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Filing Taxes

Friday Deadline

Kathy Burlison
Director, Tax Implementation, H&R Block
Tuesday, April 12, 2005; 1:00 PM

The countdown is on. Friday's the deadline. Done your taxes yet or are you, according to a Yahoo Finance survey taken last week, among the 14 percent of taxpayers who plan to wait until April 15 to file or the nine million who will apply for extensions? Kathy Burlison, director of Tax Implementation at H&R Block corporate headquarters in Kansas City, Mo., was online Tuesday, April 12, at 1 p.m. ET to answer questions and offer advice about filing your taxes this close to the deadline.

A transcript follows.


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Oakton, Va.: For someone who maxes out their 401K and does not qualify for a Roth IRA, is there a significant benefit to contributing to a non-deductable IRA, versus investing outside of an IRA? The earnings aren't taxed til later, but dividend payments will be taxed at the ordinary income rate upon withdrawl, versus the lower dividend tax rate of 15 percent if I invested on my own. Also, I lose flexibility with my money as it won't be available to me til retirement, which would limit me if other attractive investment opportunities arise. I went ahead and contributed for 2004, on the hope that down the road I might qualify for a Roth IRA, which would allow me to roll over this contribution into a Roth account. Other than that, I just don't see any overwhelming reason to invest in a non deductible IRA. Do you have any thoughts on non-deductible IRA's for someone who doesn't qualify for a Roth IRA?

Kathy Burlison: Often, the answer in taxes is "it depends." You've astutely identified many of the issues and considerations. One thing to keep in mind to overcome the ordinary income issue, is that, if you practice asset allocation and some of your savings is in assets that will produce ordinary income (rather than capital gain income), you might choose to have those in your traditional IRA rather than in a taxable account. Of course, a case can be made for putting the items most likely to appreciate the most in the tax-deferred account.

Putting money into the traditional in hopes of being able to convert to a Roth (especially if you might be able to do so soon) is a critical consideration. As is your personal guess as to what will happen to keep or eliminate lower capital gains rates.

So, I really don't have a solid answer. It's a bit of a roll of the dice because there are so many variables that can't be known.

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Washington, D.C.: I keep getting conflicting advice and I don't know what to do -- please help! Early last year, I moved from D.C. to Oklahoma for work (I have since returned). Several weeks after I had established residency in Oklahoma, I was mailed a check from my former D.C. employer for my unused vacation days. Turbotax is now asking me, 'Enter any income received while residing outside of D.C.'. Is this vacation day check considered D.C. income, since it was earned here, or can I claim it as Oklahoma income since it was 'received' while I lived there? The difference in taxes is about $200.

Thanks for taking my question! I'm so lost and don't want to pay $200 more than I have to, nor do I want to risk an audit.

Kathy Burlison: Because the income resulted from work done in DC, it's taxable as DC-source income.

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Washington: What do you do when you get a late piece tax information, a late schedule K for example after you have filed? Will the IRS impose penalties if someone else was late with information?

Kathy Burlison: You can amend without fear of penalties up until April 15. If you're unable to do so, you can request that any penalties assessed be waived for reasonable cause.

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Saint Louis, Mo.: In my previous job, tax-free deductions were made and placed in a retirement fund. When I switched jobs, I received the money I had contributed, less the tax withheld. How do I enter this on my tax returns.

Kathy Burlison: You should have received a Form 1099-R showing the taxable portion of the distribution and the amount of any tax withheld. Report the taxable distribution on 1040, page 1, line 16. There is a 10% penalty assessed; use FOrm 5329 to calculate the penalty and determine whether you qualify for any exceptions (there are several).

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Arlington, Va.: Hi, I filed my 2004 Virginia taxes online and already got my refund. I've now realized I forgot to enter one 1099-INT showing less than $100 in interest. What should I do?

Kathy Burlison: The extra $100 will probably cause you to owe a few more dollars. File an amended return to report the additional income and pay the additional tax. While doing so, you might want to take a good look at the tax return you filed and make sure nothing else got omitted, whether income or a deduction oe credit.

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Mount Airy, Md.: Is there any way to reduce the tax impact of a one-time capital gain resulting from the sale of a rental property? Currently I will have to pay the AMT as well as lose my four deductions because of the combination of my income and the capital gain.

