|
|
 |
|
|
 |
| 02/11/2006 - Updated 07:53
PM ET |
|
Tax help: Michael Schulman
Thursday, February 9, 1:00 PM
ET
Got tax questions? Michael Schulman, owner
of Schulman CPA and a member of the American Institute
of Certified Public Accountants and NYS Society of CPAs,
can help. Michael also created Schulman CPA/PFS to offer
personal financial planning services. He is a certified
public accountant (CPA) and a personal financial
specialist (PFS). Send your question now, or join the
chat with Michael live online Thursday.
Each
Thursday from now until April 13, USATODAY.com will
feature a different tax expert from the AICPA to answer
your tax questions. Remember, our online accountants
can't know your entire tax situation, so go to your own
tax preparer for detailed advice.
| |
|
| Comment from Michael
Schulman: Hello, everyone.
Welcome to the first 2006 USA TODAY tax chat. Please
remember that the answers below do not necessarily cover
all situations. Please consult a tax professional for
answers to your specific questions. To contact the
Internal Revenue Service (IRS) go to www.irs.gov. Now,
then, let's begin. |
| Columbus,
OH: In 2005, I
exercised and sold an amount of company granted
stock-options. Because I did a cashless transaction, the
profits were obviously considered regular income. The
check from the profits was sent though my employer who
also withheld appropriate taxes. The whole transaction
shows up on my W-2. Now the problem, In addition I
received a 1099-B from the brokerage firm that handles
the sale. That document shows the proceeds from the sale
and no taxes withheld. If I put the 1099-B info into my
tax return, I am actually showing the profit twice (once
from W-2 and once from 1099-B). I don't want to just
ingnore the 1099-B. What is proper way to report
this? |
| Michael
Schulman: I would put the
amount of the 1099-B on Schedule D and use a cost basis
equal to the 1099-B amount. This will produce a $-0-
gain but the gross proceeds amount will be properly
matched. |
| Bethesda MD: I recently sold
and bought a house in 2005. On each transaction I paid
$6,000 or so in Government Recording and Transfer
Charges - City/County Tax Stamps; State Tax/Stamps and
State Recordation Tax - are these deductible as state
and local taxes? |
| Michael
Schulman: Sorry, but no,
they are not. Deductible taxes include either state
income taxes or state sales taxes (but not both); real
estate taxes; and state and local personal property
taxes. |
| Boston, MA: I have just
graduated from college and I am about one year into a
new job. What is the most secure and lucrative way to
save for retirement? |
| Michael
Schulman: Congratulations
for recognizing the importance of accumulating
retirement savings. First of all, make sure that you are
contributing as much as possible into your employer's
401(k) plan, if there is one. After that, you may be
able to make a deductible IRA contribution. In either
event, you can probably make a Roth IRA contribution. As
a new member of the work force, you are probably in a
low tax bracket so a Roth IRA is a great idea. You don't
need the tax deduction and the future income stream will
be free of income tax. |
| Providence,
RI: I recently
received a 1099-C from my former credit card company
that I paid off my debt minus a portion of interest they
were charging me. The 1099-C indicated that I have to
report the interest canceled as other income. Why is the
canceled interest reportable income? |
| Michael
Schulman: The easy answer
is "because Congress says so," but that would be rude.
Seriously, when a debt is forgiven, in your case, the
interest due to the credit card company, the amount of
debt forgiven must be included in your taxable income.
Use the "other income" line of form
1040. |
| Rock Hill,
SC: I exercised
some stock options last year and got hammered by the
alternative minimum tax (AMT). I seem to recall reading
that when this happens, you can take a deduction of some
sort the following year. Is this true? What do I have to
do to take advantage of this? |
| Michael
Schulman: In the year that
you exercise Incentive Stock Options, the difference
between the amount that you paid for the options and the
fair market value of the shares must be added back when
calculating the dreaded Alternative Minimum Tax (AMT.)
