How can I legally reduce my income?

Q: My children attend private school on a scholarship based on our family’s low income. I recently got a part-time job making $8,000 a year that will put me $4,000 over the limit if I keep it all year. I need to find a legal way not to count my income. Can you help?
A: You could reduce the adjusted gross income on your tax return by contributing that $4,000 to a deductible IRA. Or, put it into a flexible spending account for medical or child care expenses if your employer offers one (Caution: you would lose any money you had not spent on qualifying expenses during the year.)
But before you do anything, take a close look at the school’s financial aid form. It might require you to add IRA and flexible spending account contributions to your adjusted gross income.

Donor-advised funds can be a great way to give

The fastest-growing forms of philanthropy is the donor-advised fund. These funds grew 25 percent last year, to $23.3-billion, according to a survey by the Chronicle of Philanthropy. The funds serve as conduits between donors and the charities they want to support. Why would you need one? Largely for the tax advantages, particularly if you want to use appreciated real estate, securities or an interest in a business to make your charitable contribution. Say you've got a piece of property you bought for $100,000 and you're going to sell for $500,000 and you'd like to give $100,000 of the proceeds to charity. You can give the donor-advised fund a one-fifth interest in the property before you sell it, avoiding capital gains on that amount. When you sell the property, the fund gets the $100,000 and you get the charitable deduction. The fund then holds the money until you instruct it to parcel it out to the charities of your choice. You could, for example, use it to pay $10,000 a year to your church for the next 10 years. Typically the fund would invest the money and as it grew, you would have even more to give to charity. It's a slick concept.

Tampa Bay donor-advised funds include the Community Foundation of Tampa Bay, Raymond James Charitable Endowment Fund, Pinellas Community Foundation and Christian Legacy Foundation. 

Don't miss out on your stimulus check from the IRS

The IRS says 405,968 Floridians who may be eligible for a $300 or $600 economic stimulus payment still haven't filed for it. That's 29% of the potential filers. Who are those people? Social Security recipients and disabled veterans who don't normally file a tax return.

The IRS announced a new program today to reach out to them. Nationwide, about $5.2-million potential filers are unaccounted for, or about 26% of filers.  Here's a state-by-state breakdown. The potential filers list includes 14,662 in Tampa, 11,605 in St. Petersburg, 4,817 in Clearwater and 3,474 in New Port Richey. Click here for the IRS' complete report on Florida cities. Most of those who did not file have not filed a tax return in for at least the past three years. As a result, the IRS says they may not be aware that they need to file a return to get a stimulus check.

You must file by Oct. 15 to receive a stimulus payment this year. Get a Form 1040A here.

The outreach initiative will partner with state and local governments and gruops such as AARP, National Council on Aging, United Way of America and National Disabilty Institute.

Still looking for your check? Here's the payment schedule for returns that were processed by April 15. The intial wave of direct deposit rebates in May went to people who had a direct deposit REFUND on their tax returns. I've heard from many people who mistakenly thought that just because their Social Security check is direct deposit that their rebate would be in the first wave of those delivered.

Questions? Call the IRS toll-free at 866-234-2942.

How should I handle a 401(k) withdrawal?

Q: My job was eliminated several months ago. My family and I have managed to make ends meet since then, but I am now considering a request for my 401(k) funds (about $17,000). Should I request a direct distribution to me for the full amount to utilize for my family’s day-to-day expenses if required or should I process a rollover that would require me to place the funds within an IRA account within 60 days? Chances are good I will have full-time employment within the next 30 days, but I’m not totally sure.

A: Usually the best approach is to open an IRA with a mutual fund company or brokerage firm and arrange for a direct trustee-to-trustee transfer of the money. If you ask for a check, the 401(k) custodian will withhold 20% for taxes, which creates problems if you want to do a rollover.

However, you might want to leave the 401(k) money right where it is if the plan allows it and if you are between 55 and 59 1/2. There’s no 10 percent penalty on a 401(k) withdrawal if you were at least 55 when you left the company. For an IRA, the penalty is eliminated at 59 1/2.

How are you spending your IRS stimulus rebate? Can you keep food and energy costs from consuming it?

Times readers have lots of creative uses for their rebate checks, from electronics and travel to repairing old appliances and buying new ones. You already know that I spent mine on a vacation to Wyoming. However, Slate columnist Daniel Gross says rebates aren't going to stimulate the economy much because a big percentage of the money will be consumed by higher energy and food costs.

Gross raises an important point. However, many of us have options--we don't have to sit back and let food and fuel consume our entire rebates. Unless you are required to drive as part of your job, you may be able to drive less by car pooling, combining errands, shopping closer to home, walking, biking or even taking the bus. With electricity prices on the way up, it pays to push that thermostat up. You also can cut food costs by opting for fewer processed and packaged foods, eating less expensive proteins and brown bagging it when you are working or out running errands. 

Why is our income tax stimulus rebate less than I expected?

Q: We have just received by direct deposit to our bank an amount of $600.00.  We filed a joint return with valid security numbers and showing that we both had tax liabilities.  I thought that we should have received $1,200 according to our filing status. Is there an answer to this problem?

A: In order to receive more than $600, you needed to have a 2007 tax liability of more than $600. The stimulus payment for a couple (no kids) is your tax liability with a minimum of $600 and a maximum of $1,200. For a single person (no kids) it's your tax liability with a minimum of $300 and a maximum of $600.

How do I let the IRS know I've moved?

Q: We are going back north and are worried our rebate check will not reach us. What should we do?

A: File this change of address form with the IRS and, just in case, fill out a form with the post office to have your mail forwarded.

IRS getting an early start on rebate checks

President Bush said this morning that rebates will start going out Monday, four days earlier than previously announced. The first rebates will go out by direct deposit to taxpayers who included bank account information on their tax returns and whose returns were processed by April 15. About 7.7-million people are expected to get their rebates electronically. The IRS plans to start mailing paper checks May 9 and complete the first wave of mailings by July 11. People who filed later will get their rebates later. In fact it's not too late to file a 2007 return and get a rebate.