Kathy Burlison: Unfortunately, there's not much that can be done after the fact. The best tactics for avoiding this situation are to arrange a tax-free exchange for other property or to make an installment sale so you don't have income all at once. However, those options may leave you in a life-situation (as opposed to a tax situation) that you may prefer not to be in (owning rental property and/or holding a note).

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Charleston, S.C.: I started a new business in 2004, I purchased equipment for the business. Can I deduct the full expense on schedule C, or must I depreciate the expenses?

Kathy Burlison: In most circumstances, you can elect to deduct the full cost of the equipment by making a section 179 election. When you complete Form 4562, you'll elect to deduct the entire cost this year rather than depreciating it over several years.

Before you make this election, take into consideration your expectation for the business over the next few years. If you expect your income to go up, the future depreciation deductions may save you more than a current deduction (but the current deductions is much more helpful with your cash flow this year!).

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Washington, D.C.: Are parking fees tax deductible if it's for transportation costs for higher education such as a master's degree?

Kathy Burlison: Only if the education is to maintain or improve your skills for your current job. In that case, they can be deducted on Schedule A, as a miscellaneous itemized deduction. Expenses in this category are deductible only to the extent that they are more than 2% of your income.

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Newark, N.J.: For the past three years, since my pay rate has increased. I have to owe between 500 to 1000 a year.

I am married but filing separate. Due to my husband's child suport.

I do not claim myself doing the year, but claim myself at the end.

We do not have any children or own a home.

I have an 401K with my company and take the pre-deduction before taxes.

What can I do to change my owing status for 2005?

Kathy Burlison: MFS is probably costing you extra taxes (although this is not true in all cases). If your taxes are higher because of filing MFS, the best thing to do to save taxes is to file jointly. If he has refunds that are being held up because of back child support, filing jointly won't hurt you because you have a balance due. If you had a refund, you could file an injured spouse claim to get your portion of the refund.

You can also change you W-4 to have more withheld. Keep claiming $0 but ask for an extra dollar amount to be withheld each pay period. If you're paid weekly and owe $520, for example, and extra $10 a week will allow you to break even.

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Fairfax, Va.: Big problem: I just found the envelope with my taxes that I should have mailed in 2003! I have called the IRS to find out what problems I have caused myself and the solutions to fix them. Any advice you can offer me to help?? I am worried that I have a large penalty of some type to pay? I'm sure you're laughing about this one. I feel like an idiot. Also, why hasn't the IRS contacted me about this yet -- its 2005? Thanks for any help you can offer.

Kathy Burlison: No laughter from me . . .we all get busy!

If you have a refund, there will be no penalties. If you have a balance due, mail it in with your 2003 tax return. You'll get a bill for penalties and interest. You'll pay at least a 25% penalty plus interest.

It usually takes about 2-3 years for the IRS to send correspondence about a missing tax return. Unfortunately, the penalty and interest on a balance due are accruing all along.

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Alexandria, Va.: I itemize my deductions. I know that I can write off mileage to my volunteer jobs, but where do I put it? Is that a non-cash charitable contribution?

Kathy Burlison: Strangely enough, it's a cash charitable contribution. Just hang onto your mileage records and your calculations and include it with the rest of your cash contributions on Schedule A.

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Reston, Va.: Good Afternoon:

In a panic I sent my tax info to my tax preparer this week. I am late because I was trying to find the canceled checks from the local charities (animal shelters, cancer societies, county firefighters, tsunami, etc). The donations averaged around $50 each for a total of about $300-$400. I am trying to get proof from my bank but I don't know if I can get it before the 15th.

Do you have any suggestions on how I can claim it on my taxes and what supporting documents I should have before and after April 15th? Also am I just asking to be audited without the canceled checks?

Thank you in advance!

Kathy Burlison: You don't need to submit your cancelled checks with the return, so there's no audit flag. Your tax preparer should be able to use the information you provide in preparing your return. You don't need to have your checks in hand before filing your return, you'll just need to be able to get them if you are audited.

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Los Angeles, Calif.: I received about $200 in dividends last year from my company stock. The dividends were added to my paycheck once a quarter and I think they were added into my income and appropriately taxed at that time. Do I need to submit a 1099-div with my tax return?

