Saturday, March 5, 2011

Where is my Tuition Deduction?

Q.  I am at a loss as to how to take the deduction for tuition and fees on my tax return. Form 8917 won't transfer to my 1040. I finally gave up and gave it to my daughter, but she says she can't use it because we take her as a dependent. What are we doing wrong? DE, Illinois

A.  Most likely you aren't doing anything wrong. In my practice, I find that most parents both work today, and with a Adjusted Gross Income in excess of $130,000 you start to lose the deduction. At an Adjusted Gross Income level of $160,000, the deduction is totally lost. If your Adjusted Gross Income is at or below $100,000 you may realize more benefit by trying the American Opportunity or Lifetime Learning Credits. Usually a credit will benefit you more than a deduction.

Friday, March 4, 2011

Incorrect Forms

Q.  I'm helping my grand-dad with his tax return, and I think I found a mistake. The person he leases his land to reported the rents on a 1099-R form. I think it should have been a 1099-Misc form. In any case, the software we're using refuses to put it on a Schedule E. Now what?  FR, Oklahoma

A.  You are correct in finding a mistake. The rents paid should have been reported on a 1099-Misc. Your best option is to contact the lessee and ask them to please void the 1099-R and reissue a 1099-Misc. That, however, is easier said than done. Barring getting a timely corrected form, these are the choices you have:

  • Ignore the 1099-R and just enter the correct amount on Schedule E
  • If the lessee says they will correct the form, ignore the 1099-R and wait until the corrected form arrives. You may need to put your grand-dad's return on extension pending arrival of the new form.
  • Enter the 1099-R on line 16b where the computer normally puts it, and then make an adjusting entry on line 21 as a negative amount to zero it out, and then enter the correct amount as above, on Schedule E.
Sometimes there are no good answers to a situation as this. I'm grappling with a similar situation now. Always be prepared to justify your actions by keeping excellent records and documenting whatever you do. Be prepared to receive a notice from the IRS inquiring about the missing 1099-R form if you choose to omit it and/or can't obtain a corrected form. As long as the total correct income is reported, you shouldn't incur any trouble from the IRS other than the inconvenience of having to explain the situation.  Good luck!

Thursday, March 3, 2011

How do I pay Self-Employment or Estimated Taxes?

Q.  Someone just told me now that I'm self-employed, I should start making estimated quarterly payments of my taxes to avoid penalties. When I was working my employer always withheld income taxes. How much do I have to pay and how do I make them? CR, California

A.  If you are no longer having any type of federal or state withholding, you indeed may incur a penalty if taxes are not prepaid. Currently you are allowed only to owe $1,000 with your timely filed 1040 without incurring a penalty. Since you are from California, the balance due must not exceed $200 without incurring a penalty. Each state has a different threshold, so be sure to check for each state you are required to file a return.

I can't tell you how much to pay without knowing all the facts about what you expect to make. Wouldn't it be nice to have a crystal ball! A good place to start would be with your 2010 return. Review each line item and ask yourself if the amount will be greater or less than you reported in the current year. Then, estimate the amount of self employed income you expect to make. Multiply your self-employment income by 15.3%. This will cover your self employment taxes, i.e. social security and medicare. Note: if you have a loss from your self-employment, no self-employment taxes are due.

The final part will be to estimate the amount of income taxes you expect to owe in the coming year. Add that to your self-employment taxes, and the result will be the amount of estimated taxes you are required to pay. You pay them on Form 1040-ES and in California, 540-ES on a quarterly basis. Remember, you only need to pay California income taxes. Currently there are no self-employed state taxes. The address to mail them to is right on the form. Alternately, you can now pay online. Go to the IRS website and the FTB website and follow the instructions.

Wednesday, March 2, 2011

I don't understand the answer to my question. What does it mean?

Q.  After getting our tax return back from our CPA, I noticed our partnership loss wasn't deducted from gross income. When I called him, he was busy, and wouldn't you know, when he returned my call, we were traveling in a dead area and he left a message on my cell saying we didn't get the loss because it was a passive activity. What on earth does that mean? CA, New Mexico

A.  The best way to answer your question is to give you a little background on our income tax laws. Many decades ago, you reported two types of income: (1) capital gains or losses resulting from the sale of capital assets, and (2) ordinary income, which was everything else.

Then, I believe it was in 1986, congress decided more taxpayers needed to pay taxes, and in their wisdom, added two additional classifications of income (3) portfolio income which is basically interest and dividends, and (4) passive activity income, which includes rentals, partnerships which you don't actively participate in, and a few other things as well. You can read all about the Tax Reform Act of 1986  , but I strongly suggest you refrain from printing the 1379 pages!

Since its passage, depending on your filing status and Adjusted Gross Income, you may or may not qualify to take a passive activity loss on your tax return unless you have passive activity gains to offset them. Lacking passive activity gains, your loss will be carried forward on form 8582 to the ensuing year. This can go on for years, until the property in question is disposed. The final disposition of a passive activity frees up accumulated losses to offset any gain which may result in the disposition. If the activity is sold at a loss, both the accumulated passive activity losses together with the loss on the disposition of the property can be taken. Whew - I hope I didn't make things worse!

Tuesday, March 1, 2011

Where or where did my 1099 go?

Q.  I just received a 1099-Int and a 1099-Div form for my grandson. Since he already filed his taxes, can't I just include the interest and dividends on my return?  RA, Illinois

A.  No, that is not possible. It may be possible for your grandson's parents to include it on their return, depending on the your grandson's age, his earned income, if any, and other considerations.

Tax Tip:  It's always a good idea to have all investment portfolio income mailed directly to the recipient, even if you were the investor. Many grandparents like to make small investments on behalf of their grandchildren, but at the end of the year, if there is taxable income which needs to be reported, it will save everyone a lot of time and inconvenience if these reports go directly to the address of the account holder.

Monday, February 28, 2011

Can you help?

Q.  I just arrived at my home park  & one of the ladies in my group mentioned she finally got her 2010 tax returns finished. My husband passed away last year and he always took care of our taxes. Someone suggested I contact you to see if you are available to prepare my taxes this year and in the future. JR, Florida

A.  First, thank you for the vote of confidence. Yes, I am available, but can only take on a limited number of returns, and the information would need to be in my hands ASAP.  The week is soon approaching where I can take on no further clients, and all the information will need to be complete. No missing K-1 forms, 1099s, etc. Please email me at the address on the header or use the comments section to contact me personally. Your comment will come directly into my email account and we can go forward from there.