Rebates range from $300 to $600 for singles and $600 to $1,200 to joint filers, plus $300 for each child under 17.

Here's the rebate delivery schedule originally announced by the IRS.

Can I convert savings bonds to a Roth IRA?

Q:  I have about $10,000 in savings bonds stretching from 1986 to about 1999, half in parents' names and half in childrens (both 17). Would like to convert into Roth IRA contributions. What are the tax ramifications of cashing in the bonds or can I convert them?

A: No conversions allowed. If the bonds are cashed, the owner will owe income tax on the accrued interest. For students the extra income may have a negative impact on financial aid eligibility if they will be going to college in 2009. If the bonds held in the parents' name are cashed when the children are in college, the interest income may be tax-free. See details on page 55 of this document.

 

Here's your chance to ask an expert your financial questions

The Florida Institute of CPAs is celebrating "Financial Fitness Friday" Friday, April 18, by volunteering to answer your financial questions.So here's your chance to ask that question you always wanted to know but were afraid to ask me :)

Call the FICPA Financial Fitness Hotline toll-free at (800) 342-3197, ext. 554, between 9 a.m. and 5 p.m. Friday.

More information about financial topics is available at the American Institute of CPAs' "360 Degrees of Financial Literacy" Web site. 

Don't Forget: Today is Tax Day

If you haven't filed your income tax return, today's the day! Your return, or your request for an extension, should be electronically filed or postmarked by midnight tonight. Check out our tax guide for tips if you're still working on your return. If you're looking for a post office open after hours in the Tampa Bay area, try one of these:

TAMPA: Main Post Office (5201 W Spruce St) full service until midnight, New Tampa Station (16350 Bruce B. Downs Blvd) full service until 9 p.m.

BRANDON: Main Post Office (1315 Oakfield Dr.) full service until 10 p.m.

ST PETERSBURG: Main Post Office (3135 First Ave S) full service until midnight.

CLEARWATER: Main Post Office (100 S Belcher Rd) full service until 9 p.m.; drive-through dropoff until midnight.

TARPON SPRINGS: Main Post Office (859 E. Lime St) full service until 9 p.m.

In addition, many other post offices have outside collection boxes where mail is picked up until 9 pm. Just be sure to check the last pick-up time posted on the mail box before dropping in your tax return.

Can someone who gets SSI benefits qualify for the rebate?

Q:  I have an elderly friend who’s 79 and lives off Social Security payments of $600 a month.  She has not been filing taxes.  She lives in a government-subsidized housing and was told by the management of the housing that she’s an SSI recipient and not eligible for the IRS tax rebate.  However, as in your column, I keep reading that people who are not required to file should file anyway if they want to receive the rebate.  Should she file or not?

A: If she gets at least $3,000 a year in Social Security benefits (not including the SSI benefits), then she should file a return and will get the rebate. You are not disqualified because you receive SSI benefits, but the SSI benefits cannot count toward the $3,000 in required Social Security income.

Can I get a sales tax deduction for my new swimming pool?

Q: I understand that an airplane, RV, and building materials for a home improvement can be claimed as a major expense when determining the sales tax deduction.  What about if you have a swimming pool installed?

A: I think the addition of a pool would qualify as a substantial home improvement, which would make the sales tax paid on materials separately deductible. However, there is a problem. You must have paid the sales tax personally or your contract with the contractor must contain certain wording. (See p. A-5 of this document.) 

Can I take early IRA withdrawals and avoid the penalty?

Q: I have been told that there is a way to take distributions from an IRA, a little known Section t72, I believe, that allows a person once the age of 55 is reached to withdraw for five consecutive years the same amount of money. My friend has not been able to find it. Does one has to stop working completely? Is part time work allowed?

A: Yes, there is a way to take early IRA distributions without penalty under an IRS rule known as 72(t). Here's a calculator and some explanation of the rules, which are complicated. It's generally advisable to have a tax professional assist you in calculating the correct amount to withdraw. Then you absolutely must follow the schedule. Whether you work or how much your work makes no difference.

How do I handle the distribution from my IRA?

Q: Last year, I took a qualified distribution from my Roth IRA to help pay for my MBA tuition.  I elected to have federal tax withheld when I took the distribution and now I'm wondering how I report that on my 1040 form.  Do I just list the amount of the distribution on line 15b and add the tax I paid to the total payments on line 72?  That seems to make the most sense--but this is the IRS, so I'm not so sure!

A: If it is truly a "qualified" distribution, then it is not taxable. However, you have to be at least 59 1/2 or disabled for it to be qualified. Even if you are too young for it to be qualified, you don't owe tax on the part that represents the return of your contribution. Roth distributions are treated as having first come from contributions, then from earnings. So your taxable amount to report on line 15b may be zero depending on all of the above. The tax withheld would be included on line 64 since it was withheld from a 1099 form. 

Can I deduct my margin interest?

Q: I'm curious. Can I claim my stock account margin interest on my 1040? It really adds up.

A: Yes, you can deduct margin interest (attach Form 4952 to Schedule A) up to the amount of your net investment income. There are, however, some other limitations. For example, margin debt used to buy tax-exempt investments is not deductible. In addition, if you choose to include capital gains and qualified dividends as part of your net investment income, you lose the favorable tax treatment you would otherwise enjoy. So proceed with caution.

Do you need to file a second tax return to get a rebate?

Several people have asked me that question today so I thought I'd explain. One tax return is enough for almost everyone. Here's the exception. You need to file a second return if:

*You receive Social Security or VA disability benefits that you did not report on the return you filed AND

*You paid less than $300 in total taxes ($600 if it was a joint return) on the return you filed.