Kathy Burlison: You need to report the dividends on Schedule B. Your company may have paid or withheld taxes on the dividends and those amounts are included on your Form W-2.

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Springfield, Va.: My husband and I got married AND purchased a house last year. I think the interest on our mortgage and home equity line of credit are deductible. Are lender fees and all those other crazy fees at closing deductible as well? Thanks!!

Kathy Burlison: Most of the items on the closing statement are not deductible, but you'll want to peruse it closely for a couple of items, including points (deductilbe as mortgage interest), prorated mortgage interest that is not included on Form 1098, and pro-rated real estate taxes that have not been reported to you anywhere else.

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Washington, D.C.: I and single and own my home outright, and use the EZ form for federal taxes.
Can I claim the property as well as local (D.C.) taxes on my federal return?

Kathy Burlison: You can't deduct those items unless you itemize. To do so, you'll need to file the long form (1040) and Schedule A.

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Capitol Hill, Washington, D.C.: I missed doing my taxes in 2002 and want to do it before the grace periods end. I have called my former employer several times to my W-2 but have not been able to get it. What should I do? I'm pretty sure I don't owe anything.

Kathy Burlison: You can get a copy of what was reported to the IRS by filing Form 4506 to request a transcript of the information that has been reported.

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Arlington, Va.: Is there a deduction for health insurance other than listing it as a medical expense (subject to the AGI floor)? I notice some employers show health insurance premiums on pay stubs as taken out pre-tax. This seems to me to indicate there is such a deduction. Is this the case?

Kathy Burlison: There are several options with health insurance. If your employer offers it pre-tax, that's usually the best way to go. If you've made this election, the insurance amount is not included in your taxable income (for income tax and for social security and medicare taxes) on your W-2.

If you did not have taxes taken out pre-tax, you can deduct them on Schedule A as a medical expense. Medical expenses are only deductible to the extent that they are more than 7.5 percent of your income.

If you're self-employed and your business sponsors your health insurance plan, you can deduct your premiums on page 1 of FOrm 1040.

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Herndon, Va.: I filed my return last week, but found a 1099 that I overlooked. Should I amend my return now, or wait for my refund first?

Kathy Burlison: Wait for your refund to avoid creating confusion at the IRS.

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Oakland, Calif.: Hello, a question regarding the earned income tax credit. If my 24- year-old daughter (birthday June 23rd) was living with me, and a student until May of 2004, can I claim any part of the tax credit, even though she graduated in May? Thanks

Kathy Burlison: Because she turned 24 last year, you won't be able to claim EITC based on your daughter.

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Washington, D.C.: Are HOA (Home Owner's Association) fees deductible? If so, under what category?

Kathy Burlison: Only if the property is used for business (as a rental or if part of it is used as deductible home office).

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Washington, D.C.: How do I figure out the value of donations (of clothing, household items, etc.) to charity? I have the receipt from the charity verifying what I donated, but I don't know how to figure out realistically what the donations are worth.

Thanks!

Kathy Burlison: H&R Block offers software called "Deduction Pro." You can enter the items you donated, indicate their condition, and the software will provide feedback of the average value.

Another time-tested method is to visit thrift shops and note the prices on similar items.

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La Plata, Md.: I'm self employed with office-in-home expenses. I also have a seasonal second job for which I receive a W-2. Is the travel expense from my home to my second job deductible as an expense on Schedule C (sole proprietor) or Schedule A (miscellaneous deduction, subject to 2 percent limitation)?

Kathy Burlison: The travel is classified as "travel between to job locations." Because the purpose of the travel was not related to generating self-employment income, it will be deducted on Schedule A.

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Austin, Tex.: I made some income as a contractor in 2004. No tax withheld. So I owe quite a bit now. No penalty, since my witholding from a W2 job covered my tax liability from 2003.

But I need to make estimated tax payments this year. Thing is, I don't really know how much I'm going to make. Can I send more/less each quarter depending on my earnings?

Could you at least point me toward more detailed info? Thanks.

Kathy Burlison: Absolutely! You can recalculate your estimates each quarter to take into account how much you actually made (and owe) that quarter.

