My question is: We both pay a monthly fee for long term health insurance. For 2003, can we deduct that amount from our income?
Helen Huntley: Only if you itemize and maybe not even then. Premiums for qualified lnog-term care insurance as well as for other types of health insurance are classified as medical expenses, which are only deductible to the extent that they exceed 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $40,000 and you had $5,000 in medical and dental expenses, only $2,000 of those expenses could actually be deducted. You would then add the $2,000 to your other itemized deductions such as charitable contributions, real estate taxes and mortgage interest. Only if the grand total exceeded your standard deduction would it pay to itemize. Most likely your tax preparer's advice still holds true for your situation.
Q: If you got an $800 tax credit in August, then discover your refund this year is less than that, do you owe the difference? Wasn't the tax check in August effectively an advance on your tax refund?
Helen Huntley: The August check was not an advance on your refund. It was an advance on the child tax credit, which is just one of the factors taken into account in determining whether you get a refund or owe money.
When you do your return, you will need to fill out the child tax credit worksheet. The money you already got will be subtracted from your maximum child credit. However, your maximum credit will not go below zero.
For example, with two children, your advance credit was $800. When most two-child families do their worksheets, they will find they qualify for another $1,200 ($2,000 minus the $800 received in advance). But if it turns out your income was too high to qualify for any advance credit, you don't get any extra money, but you also don't have to pay back the $800 you already got.
After you have figured out your child credit and all the other stuff on your return, you will calculate how much tax you owe and subtract the tax you paid in advance. The bottom line may be that you owe the government or that the government owes you.
Q: When my dad died, he left his home to me with a life interest to his widow. She sold her interest to me last year and then I sold the house. How do I figure the taxes? According to the IRS, the tax basis of inherited property is the value at the date of death. How can I determine what the value of the house was more than four years ago? Since the house was not mine to sell until my dad's widow relinquished her life interest, shouldn't the cost basis be the value at the time I bought the life interest? Does the amount I paid for the life interest fit in somewhere?
Helen Huntley: The tax basis for inherited property is the value at the date of death. In your case, the original basis was the market value when your father died minus the market value of your stepmother's life interest. What you paid for that interest then would be added to your basis.
It is up to you to come up with a good faith estimate of the market value to use as your basis. St. Petersburg accountant Celia Hall says you might hire an appraiser to make an estimate for you, particularly if the house sold for a hefty price say $300,000 or more.
Or you could do your own research, perhaps consulting with the county property appraiser's office and with a real estate agent. Some of the information to collect would be the property appraiser's assessment of the property's value, sales prices for comparable houses and how much property in the area has appreciated since your father's death.
One option would be to work backward from the sale price, subtracting the estimated appreciation since your father's death. Hall suggests attaching something to your return explaining the method you used to estimate the property's value.
Q: Who qualifies for the earned income tax credit and how much is it?
Helen Huntley: You have to have earned income to qualify, just not too much of it. The maximum qualifying income for 2003 returns is $11,230 with no children, $29,666 with with one child and $33,692 with two. Add $1,000 to the limits for married couples who file jointly. Combat pay for people serving in the military does not count. The maximum credit is $382 if there are no children, $2,547 with one qualifying child and $4,204 with two or more qualifying children.
More information is available on the IRS Web site (www.irs.gov), at IRS offices or by calling toll-free 1-800-829-1040.