Your stock basis for the AMT will be higher than your
basis for the regular tax. When you sell your shares,
the inequality will be
reversed. |
| Ho Chi Minh City,
Vietnam: The first half
of last year I worked in the U.S. The second half, I
worked for a foreign corporation not subject to U.S.
taxes. I would like to file for an extension on my
taxes. I know I still have to pay my taxes on time. What
forms do I use to figure my estimated taxes?
|
| Michael
Schulman: To file for an
automatic six month extension, to October 15, 2006, file
form 4868 and check box 8. You will have until June 15,
2006, rather than April 15, 2006 to pay your taxes. For
estimated taxes, use the estimated tax worksheet that
comes with form 1040-ES. |
| San Diego,
CA: I started going
to school to receive my degree, and the company I work
for will reimburse me if I receive a B- or above. Am I
declaring this as income? Am I also receiving any tax
credits as a full-time student? I want to make sure I
understand before I file. Thank you. |
| Michael
Schulman: If your
employer's reimbursements are made pursuant to an
"accountable plan" then the reimbursements are not
included on your W-2 and you do not deduct your
expenses. Of course, excess reimbursements are added to
your income and excess expenses are deducted (net of 2%
of adjusted gross income) on schedule A. If your
employer's reimbursements are not made pursuant to an
"accountable plan" then the reimbursements are included
on your W-2. Your expenses are deducted (net of 2% of
AGI) on schedule A. There are two tax education credits:
the Hope Scholarship Credit and the Lifetime Learning
Credit. The former, available only for the first 2 years
of post-secondary education, covers the first $1,000 of
qualifying expenses and 50% of the next $1,000, for a
maximum credit of $1,500. The latter has no limit on the
number or years it can be claimed and covers 20% of
eligible expenses. |
| Las Vegas
Nevada: I worked in
California and from there I moved to Nevada to retire.
My question is do I have to pay California taxes when I
take out money from my 401(k) some day ? Someone said
that I do because I earned the money in California. If
so, how can I regain my freedom from California? THanks
Hank |
| Michael
Schulman: You'll be happy
to know that your pension income is NOT taxable to
California. Enjoy your
freedom! |
| : Mr. Schulman:
Do I count mileage reimbursment as income?
Thanks. |
| Michael
Schulman: If your employer
includes the mileage reimbursement on your W-2 form then
you must include the amount in income. You are entitled
to a corresponding deduction for the expense, see Form
2106 and Schedule A. On the other hand, if your employer
excludes the mileage reimbursement on your W-2 form then
you do not include the amount in income. You are not
entitled to a corresponding deduction for the expense.
But, excess reimbursements must be reported and excess
expenses may be deducted. |
|
| Comment from Michael
Schulman: So far, we have
had 2 questions on expense reimbursement. For taxpayers
subject to the Alternative Minimum Tax (AMT), it is
usually preferable to have your employer not put the
reimbursements on your W-2. Put differently, make sure
that you have an "accountable plan" for reimbursements
with your employer. |
| Stow, Ohio: I am a
independent driving instructor. Do I have to pay
supplemental security income (SSI) and Medicare taxes on
the amount on my 1099 MISC. I do not have my own
business and nothing is taken out of my pay check.
Tom |
| Michael
Schulman: Tom, as an
independent contractor, you are responsible for paying
Social Security and Medicare Taxes on your net
self-employment income (if the income exceeds $400.)
Compute the tax on Schedule SE and remember to take a
deduction for half of the computed self-employment tax
on page 1 of your Form 1040. |
| : Owatonna, MN:
Is there anything that I can do with government EE bonds
beside cash them in? Can I give them to a charity?
|
| Michael
Schulman: There's not much
help here. The accrued interest on the bonds will be
taxable to you, in any event. Thus, you will have
interest income and a charitable deduction. If you have
a particular charitable organization in mind, you might
ask them about various types of charitable annuities. It
is a sophisticated topic, so bring your C.P.A. with
you. |
| miami, fl: Can I deduct
the 2% hurricane deductible from my homeowners
insurance? |
| Michael
Schulman: The deductible
represents the loss to you. For example, if you have a
$10,000 loss and your insurance covers 98%, or $9,800,
the $200 balance is the loss. You would use form 4684 to
determine the amount, if any, of the loss that is
deductible. |
| Fort Worth: I have lived
in my home for three out of the last five years. I owned
the home for 10 years. I am now selling this home. Is
there any tax consequences related to this sale or
requirements to repurchase another home? |
| Michael
Schulman: The primary
requirement for a tax-free sale of a principal residence
is that you must have owned and used the house as a
principal for two out of the last five years (which you
have done). Thus you may exclude $250,000 ($500,000 if
you are married and filing a joint return) of gain. You
do not have to purchase a new house.
|
| Cheney, NE: My previous
employer filed for bankruptcy, however I was never able
to cash my last two pay checks (bank withholding all
funds), nor the promised severance. Is there any way I
can declare this on my taxes by reducing the amount I
made? Or am I stuck paying taxes on money that I have
never received? |
| Michael
Schulman: You pay taxes
only on money that you actually received. Look at your
W-2 form. If the form is correct, there is nothing to
worry about, just complete your return as usual. If the
W-2 includes wages that you never received, report the
correct amount of wages on your return and attach an
explanation as to why the reported wages do not agree
with the W-2. |
| Crystal MN: This summer I
will get a $5000 assessment on my property for street
improvements. My question is from a tax perspective is
it better to finance this on my property taxes or to
take a second mortgage out on my house to pay the
assessment? |
| Michael
Schulman: Special
assessments, such as for street improvements, are
deductible if they tend to increase the value of your
property. The construction of new streets would qualify.