If the above applies to you, you should file a 1040X (amended return) following these special instructions. The Social Security or VA benefits are not reported as taxable income. They are just reported to qualify you for the minimum economic stimulus payment ($300 single/$600 married.) If you paid at least $300/$600 in taxes, you already will be getting at least the minimum payment and there is no need to file an amended return.

The clock is ticking: Have you filed your tax return?

April 15 is approaching fast, but some of us, including me, still haven't filed our tax returns. It's not that my return is terribly complicated. It's that I owe the IRS, so there's no incentive to file early. My husband and I generally do the quick version of our return early in the tax season (we always file online) to figure out whether we owe. If it looks like we might have a refund, we'll get busy with the detailed version. But this year, as usual, there isn't going to be a refund. We could file now and pay later, but it's easier to just wait until next weekend to do both. 

Our goal with withholding and estimated tax payments is to come as close as we can to breaking even, but it's a little tricky because my husband has some self-employment income and expenses.

In today's paper, I offer some tax season tips and reminders. If you've got a question, send it my way. Or check out our online tax guide.

Estimated taxes: The form is not in the mail

If you pay estimated taxes and you haven't received a form in the mail, it's time to spring into action. You'll need to get a form, either by downloading the 1040-ES right here or by calling the IRS toll-free at 800-829-3676 and asking to have forms mailed to you. The first payment for 2008 is due April 15.

IRS officials have drastically curtailed their mailing of paper forms as more people file by computer. They say about 40% of those mailed out in the past were not used. However, they acknowledge they were overzealous and cut off people who should have received by the forms. 

Can I contribute my IRA withdrawal back to my IRA?

Q: I understand that I will need to start drawing from my IRA when I turn 70 and 1/2, but I don’t need the income. Can I turn around and deposit my withdrawal back into my IRA and use it as a tax deductible contribution?

A: No. You cannot make a contribution to a traditional IRA once you reach 70 and 1/2. There is no age limit on contributing to a Roth IRA as long you have earned income. However, you can’t get a tax deduction for your Roth contribution.

It's still early to claim Pearlman fraud deduction on your taxes

Victims of the Lou Pearlman investment scam are understandably anxious to claim a tax loss. There's no question that you can claim a capital loss of the $3,000-a-year variety on your 2007 return. However, the requirements for a larger Section 165 fraud loss are much more stringent and I don't think they have been met yet. Pearlman's guilty plea helps establish that the loss was fraud, but the amount of the loss is yet to be ascertained. Trustee Soneet Kapila repeatedly has declined to estimate what kind of recovery investors might receive, saying that's premature. He has several legal actions pending, including one against HSBC  for more than $5-million. Relying on someone else for an estimate of the recovery is going out on thin ice. Some people have told me they have tried it, but the success of that strategy can't be judged until the return has been audited, which it is extremely like to be at some point down the road. (Note: The fact that you receive a refund when you file a return is not an indication of whether the return will or will not be audited.)

Jeff Coleman and Tim Kelleher at Investment Fraud Recovery Network in Clearwater say they are setting up files for Pearlman victims interested in pursuing a 165 recovery, but consider it too early in the process to file a return claiming the loss. Another Tampa Bay firm in this field of work, J.K. Harris 165 Services, is taking the position that it's reasonable to take the loss in 2007. "They go on a reasonable person's standard," said Alan Gavel, who is part of an investor group in the process of buying the company. The company, by the way, is no longer affiliated with J.K. Harris & Co., but will continue to use the name.

Here is a very interesting article that outlines the difficulty of proving a 165 claim to the IRS. Note, for example, that people who made their investment directly with Lou Pearlman are in a better legal position than those who purchased through an agent.

How do I report the gain on land?

Q: I bought a residential lot four years ago in anticipation of building a retirement home, but I never did. I sold the lot last year, resulting in a net gain of $10,504. How should this be reported for tax purposes?  I have reviewed the IRS website and there are so many publications and worksheets related to capital gains/losses I am now totally confused. There were no improvements made to the property.

A: You have a capital gain, which should be reported on Schedule D. If you had built a house and rented it out, your situation would be more complicated. But in this case, you probably can figure it out yourself. Filling out Schedule D is a lot easier if you use tax softare, either from a box or online. Go to www.irs.gov and click on "free file" to see if you qualify for free filing. If not, you can still do your taxes online (for a fee) with one of the filing companies, knowing it has met IRS standards.

Here's when your rebate check is coming

The IRS just announced the schedule for delivering rebate checks. You go to the head of the line if you signed up for direct deposit when you filled out your tax return. Your rebate check will be deposited in the bank account you specified on your return and you should have your money in the first half of May. Mailed checks will go longer, but everyone who filed a return by April 15 should have a rebate by July 11.

People who file returns after April 15, will still get their rebates; it will just take a bit longer.

The IRS also posted this rebate calculator to help you figure out what you've got coming to you.

How do the taxes work on my H savings bonds?

Q: Our H savings bonds reach final maturity in July. There is a taxable interest amount shown on the face of each bond. How is this reported to the IRS? Must the bonds be redeemed at one time?

A: The deferred interest shown on your bonds is taxable when the bonds are redeemed or they reach maturity, whichever comes first. Delaying redemption would mean you would not be earning any interest on the money but you would still owe the taxes. You report the deferred interest on your 2008 tax return.

What tax breaks would be right for me?

Q: I would love to have a little bit more insight on what tax credits and breaks are right for me. I am single with no children. My annual salary is $30,000. I am clueless when it comes to tax time and this year I want to change that. Which tax credits would be right for me?

A: Tax breaks come in two primary categories: credits, which are subtracted from tax owed, and deductions, which are subtracted from taxable income. A person in your situation might make an IRA contribution and qualify to deduct it or take a class to improve job skills and qualify for the Lifetime Learning Credit. The credits and deductions in the tax code are Congress' way of rewarding you for spending your money in certain ways. I applaud your desire to educate yourself to make sure that you aren't missing out. I recommend getting a tax book such as J.K. Lasser's Your Income Tax 2008. It is dry reading, but you'll learn a lot.

