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Color of Money

Color of Money: Tax Time Tips

Michelle Singletary and Jim Dupree
Washington Post Business Columnist and IRS Spokesman
Thursday, March 17, 2005; 12:00 PM

Jim Dupree, the IRS spokesman for Maryland and Metropolitan Washington, again joined Michelle Singletary to help answer readers' basic tax questions.

A transcript follows.

_____Michelle's Column_____
The Color of Money

Each week in Michelle's Personal Finance e-letter, Dupree answers more tax questions. Check out a compilation of their tips here. A transcript of their Feb. 2 discussion is also online.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Michelle Singletary: Good afternoon everyone. There are lots of questions so let's get going. Don't ya love tax time? Ok, don't answer that.

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Washington, D.C.: Is there ever a transcript of all the questions and answers for those who cannot participate? This is a great information-sharing event.

washingtonpost.com: Check out our special report, Tax Time 2005, for links to past discussions and other resources.

Michelle Singletary: Yup.

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Foggy Bottom, D.C.: Michelle, a suggestion to look out for early ID theft is to check your credit report often. But isn't that expensive? In September, I'll be able to get one free one a year; otherwise, it costs. Shouldn't that be changed to free ones more frequently?

washingtonpost.com: The Color of Money: When ID Theft Starts at Home (Feb. 13, 2005)

Michelle Singletary: I know this isn't tax related but I do think with the rise in ID theft consumers should be able to get their credit report free more often than once a year. But it's a start.

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Anonymous: Selling a rental/investment property. Information on Capital Gains Tax.

Michelle Singletary: This straight from tax tips on the IRS web site (www.irs.gov): Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

Check out IRS Publication 544, Sales and Other Dispositions of Assets or Publication 550, Investment Income and Expenses

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Baltimore: Can I claim my live in girlfriend as a dependant, I provide 100% of her support and she lived with me for all of 2004.

Jim Dupree: Nope, sorry... You don't meet the relationship test for the state of Maryland...

Michelle Singletary: See that's why you should get married :)

Just kidding (well sort of)

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Richmond, Va.: When does 2001 taxes have to be filed if client filed a 2001 tax extension.

Jim Dupree: There were only two possible extentions - the first granted you until August 15th, 2002 to file the return. If you were granted an additional extention, you had until October 15th, 2002 to file the return...

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Washington, D.C.: My husband and I married in November 2004. I made more than he last year. I work full-time, he's freelance, but I also had some freelance income as well. Should we file jointly or separately?

Jim Dupree: If you and your spouse both have income, you may want to figure your tax both on a joint return and on separate returns (using the filing status of married filing separately). Choose the method that gives you the lower combined tax...

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Washington, D.C.: Hi,

Longtime chat lurker with ay question that is only sort of tax related, sorry. I will be receiving a nice return this year (~1K) but am not sure what to do with it.

I will start grad school in the Fall which will run ~$20k/yr in tuition alone. I will most likely go F/T because it will cost more in the long run doing it P/T, and will try to squeeze in 20 hrs/week or so of work or paid internships.

Assuming I don't get a fellowship or scholarships, I'll pay it all alone. I originally thought of putting that money into my SEP-IRA that I carried over from a former job, which now has ~20K in it, or opening a Roth.

But now I'm thinking I should hold onto it and add it to my 9K in my money market savings acct to use for living expenses, books, etc for school.

It can help with school if it's in the IRA, because I can pull out A BIT of it to offset tuition OR I can use it for daily school expenses.

How do I know which will give me more bang for my buck?

Also, I'm not sure if I even SHOULD be digging into my IRA for school. Would it be better to take out student loans (which I will have to do anyway since the IRA alone is not enough) and save the IRA for something bigger like a down payment on a first home or retirement?

I am a major saver, and have paid off all my debts, including undergrad, in preparation for this. I guess that now that it's approaching, I'm getting a bit of a panic attack on just how to do this.

Thanks!

Michelle Singletary: Wow. Lot going on. For simplicity sake since you'll need that $1,000 refund for grad school I would suggest you just put it into your money market. Since you will need it soon, best not to risk it by investing.

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Alexandria, Va.: I recently moved here. Is there a way to claim moving expenses, including renting a trailer and mileage? Thank you.

Jim Dupree: If your move was work-related:

You can deduct your moving expenses if you meet all three of the following requirements:

1. Your move is closely related to the start of work.

2. You meet the distance test.

3. You meet the time test

If you meet these requirements, you can deduct the reasonable expenses of:

1. Moving your household goods and personal effects

2. Traveling to your new home

Check IRS Publication 521, "Moving Expenses" for more detailed info...

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Laurel, Md.: With the explosion of home computers and people becoming more comfortable using there computers for everything from shopping to banking, Are businesses like H&R Block and Jackson Hewitt a thing of the past, or will they still have some value for people to get there money fast through 1 day loans ?

