How much should I put in a 529 plan?

Q: I have just opened a 529 plan for my grandchild. How much money should one put into this account? Do you consider this a wise step? My grandchild is 7 years old.

A: A 529 plan is a great way to save for college, as long as you are in a plan with reasonable costs. Here's one site where you can compare plans.

How much to save depends on where your grandchild is likely to go to college. T. Rowe Price has a college cost calculator and other college savings tools on its Web site. You can give $12,000 a year to anyone without gift tax consequences ($24,000 if the contribution comes from both you and your spouse.) And if you are giving to a 529 plan, you can give five times that amount (essentially spreading your gift over five years.) 

Will a Canadian owe U.S. tax on a Florida property sale?

Q. I'm a Canadian who bought property in 1993 in Florida (condo) for $133,000.  Today value is around $500,000 even with market as it is. We are there about six months per annum now. If we sold (in theory) would there be any capital gains involved here? Am thinking down the road when we get older.

A: It sounds as though you are a nonresident alien (no green card). In that case, the asnwer is yes, you will owe capital gains tax on the profit on your U.S. property when you sell. However, iff you are a resident alien (green card), and this home is your primary residence, then you would be eligible to exclude your gain of up to $250,000 (single) or $500,000 (married filing jointly) from tax. However, you would have to pay tax on your worldwide income from all sources. Read more about taxes on foreign citizens in IRS Publication 519.

Could an IRA contribution keep me under the earnings limit?

Q: After reading the article on reducing your gross income by putting money into a IRA I have a question. Would someone that is collecting early Social Security  retierment benefits with income restrictions be able to reduce their income by contributing to an IRA as to not be penalized for going over the income level  in that year? Is it legal, so to speak?

A: A deductible IRA reduces your adjusted gross income. However, Social Security has an EARNINGS limit, not an INCOME limit. If you are younger than regular retirement age, your benefit is reduced $1 for each $2 you earn above the limit ($13,560 in 2008). Only your W-2 income or net income from self employment is considered in determining whether you have exceeded the earnings limit. If you work for someone else, your gross income from work is the determining factor, before any deductions. If you are self-employed, contributions to a retirement plan may be legitimate business expenses that reduce your net self employment income.

Note: Any benefits you miss out on because of the earnings limit are not lost forever. They actually boost your future benefits.

Who can I contact to file a complaint about my bank?

Q: Because of its slovenly customer service, I want to file a written complaint against Countrywide Bank, with which I have five CDs. Can you possibly provide me with the name and address of the federal agency responsible for handling complaints against banks?

A: I can tell you where to look. The regulator varies from one bank to the next. To find out the appropriate regulator for your bank, search here. Enter the name of the bank (leave off the state if you aren't sure.) In Countrywide's case, the site tells you that the regulator is the Office of Thrift Supervision. The Web site includes information about filing complaints.

What's a short sale?

Q: In following real estate news, I have come across the term "short sale." What does this mean? How does it work, etc.? is this another greed angle that will cause more grief for homeowners?

A: Quite the opposite. A short sale in real estate is a sale for less than the amount of the mortgage. The lender agrees to accept the sale proceeds as satisfaction of the debt. It's an alternative to going through foreclosure. The problem is usually convincing the mortgage lender to agree to a short sale.

Note: the interest forgiven is generally taxable income unless the property was the borrower's primary residence. 

Help! My annuity paid zero interest last year

Q: I went to a seniors seminar on investing and bought an annuity from Alliance, and put it in S&P 500. This year I received no interest on my money. Is there a way that I can get out of this annuity? And should I put my money in another annuity?  I am a single 67 year old woman and other than Social Security, I have no other income.

A: Your annuity contract will describe the rules for getting out of your annuity and the price for doing so. Many annuities have a surrender charge that extends for five or six years or even longer. The charge declines as you get closer to the end of the penalty period. However, you usually can take a certain percentage of your money out each year without penalty. You will have to decide whether getting out is worth paying the penalty.

My opinion: It is NEVER a good idea to put all your money in any one investment, whether it's the Standard & Poor's 500 Index or a jumbo CD and it is NEVER a good idea for a retiree to buy a variable annuity with a surrender charge. An exchange for a better, lower-cost annuity can be appropriate if you don't want to cash out because of a big built-up tax liability. However, it doesn't sound as though that's your situation. If you decide to stick with your annuity, you should diversify your investments so you don't have everything riding on the S&P 500 index. 

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.

Was there a sweet deal for ousted Wachovia CEO?

Q: As a former Wachovia shareholder who voted against the Golden West acquisition when it was presented to the bank’s investors, I’ve been very interested in seeing Mr. Thompson get what he deserves for engineering such a stupid blunder. What I haven’t seen though is any discussion of what he takes with him when he leaves. Do you have any idea what Mr. Thompson’s total severance package will amount to?

