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Tax Time

Kathy Burlison and Tom Lenafelt
Director of Tax Implementation and Public Relations Manager, H&R Block
Wednesday, March 9, 2005; 11:00 AM

Kathy Burlison, director of Tax Implementation at H&R Block corporate headquarters in Kansas City, Mo., was online Wednesday, March 9, at 11 a.m. ET to answer your questions about filing your taxes.

Burlison and Lenafelt specialize in tax training and will be able to discuss such topics as new tax laws, sales tax deductions, the alternative minimum tax, tax cuts, IRAs, self-employment, stock sales, eBay sales, taxable dividends and online filing, software and tax products.


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A transcript follows.

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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Tom Linafelt: Hi Everyone!

Welcome to our chat session at washingtonpost.com.

We appreciate your interest in taxes and in H&R Block's expertise.

With us today are Kathy Burlison, Director/Tax Implementation, and myself, Tom Linafelt, Communications Manager of Digital Tax Solutions.

Kathy will handle the tough tax questions. I'll do my best with online and software-related questions.

Thanks again for being here, and thanks to washingtonpost.com for having us.

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Glendale, Ariz.: What part of closing costs on a home re-fi is deductible, if any, on Fed return?

Thanks

Kathy Burlison: The costs of refinancing are not deductible and, because they are not costs to acquire your home, they are not added to your basis.

However, if you paid points on the refinance, the points can be amortized over the life of the loan. So if you have a 30-year loan (360 months) you'll deduct one-thirtieth each year. Except for the first and last years, when you'll deduct a smaller portion representing the number of months you had the loan that year.

If you had points you were amortizing from a previous refinance, you can deduct any remaining points from that loan this year.

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Washington, D.C.: I have heard that you can count or deduct your lottery tickets as on your taxes is this so, and how would such a deduction be categorized.

Kathy Burlison: You can deduct gambling losses to the extent of your gambling winnings. Your winnings are reported on line 21 of Form 1040 and deductible losses are a miscellaneous itemized deduction on Schedule A.

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New York, N.Y.: How expensive is it to file online? Is there free software available?

Tom Linafelt: Our free offer is a great way to complete and e-file your tax return, especially for taxpayers with very simple returns. It is available via the IRS' Free File Alliance.

However, the vast majority of our clients appreciate the money-saving advice, access to tax professionals and other features included with our paid online and software solutions.

For just $20, those upgrading from the free offer to our Premium online tax program get free access to an H&R Block tax professional for help on their toughest tax issue, interactive videos, free technical support and additional help for common tax issues related to education, business and other topics.

I should make it clear that our free offer DOES NOT include TaxCut software, as it has been mis-reported in the press.

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Richmond, Va.: 1. Are church-based preschools tax-exempt?

2. How much tuition/daycare is required for a "qualified dependent care expense"?

Kathy Burlison: You'll need to check with your specific pre-school, but often they are.

Any child care expenses (paid to enable you to work)are eligible for the child care credit. The eligible expenses are limited to $3,000 for one child and $6,000 for two or more children.

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Philadelphia, Pa.: I inherited and sold a house, and I received a 1099 from the firm that handled the sale. Do I report this as income, and how much in taxes am I responsible for since I didn't pay anything for the house?

Kathy Burlison: I'm assuming you did not live in the house or make it your home. You'll report this as a sale of a capital asset on Schedule D. Your basis will be the fair market value on the date of death of the person from whom you inherited it. If the inheritance was recent, you may even have a small loss because of the costs of the sale.

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Crofton, Md.: If you belong to a sports club and your child attends the daycare there while you are working out, is the $25 a month considered daycare expenses? Is it tax deductible? Are there ways around the tax laws if it's not deductible to make it tax deductible?

Kathy Burlison: Child care expenses are deductible only if they are to enable you to work (rather than to work out). So, given that it's unlikely that working out is something your employer pays you to do, the expense is personal and not deductible.

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Clinton, Md.: If I lease a car for business purposes, can I claim that on my taxes? thanks

Kathy Burlison: If you use the car for business purposes (not including commuting) you can deduct part of your lease and other expenses based on the business use percentage of the vehicle.

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Alexandria, Va.: Is there a service that checks your completed tax returns for errors before you send them out? What's generally the charge for this type of service?

Tom Linafelt:
TaxCut software and the online tax programs at www.hrblock.com have an automated "Error Check" feature that eliminates many of the most common errors prior to e-filing or printing the return.

E-file returns are much more accurate than paper returns because this process eliminates many of what we might think of as "dumb mistakes," i.e., I forgot to enter my name or Social Security number or some other piece of vital information.