Michelle Singletary: I think if your taxes are complicated or you are tax return challenged than getting help from a professional is fine. But people stay away from those refund loans. Wait. Save.

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Seattle: I have "Qualified Dividend" I am standard deduction. Which form (that I use) to reduced rate? I am not filing 6251 (alternate minimum tax form)

Jim Dupree: Use the Qualified Dividends and Capital Gain Tax Worksheet on page 34 of your Form 1040 Instruction Booklet. this tax is reflected on line 43 of Form 1040.

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Washington, D.C.: What are some of the best ways to reduce your taxable income?

Michelle Singletary: The Post recently ran a number of stories on March 6 with tips to reduce your taxes. Especially check out "Ways to Reduce A Big Fat Tax"

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washingtonpost.com: Ways to Reduce A Big Fat Tax (March 6, 2005)

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Washington, D.C.: I am a 22 year old 'fresh' college grad who has never given taxes a second thought, at least until now. I can't imagine that my finances are too complicated, however I am nervous about preparing them on my own. Is it worth it to pay a professional to process a simple tax return? Or should I be able to handle this one on my own?

Michelle Singletary: Don't be afraid. Try to do your taxes first. If you then have trouble you might be eligible for free help with your return from the IRS. Free tax preparation is available through the Volunteer Income Tax Assistance (VITA). There is also help thu Tax Counseling for the Elderly (TCE) programs in many communities. Volunteers help prepare basic returns for taxpayers with low or limited incomes. Call 1-800-829-1040 to find the VITA or TCE site nearest you. Taxpayers may also call AARP — the largest TCE participant — at 1-888-227-7669 to find the closest Tax Aide site.

If you don't qualify for free help then it try finding a professional. If you have a simple return shouldn't cost too much.

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USA: I am having serious doubts about paying federal income taxes this year, especially since most of the money goes to building bombs to drop on the third world. I have serious disagreements with American foreign policy and do not believe we should be forced to pay taxes when that is the case. Can we submit them with the notification that they not be used for military purposes?

Jim Dupree: You cannot allocate where your tax dollars are to be spent when you file your return. You may want to contact your Congressperson and voice your concerns....

Remember, your taxes also pay for roads, highway maintenance, schools, public safety, and much more...

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Fredericksburg, Va.: My daughter is 22 and a full time college student. We have financed 90% of her school costs including room and board, paid her car insurance and she lived at home over the summer. She has worked part time mainly to pay for her car. She got married 5 May 2004. I am uncertain if I can claim her as a dependent for this year or not. For me it hinges on "did I pay half of her support for the year". How do you determine if you paid 50% of here support? What is the proof required? Of course she and here husband would have file "married filing separately" status. Please advise.

Jim Dupree: It depends on your daughter's income. See the worksheet for Determining Support in IRS Publication 17, "Your Federal Income Tax," page 32...

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Bridgton, Maine: My sister has just had to redo her bathroom and has to install a ramp because of her daughter's MS. Can these expenses be taken as a medical deduction since they are required due to the daughter's medical condition?

Brad

Michelle Singletary: According to the IRS (I did a column on this last year) the cost of permanent improvements that increase the value of your property may be partly included as a medical expense. However, the cost of the improvement is reduced by the increase in the value of the property. The difference, if any, is a medical expense. Here's what that means. Suppose you install an elevator because you have a heart condition and can't climb stairs. The elevator costs $8,000. If the improvement increased the value of the property by $4,400, you can deduct only $3,600 as a medical expense.

The good news is that some home improvements aren't considered by the IRS to increase the value of your property, so they can be included in full as medical expenses. Those improvements include, but aren't limited to, the following:

* Building entrance ramps.

* Widening doorways outside or inside the house.

* Adding handrails or grab bars.

For more information on which deductions you may be entitled to, get Publication 502, "Medical and Dental Expenses

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Clinton, Md.: My sister and I share a home. How can we split the tax claim?

Jim Dupree: It depends on who's name is on the deed. If both names, you can split the claim.

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Springfield, Va.: I didn't file taxes last year. Can I file both this year? Or do I file one, then wait to file this years?

Jim Dupree: Yes, but remember to use a 2003 tax form for last year's return and I'd suggest placing them in separate envelopes when submitting them to the IRS.

You can request last year's by calling 1-800-829-3676 or download it from our website: www.irs.gov ..

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Silver Spring, Md.: I have not worked in 3 years, can I file a tax return to get earned income credit when I have had no income or and no w-2 wages ?

Jim Dupree: Sorry... You must have earned income to qualify for the credit.

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Michelle Singletary: Hey folks. We have to run. I'm so sorry if we didn't get to your question. So many, so little time. But Jim promised to try and tackle some more questions left in the queue. I'll print the answers in an upcoming column. And as always feel free to e-mail your questions to colorofmoney@washpost.com. In my weekly newsletter (which you can subscribe to) Jim answers questions every week and has been doing so since the beginning of the year.

Again, thanks for joining me today.

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