A: According to the Wall Street Journal, Ken Thompson is getting $1.45-million in severance, $50,000 to pay his legal bills and accelerated vesting of $7.25-million in restricted stock. Post retirement benefits include an office and an assistant for three years. The Journal calls the package "modest by recent Wall Street standards."

Of course it is not modest to those of us who aren't Wall Street CEOs and who did not cost our companies billions of dollars. 

Any increase in FDIC coverage on the horizon?

Q: I am reviewing an article written by you and published May 8, 2005. The title is "FDIC limit increase would help retirees". In the article you mentioned that the U.S. House of Representatives passed a bill raising the limit to $130,000 but the U.S. Senate had yet to act. Do you have any knowledge as to whether or not such an increase is in the near future?

A: It's always nice to know that my work was preserved for posterity! The $100,000 base insurance limit was not increased. However, Congress did set a separate limit of $250,000 for retirement accounts (including IRAs and 401(k)s. Thus a single person can have $250,000 in an IRA and $100,000 in other accounts at the same bank and be fully covered. Of course, by adding other people on the accounts, you can increase your limits. Here are more details.

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.

Should I refinance my mortgage?

Q: We currently have a 30-year fixed-rate mortgage at 5.75%. Our unpaid principal balance is $145,496. We've been in the home for five years. We have credit card debt of almost $16,000 that we'd like to pay off. We've been offered a new loan for $175,000 at 5.375% rate for 30 years. The closing costs will be about $9,734, monthly payment approximately $1,363 (including taxes and insurance). We will receive approximately $1,100 in cash. We really can't afford to make another bad decision. What should we do?

A: I would not do this, but I do not know what your alternatives are. Something is wrong with your math, because it looks to me like you'll end up owing $13,504 more than you do now and extending your mortgage for an additional five years, both of which seem like a bad deal to me. The best approach, in my opinion, would be to put your credit card balance on the lowest interest rate card you can get and make extra-large payments every month until it is paid off. 

The way I look at it, there are hundreds of thousands (maybe millions) of homeowners out there who a few years ago did something very similar to what you are contemplating and now regret it very much. This is particularly a problem if their mortgage is now more than their house is worth. If you had to sell your house, would it bring at least $175,000 plus real estate commissions and other closing costs?  If there's any doubt about that, you definitely don't want to refinance.   

Are you telling me that it is impossible for you to pay off your $16,000 in credit card debt? If so, maybe you should be considering bankruptcy. Talk to a credit counselor about your options before signing anything. Credit card debt can be discharged in bankruptcy but if you put it on your mortgage, you put your house at risk. Here are some calculators (one, two)  you can look at in analyzing your situation. There are numerous others on the Web as well--just do a google search on mortgage refinancing calculators.

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.

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.

Will you spend more or less on vacation this year?

High gas prices and inflation-pinched wallets are prompting some people to cut back on their vacation plans. However, others say they'll just spend more this year, some of them taking the same trips but expecting to spend more filling up the gas tank. When I asked the question of Times readers, here are some of the responses I got. I think I'll probably spend about the same. How about you?

How do you get started with a Roth IRA?

Q: My son is 30 and wants to start a Roth IRA. Where should he put his $1,000 and how does he begin to do it? We won't hold you responsible with the outcome. It is our responsibility, but we are not knowledgeable like you about such things.

A: Getting started with an IRA is a three-step process: 1. Opening an account with an IRA trustee, such as a bank, brokerage firm or mutual fund company. 2. Putting money in the account (you have until April 15 to make a contribution of up to $4,000 for 2007 plus an extra $1,000 for those 50 and older). and 3. Choosing the investment.

The type of investment you want will influence where you open the account. For example, if all you want is a bank CD, then your best bet is to simply open an IRA with a bank that offers CDs with above-average yields. How much money you plan to invest also matters since a fund company or brokerage may have a minimum account size or charge fees that make a small account unfeasible. In some cases you can get around an account minimum by signing up for monthly transfers from your checking account to your IRA, such as this program from Fidelity.

Since your son has a long time to go until retirement, I'd recommend a mutual fund that invests in stocks or a combination of stocks and bonds. He should choose only one fund to get started, which can be overwhelming because there literally are thousands of fund choices out there. The important things are to choose a fund that's broadly diversified rather than focused a particular area such as small stocks or health care and to choose one that has reasonable expenses. I don't recommend any particular funds, but I will give two examples of funds you can buy directly from fund companies with $1,000 minimums for IRAs: T. Rowe Price Retirement 2045 Fund and Vanguard STAR Fund. Another approach is to open an IRA account with a low-cost brokerage firm and buy funds available through that firm with no transaction fees.

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.

How can I replace my 7% annuity?

Q: I have a fixed-term IRA annuity yielding 7 percent that ends in July. What can I invest this in? I am 80 years old and need this income to live on. My health so far is good.

A: I'm afraid the days of 7 percent returns are long gone for the type of investment you have now. Consider instead an immediate annuity that will pay you a monthly income you can’t outlive. You’ll get the largest payment if you choose the option with nothing for your survivors.