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Washington, D.C.: As a short-term employee of an international organization (working abroad and in U.S.), am I responsible for paying taxes on income earned and per diem while abroad?
Thanks

Kathy Burlison: If you are a U.S. citizen or resident, you are responsible for paying taxes on all income regardless of where it is earned. If you are working abroad, you may qualify to exclude some of your foreign-earned income using Form 2555, depending on the length of time abroad. If you pay foreign taxes on the income, you may qualify for the foreign tax credit using Form 1116.

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Washington, D.C.: My wife and I have been separated for all of 2004 and are scheduled for divorce in just a few weeks. We have and will maintain a near 50-50 joint physical custody split. I have lived in D.C. for all of 2004 and she has lived in Maryland. Can we file a joint return? What is the best filing status for me? I have heard that filing married but separate is the worst thing I can do. Can we each claim one of our two kids? Any other advice for me?

Kathy Burlison: Because you were still married as of 12/31/04, you can file a joint return. However, if you did not live together after June 30 of 2004, one or both of you may qualify as head of household. To be head of household, you must pay more than half the cost of maintaining a household with a qualifying person. THe qualifying person could be iehter of your children, but that person must have lived with you more than half the year.

With two children and two households, if one child lived with you more than half the year and one lived with her more than half the year, you can both qualify as head of household which will probably give the biggest tax benefit. If not, one may be head of household and one married filing separately. You'll really need to run through the numbers each way to see what's best.

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Washington, DC: I am a single mom filing for the first time with a dependent (born last summer). Should I file as head of household with dependent or single with dependent? I plan to file online with H&R Block this year.

Kathy Burlison: Glad to here that you'll be using our services this year!

If you provided more than half the household support for the home in which your dependent (congratulations!) lived, you'll qualify for head of household and that will be the better filing status.

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Richmond, Va.: I filed electronically, then realized a mistake and filed an amended return two days after the original filing. It was a fairly simple mistake, but it's been 30 days since I filed the amended return and have heard nothing. Should I follow up or wait? How do I follow up?
Thanks

Kathy Burlison: It can take up to six months for the IRS to process an amended return (although it will probably be closer to six to eight weeks).

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Washington: If you settle on a student loan for less then the full penalty and interest amount is that a gain for tax purposes? Assuming you paid interest and the full amount of the loan.

Kathy Burlison: Generally, yes, it's forgiveness of debt. Even though you paid off the principal, the additional amounts are amounts that you owed and so the forgiveness is treated as if you had actually received the money to pay the full amount.

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Lorton, Va.: My husband runs a home daycare (opened in july last year). Can we deduct some of the cost of our surveillance system and costs associated with improving our living room where he runs the day care? The items were purchased to attract more clients and make the environment more comfortable for children.

Kathy Burlison: WHen you use your home for daycare, you can deduct depreciation and household expenses (such as utilities) based on a formula. The portion that's deductible is the percentage of your home used for day care multiplied by the ratio of the number of hours used for day care by the number of hours in the year.

For expenses that are used only for the day care, you can deduct or depreciate the full expense. For example, if you have no personal benefit from the security system (turn it off outside of daycare hours) the whole cost is deductible. You likely personally enjoy or use the improvement to the living room; if so, they are deductible or depreciable using the ratio of business use.

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Rockville, Md.: My mother bought a townhouse back in 1989 -- $114k and I inherited it in 1993 -- $125 appraisal. I just sold it in April 2004 for $205k. I owed $80k on the remaining loan. What are my federal tax implications. Also, since I am a Maryland resident, will there be any state impacts? Thank you.

Kathy Burlison: Your original basis is $125,000. If you used the property as your home for two of the last five years, and have not sold another home within the last two years, you will exclude the entire gain.

If the property was used as rental property, you'll adjust your basis to add improvements and subtract depreciation. The gain is taxable on Form 4797. The gain up to the amount of depreciation will be taxed at your regular rate, and any remaining gain is taxed as a capital gain at either 5% or 15%.

I'm afraid I don't know Maryland taxes well enough to give you a firm answer regarding the state.

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Washington, D.C.: Hi -- Is LASIK eye surgery tax deductible if none of the cost is covered by insurance?

Kathy Burlison: Yes. It's a medical expense on Schedule A. Only the amount of your total medical expenses that are more than 7.5% of your income are deductible. When figuring your total expenses, be sure to include miles to and from all medial, dental and vision visits. They are deductible at the rate of 14 cents per mile.

