(Try this quiz yourself! Compilation of newsletter questions since
1982. They all still apply!)
I spent a considerable amount for my business attire. Are any of these expenses deductible?
· · No. The IRS allows only specific “uniform” attire. Examples are police, nurse, and bus driver uniforms.
I contributed to a
charitable institution and received a gift in return. Is the whole contribution deductible?
·
·
No. You should subtract the value of the gift
you received. For instance, if you
attend a $50 a plate charitable dinner and the value of the dinner is $20, your
contribution is $30.
I
had $500 worth of items stolen for my home.
My insurance cover only amounts over $500. Is my $500 loss deductible?
·
· Possibly, but
unlikely. For theft and casualty
losses, the amount exceeding 10% of your adjusted gross income (AGI) is
deductible. For instance, a taxpayer
with an (AGI) of $80,000, must have a loss of more than $8,000 in order to
deduct it
Are funeral and burial
expenses deductible?
·
· No. These are personal expenses. Personal expenses are not deductible unless
specified in the Internal Revenue Code.
Mortgage interest and real estate taxes are examples of personal items
specified in the IRS code.
I head a Girl Scout troop. Can I deduct the mileage when I use my car to buy supplies and go
to meetings?
·
· Yes. Out-of-pocket expenses, such as the cost of
gasoline and supplies for tax-exempt charitable organizations are
deductible. Simply supply the number of
miles to me with your tax information.
Note that you are not allowed to deduct what your services “would have
cost.” For instance, you cannot assess
the services you donated at $65 per hour and then deduct that amount on the tax
return.
If someone gives me $1,000, is it taxable to me?
·
· No. Gifts up to $10,000 may be given and
received without taxation.
Are capital gains taxed at the same rate as ordinary income?
·
· Long-term
capital gains (assets held over five years are taxed at no more than 18%. Mid-term capital gains (held more than one
year) are taxed at no more than 20%.
Short-term capital gains are taxed as other income.
May I withdraw my 401
(k) pension if I buy a new house or have a medical emergency?
·
· Yes, if your
company plan allows it. However, when you withdraw these funds from the plan,
they are fully taxable, and you will incur a 10% penalty. So if you are in the 31% federal tax bracket
and 6% bracket for state taxes, you will pay 47% (effectively half) of what you
withdraw for taxes and penalties.
As you can see, it’s a high price to pay, so I recommend borrowing from these funds instead. You’ll pay yourself interest as you pay back the loan! If you do withdraw the money (not borrow it), be sure to call me so we can discuss the taxes that must be paid when withdrawn in order to avoid additional penalties.
My 21-year-old daughter who lives with me earned
$8,000. Can I claim her as a dependent?
·
· Yes, if
she’s a full-time student. At age 24
you can no longer claim her as a dependent, however, unless her income falls
below the exemption amount allowed by the IRS (about $3,000). If she’s not a full-time student, you
cease claiming her as an exemption when she reaches 19.
How long should I keep my
tax returns?
·
· You should
keep your returns for a minimum of 3 years.
There are exceptions, of course.
Keep specific returns indefinitely for the following circumstances: (1) The year you sell your residence. (2) The year you get a nondeductible
IRA. (3) All the years you are
self-employed. (4) The years you have
reinvested dividends. (5) Any year you
take depreciation for your vehicle, rental property, business equipment, etc. (6) And any year you have a passive loss
from a limited partnership.
If you substantially under-report your income, the IRS
can go back six years to check your returns.
If the IRS detects tax fraud, they can check back as far as they
want. That’s how Al Capone was finally
sent to prison!% top rate.
How much will I get back on my tax return?
·
·
I don’t know!
Can you trade stocks
(instead of selling) and avoid paying capital gains tax?
·
· Tax wise,
trading stock is the same as selling it.
You realize capital gain and pay taxes on it.
Under
which of the following circumstances can you deduct the mileage?
a) a) Taking Aunt
Rose to visit Uncle Joe. (Uh, no! Have you dropped your chalupa?)
b) b) Business
Mileage (36 ½ cents)
c) c) Medical
Mileage (10 cents)
d) d) Charitable Mileage
(14 cents)
e) e) Moving Mileage
(10 cents)
Uncle Joe is the only loser
above. Exploit the others at the given
rates per mile.
Let's say you're selling your home that you owned for two
years, and you will have a sizable gain.
You plan on buying a home that costs considerably less than the selling
price of your current home. (Or you
plan on not buying another home at all).
Is the gain taxable?
·
· Nope! Since 1997, you may exclude up to $500,000
($250,000 for single filers) of gain on the sale. You simply have had to live in the home for two of the last five
years. And this can occur every two
years—unlike the previous "Once in a lifetime exclusion.” What's more, if you owned the home less than
two years, we can prorate the exclusion.
Because of the high profit allowed with no taxability, it
is no longer necessary to track the improvements on your home, unless you think
you’ll exceed the above gains in the sale.
I obtained a second
mortgage to pay my tax preparation fee: Is the interest on the loan deductible?
·
·
Yes! It doesn't matter how you use the proceeds
of a second mortgage or home-equity loan.
The interest is deductible as long as you itemize your deductions.
Is private mortgage insurance
deductible, and how do I eliminate it?
·
· It's not
deductible, unless it is used for rental property or you use your home as a
home-office. (Be sure to include it on
my worksheet.) Private mortgage
insurance is usually required when you put less than 20% down on a home. Mortgage insurance can be pricey, and the
insurer will not beat down your door to indicate it’s no longer necessary. Once you have 20% equity in your property,
indicate to your lender that you wish to cancel the insurance. Your equity increases by appreciation,
improvements, or simply paying down the loan.
Can I deduct my itemized deductions regardless of my income
level?
·
· No! If your income is over about $129,000,
you'll lose $300 of your itemized deductions for every $10,000 of income over
the limit (3%).
Can You Eliminate Filing a Tax Return for Your Child?
·
· You bet! If your child has investment income greater
than $700, a tax return must be filed for the child. However, you may consider investing in high quality growth
stocks, which typically do not pay dividends or capital gains. By doing this, you will realize growth, with
no dividend income. End result: No filing until you sell the stock!
Can you deduct your commute from home to your work place?
·
·
Normally,
you cannot! The IRS considers the
expense personal. But, there are
ways: If you have a temporary
work location farther than your normal location (must be both), then you
can deduct the mileage.
Are US Savings Bonds and Treasury Bonds tax-free income?
·
· No! The IRS does tax the interest earned on
them; however most states do not.
Municipal bond interest income is tax-free by the Fed and also by the
State, if the issuer is located in the state where you reside.
Is the Medicare Premium
deductible?
·
·
Yes. It is deducted as medical expense if you
itemize deductions.