You also could create your own annuity with CDs and money market accounts, withdrawing both income and principal to meet your income needs. Of course you run the risk of running out of money with that option. A third option is a reverse mortgage if you own your home.

Should I have to pay sales tax on a manufacturer's rebate? How about shipping and handling?

Q: I feel that I was cheated by the state of Florida. I agreed to pay $19,000 for a Mazda. When the dealer presented the invoice, the sales tax was calculated on $22,000 and then a "rebate" of $3,000 was deducted from the price. I protested, but the dealer insisted it was required by the state. A cash rebate was not discussed or offered. I felt it was a price adjustment or discount. The state is collecting tax on fictitious prices. I don't know if fraud is the correct term, but it sure is unfair. What do you think?

A: I see your point, but there wasn't any fraud. Florida sales tax is based on the amount received by the seller. In this case, the dealer received $19,000 from you and $3,000 from the manufacturer for a total of $22,000. "The tax is due on that amount because that's what the dealer received," said Mark Zych, director of technical assistance for the Florida Department of Revenue.

The same principle applies at the grocery store. If you use a manufacturer's coupon, you'll pay tax on the precoupon price because the retailer collects from you and the manufacturer. If you use the store's coupon, the tax is on the after-coupon price.

Q: I recently purchased an item online from a national retail chain. While I realize that I must pay sales tax on the item, I questioned the fact that I should pay sales tax on the shipping and handling as well. After all, I don't pay sales tax on stamps, or labor. What gives?

A: What's taxable and what isn't is a matter of state law. Under Florida law, the sales tax applies to shipping and handling charges. Here's a reference.

What in the world happened to my stock?

Q: I own shares of Wachovia Corp stock that were worth $57,113 in August and are now worth just $29,811. Can you tell me what would be the cause of this?  I read about Wachovia acquiring all these banks, trying to become the largest bank in the nation. How can this be when its own stock is dropping in value?  Would I not be better off collecting the dividends now instead of reinvesting them?

A: Pretty much everybody invested in the financial sector shares your pain. You may have seen an article or two about problems in the credit markets. The problem is not just people defaulting on their mortgages, but the fact that the future doesn't look especially rosy for financial services right now. Further writeoffs of bad loans are likely and we have to figure a way out of this mess without further damage to our markets. Then, assuming we do, banks simply aren't going to be making the same kind of profits on mortgages and home equity loans that they did in the past. One analyst says Wachovia could become a takeover target. Stock prices have fallen so much that some people think financial stocks may represent a buying opportunity. However, that's only something we'll know in hindsight. You have to be brave to stick your neck out.

This problem points once again to the importance of diversification. Having a lot of eggs in one basket doesn't work out so well when something happens to basket.

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.

What's the safest place for our money?

Q: My wife and I are in our seventies and we are not to diversified. Most of our retirement is in CDs, money markets and two homes.  Everything is paid for. We have , I think, enough money to get us through our retirement if someone dosen't take it away from us. What in your opinion is the safest place for our money?  I worry about the banks.

A: In my opinion, banks still are the safest place. Put your money in a well-capitalized bank or credit union (Look up bank safety ratings here.) and stay within deposit insurance limits.

What kind of retirement plan is best for me?

Q: My employer only offers 403(b) and 457 plans to save for retirement. Do these plans have stocks that I can choose from and allocate by percentages like I was able to do in my 401(k)? I am considering rolling my investment over to a traditional IRA because the other two do not seem as appealing to me right now. Where can I find simplified information comparing all three options so that I can make the best financial decision?

A: If you want to buy individual stocks, I recommend rolling your 401(k) money to an IRA with a discount brokerage firm. To find out whether buying individual stocks is even an option with your 403(b) or 457 plan, you need to contact your plan providers.  If by "stocks," you really mean "stock mutual funds," all these plans provide that type of option. Your plan provider can tell you which particular fund options you have and what kind of fees are involved. Comparison info tends to be written for the employer trying to decide which type of plan to offer. But here's some info if you want to read up: One,  Two, Three, Four.

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.   

Should my phone number be on my checks?

Q: We’ve had our phone number printed on our personal checks for many years because the stores where we shopped asked for it. Recently I ordered new checks, which arrived today with no phone number printed on them. Also the names were not printed the way I expected. I wanted each of our names printed on a separate line but instead the names are written “William T. or Betty A. Jones.” Should our phone number be shown on the checks? Does the way the names are shown on the checks make any difference?

A: Security experts say printing extra information on checks makes identity theft easier. They advise leaving off phone numbers, driver’s license numbers, middle names and, of course, Social Security numbers. Having an “or” between names makes it clear that either one of you can sign checks. But that’s also how it works when the two names are listed with nothing between them. An “and” between names means both have to sign. Talk to your bank if you want your checks printed differently.

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.

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.

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.

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