You do not deduct the assessment, you add it to the
basis of the property. Interest on the assessment is
considered "real estate taxes" and deducted there. (So,
if you are in an AMT situation, you get no benefit.) If
the assessment is for maintenance and repairs, it is
deductible as real estate taxes to the extent allocable
to your property. Using a $5,000 second mortgage to pay
the assessment yields deductible interest expense. (As
opposed to deductible real estate taxes if financed via
property taxes, above.) |
|
| Comment from Michael
Schulman: An interesting
point concerning real estate taxes: Many taxpayers
escrow their real estate taxes. That is, their bank or
mortgage company collects a portion of the estimated
real estate taxes on a monthly basis and remits them to
the appropriate taxing authority. You get a deduction
when the bank or mortgage company pays the municipality,
NOT when you make your monthly mortgage payment. I have
seen instances where the mortgage company does not make
a payment to the municipality. In such a case, you get
no deduction. You have to wait until the taxes are
paid. |
| Huntsville,
AL: I am a single
2005 MBA graduate who has an $1300 investment loss &
moving expenses in 2005 that can be used for a tax
credit. However, I have other credits (school loan
interest payment, standard deduction) that covered my
2005 taxes without the investment loss & moving
(taxes are $2700). How do I carry over the investment
loss to 2006 if I can't apply it to the 2005 tax return?
Do I need to indicate the loss on the 2005 return? Can I
carryover the moving expense ($2000)? My income in
$70,000 before taxes, with 10% into a 401k. Thank you
for your response. |
| Michael
Schulman: Congratulations
on your MBA. Your $1,300 investment loss is deductible
this year on Schedule D. You do not have a choice to
carry it over to 2006. Likewise, moving expenses are
deducted this year, use Form 3903. Student loan interest
is deducted on page 1 of form 1040. Note that student
loan interest, investment losses and moving expenses act
as deductions (i.e. they reduce taxable income) rather
than tax credits (that directly reduce taxes.) I suggest
that you recalculate your taxes and you will see that
you have a smaller tax liability but no tax credits,
based on what to told me. |
| Hertford, North
Carolina: If you
reinvest dividends by buying stock in an existing IRA
(individual retirement account) are the dividends
taxable? |
| Michael
Schulman: No, they are
not. Interest, dividends, and capital gains realized in
an IRA are not taxable. They increase the value of the
IRA and you will pay taxes on these when the money is
withdrawn. |
| JAcksonville
Florida: If I did not
file last year can I file this year's taxes and last
year's together? |
| Michael
Schulman: Every year
stands on its own. You must prepare a tax return for
each year using the appropriate forms (and laws) for
each year. Remember that the penalties for nonfiling and
nonpayment are huge. |
| Yelm,
Washington: Six years ago
I bought a vacation lot for $4500. This past year I sold
it for $57,000. I own a house that has an outstanding
mortgage of $200,000. Can I use the $57K to pay down my
mortgage thus eliminating the capital gains tax on the
money? |
| Michael
Schulman: No, you cannot.
The capital gain in the sale of the vacation lot must be
reported on its own and taxes paid. Any money you use to
reduce the mortgage is just that - a reduction of the
mortgage. It is not deductible.
