It pays to sweat the details
The Atlanta Journal-Constitution
March 20, 2005
ATLANTA — Tax forms and instructions are long and tedious, and so is the path of millions of taxpayers who still fill out returns.
That's why readers took the shortcut provided by the Atlanta Journal-Constitution tax hotline, co-sponsored by the Georgia Society of Certified Public Accountants.
Here are some of the most frequently asked questions brought up by callers and answered by CPAs:
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A: The loan must have been valid to begin with. A written promissory note and repayments by the borrower according to the terms of the note should support this. The loan must be totally worthless, and you must try to collect.
The deduction is on Schedule D, Part I, Line 1, as a short-term capital loss for the amount of the loan not repaid. Attach a statement to your return with the following information: a description of the debt including amount and date due, name of debtor and relationship to you, efforts made to collect and how you determined the debt was worthless.
Q: My daughter has W-2 income in both Georgia and South Carolina. Does she have to file tax returns in both states? — Dee Tillman
A: Yes. Individuals with earnings in multiple states that have individual income taxes usually must file returns for each state. If Georgia is the home state, your daughter will get a credit for taxes paid to the other state or states.
This credit is limited to the overall percentage of income between the states and to the tax rates of those states.
Georgia requires the taxpayer to submit a copy of the tax return for the other state in order to approve the credit.
This nonresident state tax credit eliminates some or all of the double taxation that may occur at the state level.
Q: I am 76 years old and have several traditional individual retirement accounts, from which I have been annually withdrawing the required minimum amount. I have just discovered that I did not receive a withdrawal from one of the accounts during 2004. Will I be penalized? How do I correct this situation? — Larry W. Nichols
A: First, the bad news: You could be taxed on money you did not receive. After you reach age 70 1/2, you are required to take at least annual minimum distributions from your traditional IRA plan. Since you did not take the required minimum distribution, a 50 percent excise tax may be assessed on the difference between the required minimum distribution amount and the actual amount distributed to you.
This additional tax is computed on Form 5329, Part VIII. You should attach the form to your 2004 income tax return.
Now, the good news: The IRS may waive this tax if you can show that any shortfall was due to reasonable error and that you are taking or have taken appropriate steps to remedy the shortfall. If you believe you qualify for this relief, file Form 5329, pay the tax and attach a letter of explanation, requesting that the penalty be waived for "reasonable cause." If the IRS waives the tax, it will send you a refund.
For more information, refer to IRS Publication 4141, Senior Citizens, and IRS Publication 590, Individual Retirement Accounts. These are available on the Internet at www.irs.gov.
Q: Is it true that I can file electronically for free? — Komaru Olugbani
A: Yes. Go to www.irs.gov to access this service. With most providers, you can file your federal income tax return electronically, and with some you can also file your state income tax return. You must be a U.S. citizen or a resident alien. There are certain eligibility rules, and you can get the free service only through the IRS Web site. In some cases, you may be charged a fee.
Q: I support an elderly parent. Can I claim her as a dependent? — Bo Jackson
A: You can, but only if your parent meets all five requirements for 2004. First, your parent must be a U.S. citizen, resident or national, or a resident of Canada or Mexico for any part of the year. Second, your parent cannot file a joint return. Third, you must have provided more than one-half of your parent's total support. Support includes such items as food, lodging, education, entertainment and travel, medical care, etc. Fourth, a dependent must be a member of your household or must be related to you. Fifth, your parent must have had less than $3,100 in gross income during 2004. Gross income does not include tax-exempt income such as municipal bond interest and certain Social Security benefits. (These rules are eased for 2005.)
Q: My wife spent more than $250 for classroom supplies. Can we deduct all of it? — Dan Lee
A: A kindergarten through grade 12 teacher, instructor, counselor, principal or aide in a school who worked at least 900 hours during a school year can claim an "above-the-line deduction" — meaning an adjustment to gross income on line 23 of Form 1040 — up to $250 of expenses. Eligible expenses consist of books, supplies, computer equipment or software. Expenses of more than $250 may be claimed as a miscellaneous itemized deduction. (The $250 "above-line-deduction" deduction won't be available for tax years beginning after 2005.)
Q: I got some stock as a gift years ago. How do I figure out the basis? — Joel Pascaner
A: The recipient of a gift of property, such as stock or land, also receives the tax basis of the property. Generally, the cost of the property to the original acquirer becomes the basis of the property received by the new owner. That original basis would be modified by any improvements, in the case of land, or, in the case of stocks, adjustments for splits, returns on capital and the like. This is different from the treatment of property inherited from a decedent. Such property's basis is generally equal to its fair market value on the date of death.
Q: I hear I can exclude the profit I made from selling a house. How do I go about it? — Mark Wyssbrod
A: You may exclude a gain up to $250,000 ($500,000 if you are married filing jointly) on the sale of your principal residence. The residence must have been your primary residence for two out of the last five years. To get the full $500,000, both spouses must live in the house for the full two years. You can only use the exclusion once every two years. There are exceptions for the two-year requirement which allow you to prorate the exclusion amount. These exceptions include hardship, change of employment, health, unforeseen circumstances and moves required of military and foreign service personnel. The rules have been adjusted for 2005.
Q: My wife doesn't work. Can we open an individual retirement account for her? How much can we contribute? — John F. Wilfore
A: A non-working spouse may make either a traditional IRA or Roth IRA contribution, not to exceed the lesser of $3,000 or the working spouse's earned income (plus a $500 catch-up if over age 50). Taxpayers have until April 15, 2005, to make 2004 contributions. The couple must file a joint income tax return for the year in question. The laws regarding IRAs are very complex. It is a good idea for individuals to seek out the advice of a CPA whenever they are unsure of the rules. IRS Publication 590 covers many of the details.
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