But now for the sad reality: Most people can't actually take any of those credits and deductions. For example, I won't get any tax credits on my return this year; now that my children are grown and I'm not paying their college tuition, I don't qualify to claim any credits. I do take deductions, but most people don't unless they are homeowners with mortgage interest and real estate taxes to deduct. Some deductions, such as IRA contributions and student loan interest, are available to anyone. But you have to itemize to claim most deductions, such as charitable contributions, and you won't do that unless all your deductions are more than the standard deduction ($5,350 this year for a single person).

Congress says sorry, no rebates for elderly whose kids claim them as dependents

Q:  I understand that people making at least $3,000 (in wages or Social Security benefits) need to file to get the rebate and that you cannot file if you're claimed as a dependent on other people's taxes. I claim my parents as dependents on my return. For a child who doesn't file, the taxpayer filing the 1040 receives $300.  Does that mean that the taxpayer who is filing the 1040 receives that money on the elderly person's behalf, same as for a child? I would like to claim my parents as I usually do, except that now I'm afraid they won't get the $600 they're due as a couple on Social Security if I were to claim them.

A: Your fears are correct. As far as the rebate payment is concerned, your parents are in the same category as children 17 and older who are claimed on their parents' return. The parents don't get the rebate and neither do the children since they are claimed on their parents' return. The $300 per child rebate applies only to qualifying children 16 and younger. Either you get the personal exemption for your parents or they get the rebate, but not both.   

How do you report an IRA withdrawal?

Q: When filing a tax return where the only income is from an IRA withdrawal, do you use the standard tax form? If so, do you take the standard deduction and personal exemption and if it results in a negative figure are no taxes owed? Or is there a special form for IRAs?

A: You can use Form 1040 or 1040A to report an IRA withdrawal and calculate whether you owe income taxes. Yes, you take your personal exemption and either the standard deduction or itemized deduction and the bottom line will determine how much, if anything, you owe. You need to fill out a special IRA form (Form 8606) only if certain situations apply, explained here on page 22-23 (the section about IRA distributions). The form is mainly for people who have made nondeductible IRA contributions in the past, who are converting to a Roth IRA or who are taking distributions from a Roth IRA. Be sure to report your Social Security income (some of which may be taxable) to make sure you qualify for the rebate. If you need help, go here to find an AARP tax volunteer site.

Annuities can be tax time bombs

The tax deferral annuities offer is one of their big selling points. But people who buy them often don't understand that these investments carry negative tax consequences too. Today's column is about a couple (Keith and Dolores Cutler, shown here) who learned about one of those consequences the hard way. Here are some things you need to know about annuities and taxes:

Annuities and taxes

- Taxes are deferred as long as the money stays in the annuity.

- When an annuity is purchased outside a retirement plan (with after-tax dollars), withdrawals are partly taxable/ partly tax-free return of principal.

- Withdrawals are taxed as ordinary income, not capital gains, even when they are invested in stocks.

- Taxes may continue to be deferred in a direct annuity-to-annuity transfer between companies, known as a 1035 exchange.

- An heir who inherits your annuity is taxed the same as you would be. There is no step-up in basis at your death.

[Times photo]

Can I make an additional nondeductible IRA contribution?

Q: Could someone who is age 45 and has already made the maximum allowable IRA contribution for 2007 make a non-deductible contribution for 2007 (I assume that interest and dividends would accrue tax-deferred) and, if before they reach 59-1/2 they needed to get the non-deductible contribution dollars back, is it possible to do so without paying taxes or penalties for early withdrawal?

A: First: If you already have made the maximum IRA contribution for 2007 ($4,000 since you are younger than 50), you cannot contribute any more to any type of IRA. You are, however, free to make a 2008 contribution (up to $5,000).

Second: The deductibility of your contribution is not determined when you make the contribution, but when you file your tax return. If you want your contribution to be nondeductible, then don't deduct it. Instead, file a Form 8606 with your tax return. If you already filed your 2007 tax return, you can amend it by filing a 1040X. Of course, you will have to pay taxes if the amount previously deducted is added back into your income.

Third: Sadly, you are not allowed to withdraw only your nondeductible contributions from an IRA. Once you have made nondeductible contributions, all withdrawals will be partly taxable and partly tax-free. The taxable part will be subject to the 10 percent penalty for early withdrawal.

Claiming a rebate when your income is too low to be required to file a return

Q: My mother has a small pension from Canada in addition to her Social Security. Should she add this in with her Social Security amount on the 1040 for the stimulus rebate? The person at the IRS that I spoke to did not seem to be able to answer that for me.

A: When Congress extended rebates to nontaxpayers, the issue became a lot more complex for everyone, including the IRS. Your mother and others whose income is too low to pay taxes have the option of partially filling out the 1040A or 1040--that means writing "stimulus rebate" at the top of the form, completing the top section with her personal info, filling in the amount of her Social Security benefits, with the taxable amount as zero, filling in the bank account information under "refund" if she wants her rebate direct deposited, signing and dating the form. OR she call fill out the form completely, which would mean including her Canadian income, interest income, etc. She would not add her Canadian pension to her Social Security, but would report it on a separate line.'

Having said all that, I highly recommend that people who are not accustomed to filling out tax forms, get someone to help them. Go here, enter your zip code and find a free tax help site near you.

Can I avoid paying taxes on the sale of stock?

Q: My adviser recommended selling some of the stocks in my portfolio. Here's my question:  If I sell stocks and reinvest all the money from the sale into my IRA, will I have to pay federal taxes?

A: If your stock portfolio is part of your IRA, selling stocks will not have any tax consequences. You only owe tax on an IRA when you withdraw money. If your your stock portfolio is in a separate taxable account, you definitely will owe capital gains taxes on your sale. If you have earned income, you can make an IRA contribution, which may be tax deductible. It makes no difference whether the money comes from sale of stock or some other source.