The instructions for Form 1040-ES (as www.irs.gov) provide a worksheet. If you want your withholding from your job to cover more of your taxes, there's a W-4 planner (interactive) at www.hrblock.com).

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Reston, Va.: Kathy --

Thanks for taking the time to be here. I have a couple questions about deductions for education for an MBA program. Can I take the lifetime learning credit (MAGI qualifies) add then write off the balance (subtract tuition reimbursement) as education as a business expense? I pass both tests that qualify that deduction. What is the limit that I can deduct is up to 2 percent of my MAGI?
Thanks!

Kathy Burlison: Yes, you can take the Schedule A deduction regardless of the other education credits or deductions you may have claimed. Just make sure you don't claim the same expense twice.

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washingtonpost.com: IRS Web Site

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washingtonpost.com: H&R Block

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Mount Pleasant, Washington, D.C.: I just received a sizeable payment from my father's TSP plan (federal govt. 401(k))-- he died two years ago -- and had a couple of questions about the taxes. I am assuming I should pay estimated taxes for 2005 -- do I need to pay the first installment by April 15th? And also, should I pay all of it at once and get it over with, or string them out over all four quarters?

Thank you.

Kathy Burlison: You'll need to make those estimated payments unless you can cover the tax through withholding from other sources. Financially, it's smarter to pay each quarter (you keep your money working for you longer), but remembering to make the payments can be a hassle. The first installment is due April 15, but don't mail it in the same envelope with payment for any 2004 balance due.

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Washington, D.C.: This is very helpful. Thanks for doing this. I bought a home in D.C. last year and am deducting property taxes and interest. At closing, I paid a fee/tax called the City/County Tax/ Stamps. Can I deduct this?

Kathy Burlison: Unfortunately, no.

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Glen Rock, N.J.: My two sisters and I had to empty an IRA from my mother in part to pay the estate tax. Publication 559 and 590 mention being able to deduct estate taxes paid on income in respect of a decedent. How does one figure this deduction.

Kathy Burlison: The IRA distribution does not meet the definition of income in respect of a decedent, so there's no deduction.

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E-file?: Since I'm not in desperate need of my refund, what's the advantage of my using e-file? I use TaxCut to do my taxes, and while I could pay for the e-file, fill out the rebate, hope that everything works, and maybe get reimbursed, a 37 cent stamp is easier all round. I know it helps the IRS -- why isn't it free to e-file?

Kathy Burlison: There are two additional advantages to e-filing. 1) You get confirmation from the IRS that they received your return. 2) You know that what goes into their system is EXACTLY what you entered when preparing your return; there's no room for data-entry errors (and the IRS corerspondence that comes with them!).

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Washington, D.C.: My husband and I separated in 2003 and, in accordance with our separation agreement, I filed as head of household on my 2003 tax returns. My husband ultimately did not file. My husband and I decided to try to reconcile mid-2004. Will the fact that he did not file a tax return in 2003 affect our joint tax return for CY 2004?

Kathy Burlison: It won't affect the return but it may affect whether you recieve any refund shown on the return. The IRS may hold up any refund to pay off any balance due they think your husband owes.

Go ahead and get that 2003 return filed as soon as possible; you may even want to amend yours and file a joint return.

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Washington, D.C.: I sold about 7K worth of stock in 2004. I received this stock as a gift from my grandfather many years ago, who has since passed on. Unfortunately, since I have no idea what he paid for the stock, I don't know how much appreciation I realized upon sale, and therefore don't know how to go about reporting this for capital gains purposes. Do you have any ideas?

Kathy Burlison: You can always use a worst-case scenario of claiming zero basis. However, you can probably do at least a littel better than that. If you can get close to the date he bought the stock, you can look up the information. A safe calculation would be to take the lowest price in the period (day, month, year) that you can narrow it down to.

Also, the company that the stock was issued for may be able to research the stock and tell you it's history, including what your grandfather paid.

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Capitol Hill, Washington, D.C.: I owe $500 in taxes this year. My income is under $60K. Should I open an IRA and put $500 in that instead of paying the money to the gov't? If so, should I open a Roth IRA or a traditional IRA?
Thank you!