Sorry. |
| Charlotte,
NC: My girlfriend
and I just got married last year and both of us put zero
deductions on our paychecks with our company. The two of
us also put the maximum amount our company matches into
our 401K pretax. We feel that we are paying a lot in
taxes every year and do not know how we can get a better
return. We do not have any children and we rent right
now and I do not know of any itemized deductions that
will help ease some of our tax burden. I was just
curious as to whether it would be beneficial to file
married or single because just perusing the E-Z form I
do not see much of an advantage. Thank you for your
time. |
| Michael
Schulman: Congratulations
on the marriage! You make a good point; there really
isn't much that you can do. One thought is to make
deductible IRA contributions if your incomes are less
than $80,000 (combined). Making charitable contributions
will reduce your tax bill but will also reduce your
cash. When you buy a home and have mortgage interest and
real estate tax deductions, you'll really see a
difference in your taxes. |
| Longview,
Texas: What
percentage of church contributions are tax
deductible? |
| Michael
Schulman: Church
contributions are deductible, in full, up to 50 percent
of your adjusted gross
income. |
| burleson
texas: I want to
start my own small business. Can you refer a good book
to learn the in and outs for tax reasons.? Do I need a
tax number too? |
| Michael
Schulman: An excellent
book can be found on the IRS's website www.irs.gov. Get
a copy of Publication 334, Tax Guide for Small
Businesses. If you form a corporation, you will need an
employer identification number (EIN). If you are a sole
proprietor, you don't need an EIN unless you will have
payroll. Get an EIN by filing form
SS-4. |
| Burke, VA: What are the
prime contributors that puts a taxpayer into a situation
where they would have to pay AMT (alternative minimum
tax)? |
| Michael
Schulman: For most
individuals, the dreaded Altrernative Minimum Tax is
triggered by 4 things: (i) large medical deductions,
(ii) large deductions for state and local taxes, (iii) a
deduction for business expenses in excess of 2% of AGI,
and (iv) the exercise of Incentive Stock Options. By the
way, if you find yourself in an AMT situation, discuss
with your C.P.A. whether it makes sense to accelerate
income into the AMT year. Sometimes, this produces a
lower tax on this income that you will pay in a non-AMT
year. Be careful, here. |
| Los Angeles,
CA: 2005 was the
first year I did hundreds of stock trades, but I didn't
realize until I paid a visit to H&R Block that they
had to log every one into my taxes, which they wanted to
charge me $4 for each transaction ($8.00 per stock). Is
there a more practical way of going about this without
getting charged over $1,000 to do my taxes?
|
| Michael
Schulman: Have you
considered doing the job yourself by creating an Excel
spreadsheet? Be sure to segregate the short and long
term items. Many brokerage firms can prepare these, as
well. |
| Indianapolis: Does it make
sense to contribute to my IRA if my income is over
$300,000 and I am participating in my compnay
401k? |
| Michael
Schulman: If you
participate in your company's 401(k) plan and have
income over $60,000 single/$80,000 married filing
jointly, you cannot make a deductible IRA
contribution. |
| Sterling,
Va: Dear Mr.
Schulman: My parents do not have any income besides
$3000 from babysitting a friend's son. What tax should
they fill out? Thanks, Kevin |
| Michael
Schulman: No forms at all,
they are not required to
file. |
| Columbia,
MD: My mutual fund
company did not keep records as far back as they needed
to do my cost basis and neither did I. If they don't
know and I don't know., does the IRS know or will they
accept my figures if reasonable? |
| Michael
Schulman: This is a very
common problem. The recordkeeping burden falls squarely
on your shoulders. That being said, do you have enough
information to make a good faith estimate? If so, I
would go with that. |
| Chicago IL: I have owned a
stock for many years. There have been so many mergers,
divestitures, stock splits, and reinvested dividends
that it is difficult to figure the gains. How do I
handle this to avoid errors in calculating the
gains? |
| Michael
Schulman: Often, when
companies reorganize, they provide worksheets to assist
shareholders with just this problem. Also, there are
books in the library that have histories of stock
transactions as should the company, itself. Searching
on-line is not a bad idea,
either. |
| Agawam,MA: My wife worked
two months in Massachusetts (MA) and the rest of the
year in Connecticut (CT). She worked for the same
MA-based company and was given two W-2 forms. The CT one
was completely filled in top to bottom, but the MA W-2
was blank on top and only had lines 16 and 17 filled in.
Line 16 for MA had what she made for the entire year,
even though she only worked in MA for two months, while
the CT W-2, line 16 had what appeared to be what she
actually earned while working in CT. Why didn't the MA
W-2 have what she actually earned in line 16 while she
worked in MA? If it matters, we live in MA too.
|
| Michael
Schulman: As MA residents,
you are taxable on all of your income earned, regardless
of state. You will also be required to file a CT
nonresident return using the CT income numbers provided.