Should I gradually convert my IRA to a Roth?

Q: Should I consider systematically converting my IRA to my Roth? I read somewhere that this was prudent as long as you stayed in a low income bracket. What’s a low income bracket?

A: Gradual conversion is a good idea since money in a Roth grows tax-free. Money left in a regular IRA at your death will be taxable to your heirs, while Roth IRA money will be tax free. The lowest tax bracket is 10 percent, which applies to taxable income AFTER deductions and exemptions of up to $7,825 if single and $15,650 if married filing jointly.

You are eligible to convert from a traditional IRA to a Roth if your modified adjusted gross income is $100,000 or less (not including the amount of the conversion.)

Can an injured spouse get a rebate?

Q: My husband and I file a joint return and include a Form 8379 (injured spouse allocation) so he may receive his portion of the refund. I am on disability and do not work but owe back student loans. Can an 8379 be filed to request his portion of the stimulus rebate? I have gotten a lot of different answers.

A:  The IRS says there is no need to file a separate Form 8379 to cover the stimulus payment if you already sent one in with your tax return. (If you had not already sent one in, you would need to do that.) Your portion of the rebate will be withheld to cover your student loan debt. Your spouse will get his portion.

Do my parents have to claim my sister to get medical insurance?

Q: Do my parents have to claim my sister as a dependent? She was a full-time student and covered under my parents insurance for half the year. She paid all her own tuition and has a good paying job. My parents say they have to claim her because of the medical insurance, but she wants to file her own return.

A: It is possible that your parents' medical insurance policy limits dependent coverage to dependents claimed on their income tax return. If your sister was claimed only the first half of the year and is not currently on your parents' policy, then this should not be an issue. However, if she is currently insured, it is an issue. If your sister doesn't want to be claimed on your parents' tax return, she may have to find her own medical insurance. This is something that would need to be verified by a representative of the insurance company or someone in the human resources department of the company where the insured parent works.

The IRS rules say that only the person who provided more than half the support is entitled to the exemption. It sounds to me as though that's your sister, not your parents. Since she has a good paying job, your parents claiming her exemption probably will cost her at least $740 ($340 in taxes plus her rebate of at least $300.) If your parents claim her, they get the $340, and no one gets her rebate.

Do I have to report all my income to get my rebate?

Q: My income is too low to file a tax return, but I need to file to get the rebate. Can I just list my Social Security income, which qualifies me for the rebate, or do I have to list the other $9,300 in income that I have?

A: You should list it all. Fill out all the parts of the tax return that apply to your situation to avoid any confusion.

The IRS recommends filling out a paper 1040 or 1040A, writing "stimulus rebate" across the top and mailing it in. If you fill in your bank account numbers in the "refund" section, your rebate should be deposited to your account. Otherwise, it will be mailed to you. 

Can I use capital losses to offset IRA withdrawals?

Q: I have a traditional IRA that I would like to convert to a Roth IRA.  I am thinking of doing half the value this year and half next year. I think it would be advantageous to me as I expect taxes will probably rise within the next few years. I realize that taxes will have to paid on the monies converted to the Roth IRA.  I have a good bit of capital gains carryover losses. Can I use these to offset the income from the IRA conversion?

A: Unfortunately not. IRA withdrawals are ordinary income and each year you are limited to using $3,000 of your capital loss against ordinary income.

I agree with you that tax rates will be higher in the future. For the most benefit, you should pay your taxes on the IRA withdrawals from some source other than the withdrawals themselves.

Will my son in medical school qualify for a rebate?

Q: My adult son is a full-time student in medical school with absolutely zero in income, living strictly on school loans. He was not planning to even file a tax return since he has no income to report.  Is he entitled to the government's rebate of $600?  If so, he'll gladly file a return.

A: No. Since he did not have at least $3,000 in earned income (or other qualifying income, such as Social Security) in 2007, he is not entitled a rebate this year. However, if he has at least $3,000 in income in 2008, he can file a return next year to get the rebate.

Are IRA withdrawals taxable if used to pay for college?

Q: I am due to withdraw money from my IRA (non-Roth) next year and had planned to use it solely for my granddaughter's college expenses; will it be taxable to either of us?

A: Yes. You will have to pay income tax on your IRA withdrawals. If you give her more than $12,000 a year, you will need to file a gift tax return, but will not actually have  to pay gift taxes until you've given away $1-million. Tuition costs paid directly to the college do not count as part of the $12,000 annual limit.

Your granddaughter will not owe any taxes on your gifts. Because she is not your dependent, you will not get the benefit of any of the education tax breaks. However, she or her parents may be eligible, depending on their situation.

What do I do with this 1099-MISC?

Q: When the owner of a company where I worked sold the business, he gave me a check for $5,000 for my loyal service to the company. I am still employed with the new owners. I received a 1099-MISC notice for this $5,000 for my 2007 taxes. I can't find any info on such a document. In box No. 7 it lists this as "nonemployee compensation." Do I add that $5,000 to my wages on my 1040A? If I have to do that, I will be paying taxes on almost all my Social Security check. I am 74 and retiring this summer.

Revised answer

A: Nonemployee compensation reported on a 1099-MISC is definitely taxable. Depending on the circumstances, it may be considered income from self employment, which means you not only have to pay income tax, but both halves of the Social Security tax (15.3%) on this amount. It is not clear to me based on your description whether this would be considered self employment income. If it is, you would need to file a Form 1040 and a Schedule C-EZ, which also would allow you to deduct any expenses related to the income.

Tax Rebate Questions, Part V

The latest on the rebate: If you have no tax liability and are filing just to report your Social Security or Railroad Retirement benefits, the IRS suggests writing "stimulus payment" at the top of your form and mailing in a paper return. Here are instructions on where to enter your Social Security benefits on a Form 1040A.