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Washington, D.C.: My husband (of 1.5 years) is very reluctant to file jointly with me. We have separate bank accounts for most things (his choice) but I keep trying to tell him that it would save us money to file jointly. Is this true? Do you have any idea how much it would save us? Thanks!

Kathy Burlison: You generally will pay less tax if you file jointly rather than married filing separately. It's impossible to say how much you would save without looking at your specific numbers. If you husband allows you to see his tax return, you could work up a joint return so that you can show him the difference.

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Fairfax, Va.: I formed an S-Corporation which consists of an engineering consultancy. My physical business address is my home and I have dedicated one room in it for the exclusive use of the business. My actual work, however, gets conducted almost entirely at the client's site. Could I deduct my daily car use (i.e., depreciation, gas, etc)traveling to the client's site?

Kathy Burlison: Yes. Because you have a business site in your home, the expense of traveling to your clients becomes deductible because it's travel between two business locations in a single day. You will need to know the number of business miles you traveled and the number of total miles on the car for 2004. If claiming this deduction you are required to keep records showing where you traveled, how many miles, and the reason for the travel. You can deduct the business portion of your actual expenses or you can deduct 37.5 cents per business mile.

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Arlington, Va.: How should I treat the merit scholarship that my daughter received from her college?

Kathy Burlison: If it was only allowed to be used for tuition and books, it's not taxable. It will reduce her eligible tuition expenses if you or she is claiming the Hope or Lifetime Learning credit or the tuition and fees deduction. If the use of the scholarship funds was not restricted, the scholarship will be taxable to your daughter.

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Re: LASIK eye surgery: Is it still deductible if you paid for it with your flex spending acct dollars? I used the full $2500 in flex spending plus then I paid $3000 out of pocket.

Kathy Burlison: The amount paid through flex spending is not deductible, but the remainder is.

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Lorton, Va.: Are property taxes on cars and fees paid to the DMV deductible (e.g., registration fees)?

Kathy Burlison: Registration fees are not but personal property taxes are deductible.

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Washington, D.C.: My wife and I contributed to a Roth IRA in 2004, but our AGI exceeds the $160K limit. What do you recommend?

Kathy Burlison: You can convert the contribution to a traditional IRA (even if you can't deduct the contributions, you can still put the money in) or you can withdraw the money, plus earnings, by April 15. The earnings will be taxable and usually subject to a 10% penalty, but you will avoid the 6% penalty on the excess contribution.

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Washington, D.C.: I didn't file my taxes in 2003 and although I believe I will get some money back, I am nervous about the penalties I might owe. Are there penalties for not filing taxes even if you are owed money?

Kathy Burlison: If you have a refund there will not be any penalty or interest. Even if you have a balance due when you figure out your taxes, it's best to get the return filed and paid as quickly as possible to reduce the amount of penalty and interest. Even if you can't pay everything, making some payment will reduce the total amount you'll end up paying.

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Riverdale, Md.: Hi Kathy/Tom,

I exercised some employee stock options in 2004. During the process, the company funded the purchase and subsequent resale. The form I received on the transaction however, references the total value amount and margin interest. I paid taxes on the net amount so how do I reflect all of this properly?

Kathy Burlison: You'll report the sale on Schedule D. The basis will be equal to the fair market value at the time the stock was exercised. You can get to this figure by adding the cost of the options (the amount funded by your company) to the amount of gain included on your W-2 because of the exercise. The sales price is the amount reported to you on Form 1099-B. The margin interest is deductible, to the extent that you have investment income, on Schedule A. You may also need to complete Form 4952 to calculate how much of the margin interest is deductible.

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Chantilly, Va.: As a recent graduate who lives with his parents, working my first job last year, when I file my taxes am I going to have to pay

Kathy Burlison: It will depend on how much you made, how much you had withheld, and whether your parents are able to claim you as a dependent.

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Temecula, Calif.: If one has bought and sold the same stock multiple times within a calendar year, does one have to list each transaction separately on schedule D, D1 or to save time and space one can bunch them together?

Kathy Burlison: Unfortunately, each transaction is supposed to be reported separately.

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West Hollywood, Calif.: Good Morning,

I am reporting a $43,000 loss from the sale of stocks that I bought in 2000. My broker said I will receive a $3,000 refund from my fed tax return because of the loss. My daughter disagrees and said that I can deduct $3,000 from the total $43K loss to lower my taxable income.

Who is right?

