B97 - Tax Zone

Tax Zone - FAQ's

CHARITY

I gave more to charitable organizations this year than I can deduct. Can I roll over some donations to next year?   The maximum deductible contribution generally is 50% of your AGI; some types of contributions are limited to 30% or 20% of AGI. Contributions in excess of the limit may be carried forward each year for up to 5 years or until used. So, you can carry over your excess and treat it as a charitable contribution made in 2008.

What is the limit for charitable donations?    The deduction limit for most contributions is 50% of AGI (30% for most appreciated property). Contributions in excess of the limit can be carried over for up to 5 years.

HOMEOWNERS

I am a new homeowner. What expenses can I deduct this year? We're assuming you will be able to itemize deductions. You can deduct points or loan origination fees, mortgage interest, and real estate taxes paid on the home. For 2007 only, you can deduct the cost of qualified mortgage insurance on your residence if you itemize deductions. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance, as defined by Section 2 of the Homeowners Protection Act of 1998, as in effect on Dec. 20, 2006. The deduction is allowed only for mortgage insurance premium contracts issued during 2007. Mortgage insurance premiums paid in advance for periods after 2007 are not deductible unless the insurance is provided by the Veterans Administration or Rural Housing Administration. See the Schedule A instructions for more information. Other common deductions include any balance due on last year's state return, state withholding from your W-2, personal property tax, sales tax if elect to deduct it instead of state income tax, charitable donations, medical expenses in excess of 7.5% of your adjusted gross income, tax return preparation fees, and any unreimbursed employee business expenses.

Can I deduct the cost of a new roof even though I sold the house last year? The cost of the roof isn't deductible per se. If you put the roof on before you sold the house, you can add the cost of the roof to your cost basis in the home. If you put on the roof after you sold the house, the cost is an expense of the sale.

I joined the rush to refinance last year. Now I hear that cutting my mortgage interest rate will trigger a hike in my tax bill. How can that be? It happens because a lower interest rate means you paid less interest. The good news is, of course, that you've saved money. But the not-so-good news is that when your mortgage interest deduction decreases, your taxable income - and your tax - increase. However, the savings is worth more than your tax deduction for the interest. For example, if your combined federal and state marginal income tax rate is 30%, each dollar by which you lower your interest expense increases your savings by 70 cents ($1 interest saved reduced by 30 cent increase in tax). And you may have a larger deduction than you think: Any points you paid to refinance are deductible as mortgage interest, prorated over the term of your loan. Moreover, if you have not yet deducted all of the points paid to obtain the prior mortgage, you can deduct the balance this year.

MARRIAGE / DIVORCE

When is it advantageous for a married couple to file separately rather than jointly? Not very often. However, depending on how your income is divided, for example, if the lower-income spouse has a significant amount of medical expense or employee business expense, it may be advantageous. Be aware that filing separately will make you ineligible for several tax benefits.

Is alimony income taxable? In general, alimony, separate maintenance, and similar payments from your spouse or former spouse are taxable to you in the year received. The amount is reported on line 11 of Form 1040. You cannot use Form 1040A or Form 1040EZ. Note, however, that child support payments are not taxable to the recipient or deductible by the payer.

I am legally separated but the divorce is not yet final. Do I file as single again or should I file as married filing separate? You can use the single filing status if you are legally separated under a separate maintenance decree. You may also qualify for the head of household filing status if you have a child or other relative that you support.

I'm recently divorced. Can I deduct my share of the legal fees? Legal fees connected with getting a divorce are personal and not deductible, except to the extent of any fees for tax advice specifically itemized on a statement from your lawyer. Please contact a tax professional for details.

401K

I changed jobs in 2007 and I rolled over my entire 401(k) to an IRA. Do I have to report anything on my tax return? Yes. You must enter the amount you rolled over on line 16a of Form 1040, enter -0- on line 16b, and enter the word 'Rollover' next to line 16b.

I'm 39, and I lost my job when my employer went out of business. I had to take my 401(k) money to live on. What will this do to my taxes? It will increase your tax liability quite a bit. Your 401(k) distribution is fully taxable, except for any after-tax contributions you made. Moreover, because you are under 59 1/2 and are not disabled, the taxable amount is subject to a 10% penalty unless an exception applies. If it's been fewer than 60 days since your received the distribution, and you have any funds available, you may want to consider rolling over to a traditional IRA an amount up to but not exceeding the amount of the 401(k) distribution. That way, you can withdraw funds as needed and pay tax and penalty only on the amounts you withdraw. Any funds you can leave in the IRA will remain tax free until withdrawn. Note that the 20% income tax that was withheld is taxable and subject to penalty, unless you can put funds equal to that amount into an IRA within the 60-day period.

I have money that is deducted from my paycheck every two weeks for my 401(k). How do I report this on my income tax return? The amount you contribute to your 401(k) isn't taxable. Box 1 of your W-2 will show the wages after reduction for your contributions. Because the amount you contributed was not included in your income, you can't claim a deduction for this amount.

MOVING

We moved this year, and my company paid for the move. Can I still deduct my moving expenses?   You cannot deduct expenses for which you were reimbursed. But if you paid eligible expenses for which you were not reimbursed, you can deduct them by completing Form 3903 and attaching it to your return. You do not have to itemize deductions to take this deduction.