Finally, you will get a credit on your MA return form
some (maybe, all) of the taxes paid to CT. Sound
complicated? It is. |
| atlanta ga: Can a
qualified individual make a 2005 contribution to an Roth
IRA after he or she files her taxes? |
| Michael
Schulman: Yes, you can but
you have until April 17, 2006 to do so. Any payments
made after that date must be aplied to
2006. |
| Forence,Kentucky: I am a
first-time home owner. Could you explain how interest
paid on a house is tax deductible? Do you need to have a
certain amount of deductions to do this? Does any carry
over from year to year?T hanks in advance,
Shawn |
| Michael
Schulman: The interest
that you pay on your home mortgage is deductible. The
total of this interest, together with your medical
expenses, state and local taxes (including your real
estate taxes), charitable contribuitions, and other
miscellaneous deductions equals your itemized
deductions. Now compare this total to the standard
deduction ($10,000 married filing jointly, $5,000
single) and deduct the LARGER. The deduction does not
carry from year to year. Good luck in your new
home! |
| El Paso,
Texas: Michael, I am
a single mother with one child who purchased a new car
last year. My adjusted gross income (AGI) is $48,000 and
I have no other major deductions. Should I attempt to
itemize in order to benefit from the sales tax deduction
or stick with the 1040A? Thank you. |
| Michael
Schulman: The answer
depends on what other itemized deductions, if any, you
have. I would calculate your taxes both ways and choose
the option that produces the lesser tax. If you are
using a software package, it should be easy to
do. |
| Thurmont
Maryland: During the
past year my broker sold some bonds and I have a capital
gain. However I never received the money, it was all
reinvested. Do I get a tax break because it was
reinvested and I didn't receive the funds? |
| Michael
Schulman: Unfortunately,
you must pay tax on the capital gains, even though the
proceeds were reinvested. |
| Jackson, MS: What home
improvements are tax deductible? Which form is used to
document home improvement deductions? What is the
maximum home improvement deductible amount? Are home
improvement deductions legal IRS tax
deductions? |
| Michael
Schulman: In general, home
improvements are not deductible. They will add to the
cost basis of your house so keep a record of how much
you spent. An exception to this rule is when
improvements are made for medical reasons. The deduction
is limited to the excess of the improvement's cost over
the increase in fair value of the house. Finally,
certain structural changes in a house to make it
handicapped accessible are fully deductible even though
they do not increase the value of the
house. |
| : Okanogan, WA:
Is a real estate excise tax considered to be the same as
a state sales tax? I ask because it is listed separately
on a closing document from the assorted stamp tax,
filing fees etc. |
| Michael
Schulman: Excise and sales
taxes are different. In particular, sales taxes are
deductible on Schedule A while excise taxes are
not. |
| Basking Ridge,
NJ: My husband and
I bought and sold an investment property in
Massachussetts in 2005 under the 1031 tax free exchange.
What forms need to be filed with our federal tax return
this year, and is there any implication for our NJ State
tax return? |
| Michael
Schulman: Assuming all of
the statutory requirements for a like-kind exchange have
been met, you report the exchange on Form 8824. (For
help, go to www.irs.gov and download Publications 544
and 550.) |
| Freeport,Illinois: We earned less
than $32,000 last year and I was the only one drawing
Social Security. Do we have to pay taxes on what I
earned from Social Security? |
| Michael
Schulman: For a married
couple filing a joint return, if your non-Social
Security income, plus half of the Social Security, plus
nontaxable interest exceeds $32,000, then some of the
Social Security will be taxable between 50% and 85% of
the Social Security. |
| Okemos,
Michigan: My elderly mom
cannot live alone and has lived with me for 19 months.
She gets Social Security and two annuities/month (total
$1800). I pay her living expenses. Can I claim her as a
dependent for 2005 (and amend for 2004), or is it a bad
idea? I've heard that, once she's my dependent, she'll
always be, including if she ever ends up in a nursing
home. |
| Michael
Schulman: Unfortunately,
your mom's gross income ($1,800/month) exceeds the
statutory annual limit of $3,200 so she cannot be
claimed as a dependent. |
| Clifton Park New
York: I sold my
house in 2005 for a profit of $85,000 and then got
married in late 2005 and moved in with my wife. We plan
to sell her house in 2006 and buy a bigger house. Her
house will sell for a smaller profit than mine. Do we
have to pay capital gains on either sale this year or
next? Thanks |
| Michael
Schulman: Assuming that
you lived in your house for 2 of the last 5 years, you
can exclude the gain, in 2005, of $85,000. As for the
anticipated 2006 sale, you will not have satisfied the 2
in 5 test but your wife will have. Assuming that you
file a joint return, your wife will be entitled to an
exclusion on the sale of her
house. |
|
| Comment from Michael
Schulman: Thank you for
your time today. If we didn't get to your question
today, you can try again next week at the same time.
Each Thursday at 1 p.m. ET from now until April 13,
USATODAY.com will feature a different tax expert from
the AICPA to answer your tax questions. Join us next
week |
![]() |
|
|
| |
|
|
|
|
|
| |
|
|