Kathy Burlison: Your daughter is right. Your stock loss can offset any capital gains that you had, plus an additional $3,000 of other income. So your actual tax savings will depend on your tax bracket. Any loss not used up this year will carry forward to future years, offsetting stock gains plus an additional $3,000 each year until it's used up.

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Arlington, Va.: I recently purchased my first condo and would like to have deductions taken out for my monthly pay check -- how do I go about finding out how to fill in my new W-2s?

Kathy Burlison: It sounds like you want to change your withholding to make it lower because you expect to have more deductions this year. You'll want to complete Form W-4 with your new information. There is a calculator your can use at www.hrblock.com.

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Alexandria, Va.: If I won a $4,000 slot machine in Las Vegas but lost money elsewhere throughout the year. Can I write off the $4,000 win?

Kathy Burlison: Your $4,000 win is taxable on line 21. Gambling losses, whether from the slots, the lottery, or other gaming, is deductible up to the $4,000 as a miscellaneous itemized deduction on Schedule A.

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washingtonpost.com: H&R Block

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McLean, Va.: If you do a cash out refinance and use the money to purchase another property, is all the interest on the new mortgage deductible?

Kathy Burlison: Up to $100,000 of the equity debt is deductible as home mortgage interest on Schedule A. If you're buying a rental property, mortgage interest can be deducted on Schedule E (for the rental) only if it is used to purchase or improve the property and if it is secured by the property.

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Portsmouth, Va.: We placed $35K from the sale of our principal residence into a stock fund in 2001. We withdrew $40K this year to purchase another principal residence. The 1099 from our broker indicates no tax withheld from the 40K. What is our tax liability?

Kathy Burlison: I expect that your $35,000 purchased a number of shares in the fund and that the $40,000 distribution represents a sale of some or all of the shares. If all the shares were sold, you have a $5,000 capital gain on Schedule D. If fewer shares were sold, you gain will be higher. In that case, you'll figure your basis by multiplying the number of shares sold by the original purchase price per share.

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Fairfax, Va.: Are dental expenses not covered by health care tax deductible (i.e. medical expense). My wife had to have a few emergency dental visits in 2004 and my son will need to have corrective braces applied this year.

Kathy Burlison: These dental expenses are deductible to the extent they are not covered by insurance and that they are not paid for with cafeteria plan contributions. They are only deductible to the extent they are paid during the year, but payment does include charges to your credit card. Also, only the amount of your total medical and dental expenses that are more than 7.5 percent of your income are deductible.

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Washington, D.C.: In figuring out my tax deduction for medical expenses (let's say $3000), how I do I account for money I got back from my flexible spending account (let's say $2000)?

Kathy Burlison: Subtract your flexible spending reimbursements from your total expenses. The difference is what's deductible ($1,000 in your example), to the extent they are more than 7.5% of your income.

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New York, N.Y.: Good Morning ...

Is there a way for tolls to be a deduction? I have to pay several different tolls everyday due to work and childcare. It's costing me $300 a month!

Thanks!

Kathy Burlison: Ouch! If it's part of your commute, I'm afraid not. But if you work in two locations in a single day (including a legitimate office in your home), the expenses of traveling between the jobs (including tolls) is deductible.

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Washington, D.C.: Hello. Can English basement being rented be depreciated? I have a house with an English basement. I am renting the basement to a graduate student. Can I depreciate the English basement being rented? How do I calculate the value of the basement? And, if I depreciate it, is that a set-off against my taxable income? Thank you.

Kathy Burlison: Although I don't know what an English basement is, I'm guessing that it means you're renting out a portion of your home. The rental income and expenses are reported on Schedule E. Expenses will include depreciation. Determine the square footage of the basement and determine the square footage of the entire home. The ratio will give you the rental portion of your home, and multiply your basis in the home (but not in the land) by that ratio to determine the depreciable basis. Any loss, up to $25,000 for most people, may be used to reduce your taxable income.

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Hanover, Md.: If I receive tuition reimbursement from my company, can I still claim the tuition I paid on my taxes

Kathy Burlison: I'm afraid not, unless you paid more than the company reimbursed.

If the courses your taking are to improve your current job skills and you itemize, you may be able to claim related out of pocket expenses (parking, travel from work to school) as a miscellaneous itemized deduction. Miscellaneous deductions can be claimed to the extent that they are more than 2% of your income.

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Waldorf, Md.: My son received a 1099 Misc Income -- for car racing.

Can he deduct any of his cost with maintaining his race car. new engine, helmet, maintenance or mileage? If so what form would he use.

Thanks

Kathy Burlison: If he races cars as a hobby, his expenses can be deducted on Schedule A, up the the amount of his income.