We just moved into a new home. I received information that some of our moving expenses may be deductible. What can I deduct? In general, unreimbursed costs for transporting yourself, your family, and your household goods to the new home are deductible if you moved for work-related reasons. Deductible expenses include the cost of traveling from your old home to your new home, the cost of lodging (but not meals) en route, the cost of shipping your car (or if you drive, the actual cost of gas and oil for making the trip or 20 cents per mile), the cost of disconnecting and connecting utilities, and the cost of shipping your possessions. You can't deduct expenses related to selling your old home or purchasing a new home, any part of general repairs, general maintenance, insurance, or depreciation for your car, temporary living expenses in the area of your home, or the cost of side trips you make during your move-related travel. You must meet a time test (employees must generally be employed full-time at the new location for at least 39 weeks in the first 12 months following the move - the test is stricter for self-employed individuals). Your new job must also be at least 50 miles farther from your old home than your old job was from the old home. Consult your tax professional to determine if your expenses are deductible.

I moved last year and established residence in my new state. Do I need to file two state returns or one? Probably two, but it depends on when you moved, the states you moved to and from, whether you had income in both states, amd whether the income was sufficient to meet the requirements for having to file a return.

DEPENDANTS

What is the child care credit and how do I claim it? The child care credit is available to parents who are working and who pay someone else to care for a child under age 13 while they work. Parents who are diabled or students also may be able to claim the credit. The credit is equal to a percentage of eligible expenses, depending on your adjusted gross income. For each care provider you will need the caregiver's name, address, tax ID number, and the amount paid to the provider. Complete Schedule 2 if you file Form 1040A and complete Form 2441 if you file Form 1040.

Is the cost of summer camp eligible for the child care credit? It depends. To be eligible for the credit, it cannot be overnight and must take the place of day care.

If I have two kids in day care, am I entitled to a credit or exclusion of up to $5,000 for each child, or does the $5,000 figure apply to both kids?   If you use an employer-provided child care program to pay the expenses, you can exclude from your taxable wages up to $5,000 of the amount used for child care, no matter how many children you pay child care for. If you pay the expenses yourself, you can take a credit based on up to $3,000 of expenses if you have one qualifying child or up to $6,000 if you have two or more qualifying children. If you pay the expenses under an employer-provided child care program and pay expenses yourself, you may be able to claim the credit for expenses you pay on your own (but payments you exclude from your wages reduce the $3,000 and $6,000 amounts and are not eligible for the credit).

Can I claim an exemption for my son if he made more than $7,000 and is still a full-time college student? You generally can claim your son as a dependent if he was under age 24 at the end of the tax year and he did not provide more than half of his support for the year. See IRS Publication 17 for more information.

LIFE EVENTS

If I did not file my 2006 tax return, will the IRS know and keep my 2007 refund? At this point, the IRS may not have your missing 2006 tax return on the radar screen and they won't withhold your refund. However, you should file it as soon as possible.

My daughter, who turned 18 years old in October, is a dependent, attends high school, and has a part-time job. What are the triggers for her having to file a tax return? If she qualifies as your dependent, she will have to file a return if her income from her job is over $5,350, if her unearned income is more than $850, or if her total income is more than the larger of (1) $850, or (2) earned income (up to $5,050) plus $300. If her income is lower but federal income tax was withheld, she'll want to file to have that tax refunded.

I filed for divorce in January 2008. Can I file as a single person for 2007? No. Your status as of December 31 of the tax year is what you are for the entire year. Therefore, you must file as married filing joint or married filing separately. But you may be treated as unmarried for tax purposes if you did not live with your spouse at any time during the last 6 months of the year and you maintained a home for your child. See IRS Publication 501 for more information.

What - if any - home improvements and repairs are deductible? I recently repaired some plumbing in my residence, which cost $1,300. Is this type of repair deductible? The cost of home improvements to your personal residence is not deductible. Instead, the cost is added to the basis of your home and will reduce the taxable gain, if any, when you sell the home. The cost of repairs is neither deductible nor added to the cost of your home. The cost of repairs incurred as part of a major improvement is included in the cost of the improvement.

When a family member dies, what are his or her tax filing requirements? Someone in the family needs to take responsibility for filing a final tax return if a return is required. The usual gross income filing requirements apply. If a refund is due, Form 1310 generally must be filed with the return. An estate income tax return (Form 1041) is required if the estate has gross income of $600 or more. For higher value estates ($2 million for 2007 and 2008), an estate tax return (Form 706) is required. Normally, an executor or representative is appointed to take care of these duties. We recommend you consult with a tax professional to learn more about wrapping up the tax obligations of a decedent.

MORTGAGE

What part of my home mortgage payments can I deduct on my tax return?   You can deduct the mortgage interest and real estate taxes paid during the year. This information will be reported to you on Form 1098 or an equivalent. For 2007 only, you can deduct the cost of qualified mortgage insurance on your residence if you itemize deductions. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance, as defined by Section 2 of the Homeowners Protection Act of 1998, as in effect on Dec. 20, 2006. The deduction is allowed only for mortgage insurance premium contracts issued during 2007. Mortgage insurance premiums paid in advance for periods after 2007 are not deductible unless the insurance is provided by the Veterans Administration or Rural Housing Administration. See IRS Publication 936 for more information.

Why is my mortgage interest reported to me on Form 1098? Where do I report it on my tax return? The IRS requires Form 1098 reporting to give you and the IRS a record of the amount of mortgage interest you paid each year. If you itemize your deductions, enter the amount from the 1098 on the line provided on Schedule A. Typically, when you own a home it is to your advantage to itemize. The real estate tax you pay, directly or through escrow payments, is also deductible.