Looking for free tax help? Here are a couple of additional toll-free numbers to call to find a location near you: 1-800-906-9887 for a VITA site (low and moderate-income taxpayers) and 888-227-7669 (primarily for the elderly, but will help others with low and moderate incomes).

Q: People are saying the rebate will be coming out of our Social Security payments. Is this true?

A. Heavens no. In fact, it doesn't even make any sense. I don't know who these "people" are, but I wouldn't be listening to them.

Q: You said you can use your 2007 or 2008 return to claim the rebate. I thought you had to use 2007. I'm concerned because my income will be too high to get the rebate based on my 2007 return. What's the story?

A: The rebates sent out this year are based on 2007 tax returns, so you won't get one. But when you (and the rest of the taxpayers) file your 2008 return, if it shows you are entitled to a higher rebate, you will get the difference. So you have the potential to receive a rebate next year, assuming you qualify. Those whose rebate would be less based on their 2008 return do not have to be concerned. They will not have to give back any money. Here is my column on this topic.

Where do I mail my return?

Q: We are ready to file a 1040 form, but do not have an address to send it to. Could you supply same?

A: If you live in Florida, mail your tax return to Department of Treasury, Internal Revenue Service, Atlanta, GA 39901-0002. If you live elsewhere, check the 1040 filing instructions. Addresses are on the next to last page. If you are only filing to get a rebate, the IRS suggests writing "stimulus payment" at the top of your return.

Can I split my IRA contribution between regular and Roth IRAs?

Q: For 2007, can I contribute $3,000 to a Traditional IRA and $2,000 to a Roth IRA? I am over 50 years old.

A: Yes. As long as you meet the income requirements for Roth IRA contributions, there's no problem splitting your contributions between regular and Roth IRAs. The contribution limits are $4,000 for those under 50 and $5,000 for those 50 and older.

The income limits for a full 2007 Roth contribution are $99,000  (single) and $156,000 (joint) and for a partial contribution $114,000 (single) and $166,000 (joint).

Can a boyfriend claim a girlfriend as a dependent?

Q: Can a boyfriend claim his girlfriend as a dependent in the state of Indiana? The Indiana Department of Revenue's attorney couldn’t even answer that question for me. She told me to call my lawmakers on the local laws involving this. I got an email from a senator's office that said no, but a friend got a letter from the same senator's office from a different person that said yes.

A. Your best bet is to ask someone in Indiana who prepares federal income tax returns. I'm sure you are not the first person to have had this question. If unmarried cohabitation is legal under state law, then he can claim her as long as she has less than $3,400 in income and he provides more than half her support. Unfortunately I do not know the answer; I don't even try to answer questions about laws in other states.

In Florida, he could not claim her as a dependent. Here is the relevant Florida law for those who are interested:

Abstract: 798.02 Lewd and lascivious behavior. --If any man and woman, not being married to each other, lewdly and lasciviously associate and cohabit together, or if any man or woman, married or unmarried, engages in open and gross lewdness and lascivious behavior, they shall be guilty of a misdemeanor of the second degree, punishable as provided in s. 1637, 1868; RS 2596; GS 3519; RGS 5407; CGL 7550; s

Can I file as head of household?

Q: My unmarried 22-year-old son lives with me . He is not a student and is not disabled. He only had income of $300 last year and about $300 in interest from cashing in old saving bonds . He is a citizen and I contributed to more than half of his support. Can I claim him as a dependent and use the head of household filing status? I have been divorced for 19 years . 

A. Yes you can. He fits within the definition of a "qualifying relative," which will allow you to claim head of household status. However, you will not be able to receive the $300 rebate based on his dependent status since he is older than 16.

Can we deduct taxes we paid when we bought our home?

Q: When we bought our home last year, we paid about $1,700 for recording fees for the deed and and mortgage, mortgage intangible tax and mortgage doc stamps. Can we deduct any of these on our federal income tax?

A: No. Those are considered transfer taxes, which are not deductible. If you or the seller paid points on the loan and they were clearly earmarked on your closing statement, those are deductible. So are your mortgage insurance premiums if you have an insured mortgage (but NOT property insurance premiums). And, of course, your mortgage interest and real estate taxes are deductible.

Can my mom claim my sister as a dependent?

Q: My mom made about $15,000 last year and my full time college sister works part time and made about $12,000.  She lives at home with my mom. Can my mom claim her as a dependent?  My mom pays all the bills and her house is paid off.  My dad is on Social Security income.

A: Based on the information you have provided, it would be a big mistake for your mom to claim your sister. If your parents' income is $15,000 from wages plus your dad's Social Security, they will not owe any taxes. In addition, they would not be eligible for a rebate based on your sister since she is older than 16. The bottom line: claiming your sister would be of no benefit to them, but it would be very costly for your sister. If your parents claim her as a dependent, she will get stuck paying $340 in extra income taxes and miss out on her tax rebate (about $325 if your numbers and my calculations are correct) for a total of $665 lost.

The IRS says whoever provides the majority of the support (parent or child) should get the dependency exemption. Unless your sister is stashing most of her $12,000 income in the bank, I doubt that your parents actually provide more than half her support. The money your sister spends on clothes, gas, books, college expenses, entertainment, food out, etc. all count as part of her support for herself. So does any student loan she has.

What's the standard deduction?

Q: For the year 2006 there was a standard deduction of $12,300, line 40.  What is it for 2007, and what is included in the dollar amount?

A: The standard deduction varies with your age and filing status. The basic deduction is $5,350 (single) and $10,700 married filing jointly. Apparently you and your spouse are both over 65 but are not blind and you file a joint return. That would make your standard deduction $12,800 for 2007. Here's a chart that breaks down who gets what.

Nothing is "included" in the standard deduction. It is an option available to people who do not itemize their deductions.

Filing for free?

