As tax-filing deadline edges closer, hundreds of you submitted questions to Internal Revenue Service agents during our online StarNet chat a few days ago. For those who missed it, here are some of the questions that might apply to a broad swath of tax filers. The answers were provided by locally based IRS agents Ted Spencer, Olivia Wells, Barbara J. Ericks and Hildegard A. Howard; and IRS spokesman Bill Brunson.
You can download the publications and instructions they refer to at IRS.gov, under Forms & Pubs; or pick up copies at the Tucson IRS office at 300 W. Congress St. For other questions, call 1-800-829-1040.
REAL ESTATE
Q: I had debt forgiveness from a mortgage short sell. I already submitted my taxes, but received the form from the bank after doing the taxes. How do I submit the updated info?
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A: You should amend your return on Form 1040X. Also, refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Q: Am I able to claim interest on my mortgage even though I did not make a payment last year?
A: If you received a Form 1098 from your lender, which reflects mortgage payments made by you, then the payments are deductible as an itemized deduction on Schedule A.
Q: Is interest I paid on a home equity line of credit deductible on my federal return?
A: You can deduct home equity interest (secured by a first or second home) on Schedule A. The amount of interest you can claim for this purpose may be limited by $100,000 of indebtedness (married filing joint return).
Q: Is a second home eligible for the home tax exclusion upon sale, or is only my primary residence? Can I move into my second residence and make it my primary? How long must I live in it?
A: In general, you are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period before the sale of your home. Refer to Publication 523 for the complete eligibility requirements as well as exceptions to the two-year rule.
Q: My mother died a few months ago. My siblings and I just sold her house in which we will split under terms of her will. I will receive about $40,000. What sort of taxes am I looking at? Sales, capital gains? Can I put the money in an escrow-type account to purchase a home for myself?
A: Based on the simple scenario provided by your question you may not have any tax due on the distribution from the sale of the distributed property. Please keep in mind growth on reinvestment of those proceeds will have future tax implications.
Q: I owned a property outside the U.S. long before I became a U.S. citizen. What tax obligations do I have on the sale of the property?
A: If you are a U.S. citizen with income from sources outside the United States you must report all such income on your tax. This applies to earned income such as wages, etc., and unearned income such as capital gains.
Q: I sold a vacation home for a loss this year. I am carrying the loan for the buyer over 10 years at 8 percent interest. How do I put these two things (sale and loan) on my taxes?
A: Your sale will be reported on Schedule D, and interest income on Schedule B.
Q: I sold a small parcel of property in New Jersey this year that I obtained by inheritance over 10 years ago. It has appreciated since I acquired it. How do I handle reporting this on my 2010 federal taxes?
A: Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. This is true regardless of how long you actually held the property. Use Schedule D of form 1040.
Q: I sold my residential rental on installment. I am also paying off the remainder of my own loan against the sold rental. I am paying the real estate taxes on the property and interest on my loan out of the money I receive from the installment sale. Since I no longer can charge that interest and real estate tax as an expense on Schedule E, where, on what form do put these expenses - real estate tax and the interest I pay?
A: You may not own the property anymore, but you still appear to have investment expenses, specifically interest and taxes. Investment interest is deductible, subject to certain limitations, on your 1040 Schedule A. See Form 4592. Taxes are also deductible on Schedule A.
INCOME
Q: I made $29,081. Do I need to file a tax return?
A: Your filing requirement depends on your filing status. Check Table 1-1 in Publication 17.
Q: What is the income limit for filing to be necessary?
A: If you are single and under age 65 then you must file if your income was at least $9,500. Other amounts apply for different filing statuses. This information can be found in the front of the instructions to Form 1040.
TAX CODE CHANGES
Q: Have there been any changes in the 2011 tax code since 2010?
A: If you look at the first page in Publication 17 you will find a brief summary of changes for the 2011 tax year.
DEPENDENTS
Q: My son goes to the UA full time. He made $7-$8K last year working part-time. We use him as a deduction because he lives at home full time. Does he have to file taxes also?
A: Generally, if he had taxes withheld he should file but he cannot claim his own deduction since you already took it.
Q: My son attends the UA. He received a 1098T for $16K. Is he eligible for the various education credits? I put him down as eligible as a dependent, but I did not take him as a dependent. He earned $6K working part time.
A: You may claim the various education credits if you paid qualified educational expenses for an eligible student who qualifies as your dependent and can be claimed by you.
Q: If one is partially supporting an unemployed partner, can that person be listed as a dependent?
A: The answer to this question depends on whether or not your partner can be claimed as a dependent on someone else's return, how much your partner made (unemployment?), whether or not you support your partner more than 50 percent and if your partner is a U.S. citizen. Please search "dependents" on www.IRS.gov.
Q: If I am not claiming my son on my taxes this year (his dad is), can I claim my child care costs, because I pay for them solely?
A: Please refer to publication 503 Child and Dependent Care Expenses; also refer to Publication 17 page 218.
Q: My husband and I both work. When school is not in session we need to find day care for our 11-year-old. We have sent him to various day camps during the summer: art camps, drama camps, sports camps, science camps, Spanish camps, Pima Community College camps. Can I deduct these camps as day care for my child?
A: The cost of sending your child to an overnight is NOT considered work-related expense. However, a day camp may be a work-related expense, even if the camp specializes in a particular activity such as the sports camps, drama camps, etc.
MEDICAL EXPENSES
Q: Can a person claim a deduction for orthodontist expenses they are paying for a grandchild that lives with them? My daughter and my two grandsons live with my husband and myself. My daughter has 80 percent custody.