If he races cars as a business, he'll report the income on Schedule C and claim his expenses on that form as well. Any net profit will be subject to self-employement tax as well as income tax.

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Arlington, Va.: I am going through a divorce, and filing taxes separately ... I do not have a copy of the previous year tax we filed together. Do I need that or I can file without a copy of the previous year?

Kathy Burlison: It's helpful to have a copy of last year's return, but not always critical. If there are any deductions or credits that were being carried forward to this year, you'll want to have last year's return. You can get a copy of the return (for a fee) by filing Form 4506 with the IRS. You can also get a transcript for no cost.

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Washington, D.C.: Can you contribute to both a 401K and a traditional IRA? I understand there are separate limits for how much you can put in a 401K and a traditional IRA, but is there a limit overall of how much you can put away in tax-deferred retirement savings accounts?

Kathy Burlison: You can contribute to both. Your contributions to the traditional IRA may not be deductible, depending on your income.

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Help!: Thanks for answering! State residency issues: I moved to D.C. from Maryland on July 4, thus spending 185 days in Maryland and 181 in D.C. I still maintain that my official residence is in Maryland (I voted there, drivers license is there, parents are there). Am I off the hook for D.C. taxes?

Kathy Burlison: I'm afraid not. DC will consider you at least a part-time resident and will want you to pay taxes on amounts you earned while living there. However, if you were working in another state and paid taxes on that income, you may qualify to claim a credit for the taxes paid to that other state.

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Gaithersburg, MD: My daycare provider will not provide me with the tax ID number. Can I file my taxes without the tax ID number?

Kathy Burlison: Yes. Indicate "unable" in the part of the form that asks for the day care provider's ID number.

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Baltimore, Md.: I have options on 400 shares of stock, that if exercised would produce a loss. Can I exercise them before April 15th and take the loss for 2004 or would the loss be for 2005?

Kathy Burlison: The loss would be for 2005. But usually people don't choose to exercise options at a loss

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Frederick, Md.: I sold my home Dec 30, 2004 I will purchase another March 2005 Does the profit from the sale in Dec. count as income when I file my return this year? Please state the regulation or law that will support this so I can prove my case to my tax preparer Thank You

Kathy Burlison: The sale is reported in 2004, but may or may not result in tax. The purchase of a replacement home does not affect the tax treatment of the home sold. So long as you owned and lived in the home for two of the last five year, and have not sold another home within the last two years, you can exclude the gain upt to $250,000 ($500,000 married filing jointly). Any gain above those amounts is taxed as capital gain.

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Martin, Tenn.: Is the sale in '04 of farmland I inherited in '04 treated as ordinary income to me or a short-term capital gain? Thanks.

Kathy Burlison: If you did not work the farm, it is treated as investment property and is taxed as long-term capital gain. Even though you didn't hold the property for more than 12 months, inherited property is treated as if held long-term. The taxable gain is the difference between the sales price and the fair market value on the date of death.

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Washington, D.C.: I am a new owner of a small business and have just recently learned about certain things I should have done while filing taxes for the past couple of years (i.e., I didn't know that I was responsible for paying sales tax.). Do you think I need to resubmit my past years' taxes or do them right this time and not worry about it?

Thank you for your help.

Kathy Burlison: You're required to correct the returns that were prepared incorrectly. Plus, you'll probably sleep a bit better!

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Helena, Mont.: I retired from the state in October 2004 and pre-paid my health insurance October-December from my accrued leave. It was pre-tax and I wonder if I can deduct the three month premium from my taxes?

Kathy Burlison: I'm afraid not. Pre-tax health insurance premium payments are not deductible.

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Washington, D.C.: I sing as a volunteer in a semi-professional chorus. Can I deduct expenses (music, travel to rehearsals, etc) for participating? If so, can I also deduce the cost of a tour the group is taking?

Kathy Burlison: If the group were a charitable organization (a 501(c)(3)) you could deduct your volunteer-related expenses as a charitable contribution.

It sounds, though, as if this is a hobby and that the organization won't qualify. If you receive any money for your performances, your expenses will be deductible to the extent of your income.

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Kathy Burlison: You've had some great questions today! It's been my pleasure to have a chance to chat with you. Happy filing!

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Tom Linafelt: Thanks again for having us!

We've got great FREE resources and information at www.hrblock.com to help with your tax issues.

Don't forget online tax preparation at www.hrblock.com as a great way to complete and e-file your return!

It's fast, simple and includes H&R Block advice!

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washingtonpost.com: H&R Block

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