Q: You say "File for free" if your AG income is less than $54000. Then you say "Go to www.irs.gov for a list of companies and their requirements"  Does this mean one cannot file directly with the IRS??  Please clarify this. If we have to go thru these companies how is it "FREE"?

A: You can file a paper return for free directly with the IRS. You can do a tax return online (letting the software do the calculations for you) and file electronically for free by using IRS FreeFile. Free File is an IRS program in cooperation with online filing companies. Some companies have more restrictive requirements than others to get the free filing service.

I have used IRS FreeFile to do my children's tax returns ever since the service became available. In addition to being free, it's very easy to use.

Tax Rebate Questions Part IV

Q: We have our taxes prepared by an Illinois tax accountant who has been preparing our taxes for 35 years. Because we travel to Illinois only in July, we routinely defer our tax preparation until late in July.  From what I have read, in order to qualify for a rebate, we have to first file a 2007 tax return.  Since we defer our tax return until July, are we still eligible for a rebate?

A: Yes, you will be eligible, but your refund will be delayed by your late filing. You might consider mailing your information to your accountant.

Q: I am an 82-year-old senior who has not had to file taxes because of low income. I understand that I need to file to get the rebate. Which form do I use: 1040 or 1040A. And can I print it out on my computer?

A: Since your tax situation is simple, you can use either form. You can print them from the IRS Web site (www.irs.gov). You only have to use Form 1040 if you have certain deductions, credits and other tax situations. The instructions for Form 1040A tell who is not allowed to use it.

Q. I have not seen my situation discussed in any of the many articles listing the qualifications for receiving a rebate - I have over $13,000 in taxable income for 2007 but it is derived mainly from a private pension check, interest fom CD's and dividends.  I do not "earn" a salary.  Do I qualify just by being a taxpayer?  Thank you in advance for your response. 

A: Yes, you can qualify just by being a taxpayer.You can get as much as $600 (single) or $1,200 (joint), depending on your tax liability for 2007.

Q: I am disabled and have not filed taxes before. I make over $3,000 with Social Security disability. Someone told me this year I should file some form and I would get money back. Could you tell me the name of the form and where I would get one. My ex husband keeps declaring the kids live with him, which they don't. I filed a fraud form with the IRS a year ago. Can I get the earned income credit from the kids that live with me all year? My husband is also on disability.

A: You can file either Form 1040A or  Form 1040, which you can get from the IRS Web site. It sounds as though you and your husband would qualify for a $600 rebate if you file jointly. In addition, you could get $300 for each child under 17. However, you would not get the Earned Income Credit since you do not have earned income. When parents divorce, the custodial parent generally is assumed to be the one who gets to claim the kids unless the parents have agreed between them to let the other parent have the tax benefit. As a practical matter, the exemption will go to the parent who files first using the child's Social Security number. If your husband has already filed, your claim for the children will be disallowed and you'll have to contact the IRS to fight it out.

It's tax time and we want to help take the pain out of filing

The Times has put a special report on income taxes on the Web that will serve as a collection point for stories and tips about income taxes. Be sure to note these stories from today's paper:

*10 tips on filing your return

*What to look for on this year's tax return.

*Tax planning opportunities with the rebate

Email me with your tax questions and I will answer as many as possible here on the blog.

[Times photo]

Guys who support their girlfriends' kids get a break

The IRS recently clarified its rules on dependency exemptions for couples who live together without the benefit of marriage. As I explain in my column Sunday, the old rule was that a guy who supported his girlfriends' kids from prior relationships could not claim them as dependents because they could be claimed by "any other taxpayer," meaning their mom. That was the case even when the mom had no income of her own. The clarification: the mom doesn't count as "any other taxpayer" if she isn't required to file a tax return or files one only to get a refund of taxes paid. If this situation applies to you, read the rules carefully. You may even be able to file an amended return for 2005 and 2006 if the live-in arrangement was in place back then. The bad news: you still cannot claim your significant other as a dependent if you live in Florida or any other state where unmarried cohabitation is still illegal.

Note: Although you can claim the dependent exemption under these circumstances, this does not entitle you to the child credit, the Earned Income Credit or head of household status. Nor does it qualify you for a $300 rebate for the child.

Rebate Questions and Answers, Part III

Q: Is the stimulus payment basically just an advance of any refund that we would typically receive in 2008?  For example, if we typically receive a tax refund of $1,200 and we receive a stimulus payment of $1,200 this summer, does that mean that our refund in 2008 could be zero--i.e. would it just be subtracted from any potential refund?

A: No. Your refund would not be affected. Basically the 2008 return will include an accounting for the rebate to see if you are entitled to a different amount of rebate based on your 2008 return than you were on the 2007 return. If you are entitled to a larger rebate based on the 2008 return, you will then get the extra amount. If you are entitled to the same or a smaller rebate, there will be no impact. (You won't have to give back a rebate based on your 2008 return.)

Q: I am the mother of a 2-year-old. His dad claimed him on his taxes. We are not married. His dad got about a little less than $5,000 back and I only got $100 back because I just recently went back to work. Should we still file and what form should it be if so?

A: His dad will get the rebate. Since his dad already filed a return, nothing else needs to be done.

Q: Your story mentions the IRS sending out two notices. Will this be after I have filed or before?

A: After.

Q: Which year's income is the rebate based on?  Is it for tax year 2007 which we have not yet filed or is it for tax year 2006?

A: 2007. That's why you have to file a 2007 return to get it. As mentioned above, you may qualify for a larger rebate when you do your 2008 return.

Q: My wife of 50 years died during 2007. I will be able to file a joint return for 2007. I am retired, and have a income of $50,000. Since my wife is no longer with me, will I be entitled to the $600 or $1,200? (I would not want to cash a check for $1,200 if I am only entitled to $600.)

A: As long as you are entitled to file a joint return, you are entitled to the full joint return rebate based on your income or tax liability.