A: Medical expenses are usually claimed on Schedule A when itemized deductions exceed the standard deduction. You may typically only claim medical expenses paid for you, your spouse or your dependents. So, the ability to claim the orthodontia expense depends on whether or not your grandchild is a dependent.
Q: Assisted living question: As a result of a serious illness in September, my mother moved from independent living to assisted living in a licensed assisted living facility. She is unable to dress herself, toilet, transfer, bathe, or move around independently. Her monthly cost is divided into rent (which includes meals) and assisted living. Can I write off both of these costs under long-term care medical expenses?
A: If you claim your mother as your dependent then you may include the cost of her medical care as a medical expense.
Q: Am I able to claim a deduction from my purchase of supplemental vitamins? My physician asked me to increase Vitamin D and E. I have itemized receipts for such. Can I deduct?
A: Expenses that are beneficial to one's health are not necessarily deductible. (Reg 1.213-1). Medicines need to be legally prescribed under Section 213(b). Vitamins do not qualify.
RETIREMENT/SENIORS
Q: I retired last year and started consulting for a California company. The workload has increased to the point I am making about three times what I had originally planned. How do I go about paying my taxes, Social Security and Medicare quarterly, or is quarterly reporting required when you get a single 1099 form at the end of the year for hours billed?
A: In order to avoid estimated tax penalties, you may need to pay your income and SS taxes quarterly. Please see our Publication 505.
Q: I'm a senior looking to possibly itemize this year (2011). I haven't used my charitable contributions for 2010. If I itemize, can I use more than one year of contributions (2010 and 2011) 2010 being the carry-over?
A: The 2010 contribution deduction is a lost deduction unless you amend your 2010 return if you have enough to itemize. The contribution deduction can only be taken in the year incurred.
Q: I have received Social Security since November of last year. I have no other income from last year. Do I need to file? Also, how much income can I withdraw from my IRA this year so as to avoid income tax?
A: Generally, if Social Security benefits were your only income for 2011, your benefits are not taxable and you probably do not need to file a federal income tax return.
If you receive income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.
If you are single and over age 65 then you must file if your income was at least $10,950. The limit may be increased for 2012. Other amounts apply for different filing statuses. This information can be found in the front of the instructions to Form 1040.
Q: My wife reached 70.5 years in May 2011 and still works full time. Does she need to receive a Required Minimum Distribution from her retirement plan starting April 1, 2012?
A: Yes. Upon reaching age 70.5, IRA withdrawals must begin no later than April 1 of the following year.
REFUNDS, AUDITS, ETC.
Q: It's been five weeks since I filed with TurboTax. I had a direct deposit date of 2/28 that slipped and now all I see on 'where's my refund' is the status of 'Your tax return has been received and is being processed.' What is the deal? I am not alone from what I have been reading on the Internet
A: While most refunds from electronically filed returns will be paid within 21 days, some may take longer. If it is past that time, you can call our Refund Hotline at 800-829-1954. Refund times are up slightly from two weeks this year due to additional filters we put in place.
Q: If someone owes quite a lot of income tax due April 15, does it have to be paid in one lump some or can it be spread out over a few months? Is there a penalty for doing something like this?
A: You can enter into an installment agreement to spread out the tax payments. Interest will continue to accrue and there may be a late-payment penalty. To ask for an installment agreement, you can apply online at www.irs.gov or use Form 9465.
Q: What percentage of returns are picked for review and how many of those are audited?
A: The IRS generally audits approximately 1 percent of filed income tax returns. The percentage varies by income level and other factors. All returns are subject to review at some level.
Q: After not filing for many years, how do I start filing? How many years back do I go?
A: We urge you to take care of this as soon as possible. You would be best served by calling our toll-free line Monday through Friday 7 a.m. to 7 p.m. to start that procedure as needed. The number is 1-800-829-1040.
HOME OFFICES/SMALL BUSINESSES
Q: I'm self-employed with a home office. I had security screens installed on all the windows of the house. I put in the actual cost of the security screens for the windows of my office (Form 8829, Line 21), but later there is a place to enter home improvements that add to the value of the home (Line 39a), which affects the depreciation. Do I also enter it there? Or should I not claim the security screens as an improvement? Or do I reduce the amount entered under home improvement by the actual cost of the screens for the windows of the home office?
A: In general, if the security screens will be in service for longer than a year then they are considered improvements that increase the value of the home. They are then depreciated. You do not claim the expense in both spots.
Q: Small-business question: If a computer server is leased, then purchased at end of lease, how is it depreciated?
A: Generally, a leased piece of equipment is not depreciated by you; you expense the cost.
DEDUCTIONS, TAX CREDITS
Q: I installed solar, completed and paid for in December 2011. Tucson Electric Power rebate received in January 2012. Do I claim the whole cost of solar installation in 2011 for the 30 percent federal rebate? Then claim the TEP rebate in 2012 as income (they will 1099-misc me in 2012)? Or deduct the rebate now on 2011 taxes?
A: Generally you will apply the entire credit to the year paid, in this case 2011, and include your rebate in 2012 as it was received then. Refer to Sec 48(a) for details.
Q: For 2010 tax year I did not use the state refund as a deduction, using the sales tax option instead. Do I need to report this as income since I received a 1099-G?
A: In general, if state taxes paid did not provide you with a tax benefit in a prior year then the refund of those taxes does not create income in the current year.
Q: If you make a donation that qualifies for the Arizona Tax Credit (Working Poor, Private School, Public School), can you also deduct that amount from your federal Schedule A?
A: You may include the qualifying donation on your federal return as an itemized deduction. However, you will need to exclude that amount on your state return if you are taking the state credit. Including the itemized deduction on your state return and then taking the state tax credit will result in a double deduction.