Here are more Frequently Asked Questions directly from the IRS.

Online rebate calculator now available

Kiplinger.com has put up a tax rebate calculator that you may find helpful. If you hope to qualify for more than the minimum rebate, you will need the information from your completed tax return to get an accurate result from the calculator.

Rebate questions and answers, Part II

Q: Is a person 55 years old who is collecting Social Security Disability benefits eligible for the $300 rebate?

A: Yes, if the person receives at least $3,000 in disability benefits. Age doesn't matter, but the person cannot be claimed as a dependent on someone else's return. Social Security retirement, disability and survivor benefits all count toward the $3,000 total. SSI payments do not count.

Q: We are both over 65 and both receive Social Security. My wife is still working and her salary income by itself makes her eligible for the $600 rebate. Will our 2 SS incomes plus her salary make us eligible for the $1200, will we get $900 or some other sum?

A: First of all, if you are married and file a joint return, your rebates are not calculated individually. They are paid to you jointly as a couple. If your wife has at least $3,000 in earned income, then you are eligible for the combined $600 minimum rebate. Whether you are eligible for a higher rebate depends not on her income but on your joint tax liability. If you don't claim the child credit or the Earned Income Credit, use the tax liability found on line 63 of Form 1040, line 37 of Form 1040A or line 10 of Form 1040EZ. Your rebate will be this amount up to $1,200. If it is less than $600, you'll still get the $600 minimum.

Q: My mother is on Medicaid. Would she be eligible for the $300 rebate if she files?

A: Yes, if she has at least $3,000 in Social Security benefits. The fact that she is on Medicaid does not disqualify her. In addition, note that the rebate will not count as income that would prevent eligibility in any federally-funded relief program.

Q: When will I get my rebate?

A: The Treasury expects to start sending out checks in May and none will be sent after Dec. 31. If you delay filing your 2007 tax return, your rebate will be delayed.

Q: I always file tax but I have not been able to pay what I owe on the year 2006 yet. My question is Can that rebate check be used to pay my tax for 2006 and 2007?
Answer: Technically not because your tax payment is due before you will get your rebate. If you don't pay on time, you will be subject to interest and penalties. However, your rebate can be seized for unpaid taxes, so effectively it could be used to satisfy your tax obligation after the fact.

Q. I tried calling the IRS toll-free number (800-829-1040) to find where I can go for free tax help so I can get my rebate, but I just get recorded messages and can't get an answer. How can I get this information?

A. To get a live person on the line, you have to press the numbers related to questions about preparing an individual tax return. That's a "1" at the first prompt and a "5" at the second. Tell the person you want information about a free tax help site for the low income and elderly. Or just click here and enter your zip code.

Lots of questions about rebates (and answers too!)

My story in today's Times about the rebates is generating lots of questions. I'll answer some of them here. If you have other questions, feel free to post them as comments. Here are links to a helpful CCH publication and the IRS Web page on rebates if you want to delve more deeply.

Q. I don't understand if we do or do not have to file a return in order to qualify. Our income is $22,224 Social Security and $8,701 other. Do we have to file a return?

A. If you want the $600 rebate for a couple, you must file. If you don't want the $600, no law requires you to file.

Q. If we owe the government money, will they deduct what we owe from the rebate or will we be able to get the entire amount?

A. The IRS will deduct payments you owe the IRS as well as other debts the IRS collects such as defaulted student loans and child support payments.

Q. I am confused. What income qualifies for a rebate? Stock dividends, interest (bond, CD , bank), Social Security, IRA withdrawals, pensions. How can retirees qualify? Please explain.

A. There are two basic ways to qualify. One way is as a taxpayer. If you are qualifying that way, all your income is reported and you qualify based on your tax liability. The other way of qualifying is for people who do not pay taxes. In that case the only kinds of income that count are wages, Social Security benefits, VA disability benefits and railroad retirement benefits. If you have at least $3,000 from those sources, you qualify. But you must file a tax return to get the money.

Q.  In this morning's article about the tax rebate, you used the phrase "up to $600."  What's it take to get the full $600? Or is it just the income of at least $3,000 that gets the full amount?.

A. To get the full $600 for a single person ($1,200 for a couple), you must have a tax liability of at least $600 (single) or $1,200 (married.)  If you qualify based only on the $3,000 in Social Security, earned income etc., you will get the minimum rebate of $300 (single), $600 (married.) If your tax liability is between $300 and $600 (single), then your tax liability will be the amount of the rebate. BTW, tax liability is defined in a somewhat peculiar way. Tax liability is the number before subtracting the child tax credit or the Earned Income Credit.

Q. I have already filed a tax return but, did not include my Social Security benefit (because it wasn't taxable). I only included income I receive from a "state retirement account". It is in excess of $3,000 and I pay taxes on it. The only "retirement" income you mention as an eligible source of income is "Railroad Retirement benefits." Do I need to file an amended return on form 1040X?

A. Whether it is worthwhile to file an amended return depends on what the tax liability number was on your original return. If it was at least $300 and you are single or $600 and you are married filing jointly, then there is no reason to file an amended return because you won't get any more money. However, if your liability was below those amounts, you should file a 1040X that includes your Social Security income.

If you want a rebate, you MUST file a tax return

News flash: Everyone who wants a share of the rebates that are part of the economic stimulus plan MUST file a tax return this year. You are eligible if you have at least $3,000 in income from work, Social Security benefits and/or VA disability benefits (and are not claimed as a dependent on someone else's return). Many people whose primary income is from Social Security are not required to file a tax return ordinarily. However, if they want the rebate, they must file a 2007 return. The minimum rebate, which will apply for low-income people, is $300 (single) or $600 (joint) plus $300 per qualifying child 16 or younger. The maximum rebate is $600 (single) or $1,200 (joint) plus $300 per qualifying child 16 or younger.

You can file for FREE at www.irs.gov (click on FreeFile) or find a free tax help si