Kathy Burlison: If you put the money in an IRA, you'll still owe at least some tax. Saving for your retirement is usually a good idea, but you also need to pay your final tax balance due.

If you don't qualify to deduct a traditional IRA (depending on whether you participate in an employer's pension plan), a Roth is definitely the way to go. Otherwise, the tax deduction for the traditional may help you afford to may the contribution.

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New York, N.Y.: Last year my $10,000 zero-coupon bond came due and I received about $9,800 in June. It was purchased in 1988 for $2,500. Will I be responsible for the significant capital gain or is there a way to amortize so I don't pay as much? FYI, I did receive 1099s every year and reported them on tax returns.

Kathy Burlison: The $9,800 you received is a return of capital and is not taxable (you paid the tax each year when you reported the interest earned). You should be able to add together your $2,500 initial purchase price and all of the amounts reported on Forms 1099 and reach the $9,800 total payment.

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Takoma Park, Md.: Thanks for your valuable advice! I have a couple of questions:
1. I am a renter in Washington, D.C. I recently bought a condo in D.C., which I am renting out. Do I declare the condo as my primary residence (because I own no other) and deduct the mortgage interest from my taxes, or do I declare the condo as a rental property, add the rent payments to my income, and deduct only improvements to the condo (when I buy a lightbulb or something)?

2. What exactly is a health savings account? Is this the same as my company's "pre-tax account for medical expenses" that is funded from a deduction from my salary?

Kathy Burlison: 1. The condo is rental property. Report the income and expenses (including depreciation of the purchase price) on Schedule E.

2. HSAs are different from (but have some common characteristics) your employer's pre-tax account. Taxpayers with health insurance that meets specific requirements for being "high-deductible" can put money in these plans and take a deduction for the money set aside. Amounts taken out for medical expenses are tax-free. Unlike y our employer's plan, amounts not used can be rolled over to future years. Because you have a pre-tax account with your employer, you will not qualify for an HSA.

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Herndon, Va.: A matter we should have addressed long ago -- my 21-year-old college son cashed a bond last year his grandparents bought for him years ago; it matured at $25,000. He used much of it in 2004 to pay for his college tuition, and is paying the rest of his 2005 tuition with the remainder. I assume the $25,000 counts as 2004 income, but can he itemize, and deduct the cost of 2004 tuition?
I also assume we can't count him as a dependent in 2004, even though he lived with us during the summer and we took care of meals, and etc. Thanks

Kathy Burlison: I expect that, taking the whole eyar into consideration, your son probably provided more than half of his own support. If not, you can claim him as a dependent.

The interest portion of the $25,000 is taxable unless, in the first year of ownership, you elected to tax the interest every year.

Whether the interest is taxable or not, your son can claim one of the following education tax benefits:
--HOPE credit.
--Lifetime Learning credit.
--Tuition and fees deduction.

He will not need to itemize to take advantage of any of these benefits.

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Durham, N.C.: Thanks for this opportunity to ask questions. For the first time I have done some consulting work, and recieved a 1099-MISC. In filling out the TurboTax forms, I am confused as to whether I "materially participated" in my business, although since I did all the work I would guess that I did. TurboTax seems to be that given my income it is unlikely that I "materially participated". Can you supply some insight?

Thanks.

Kathy Burlison: Because you worked to earn the consulting income you are considered to have materially participated in the business.

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Washingon, D.C.: I am resident of Washington, D.C. But, presently I am in another country, working and paying income taxes to the country I am getting the income from. Do I still need to file tax in USA too? If I need to file can I still get tax return for my income is low here?

Kathy Burlison: If you are a US citizen or resident alien, you will need to file a U.S. return if you have income that is more than the filin requirement for your filing status. You can exclude up to $80,000 of income earned in a foreign country. Or you can claim a credit for foreign taxes paid.

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Arlington, Va.: I teach part-time ($6000 total income for 2004). My teaching is all done through the Internet, so I work out of my home. Can I get any kind of tax break for "home office" expenses (computer depreciation, internet fees, etc.)? Just how complicated would this be?

Kathy Burlison: If you used space in your home exclusively for business (did not use it for anything else at all) you can claim a deduction for the use of your home. Even if you didn't use your space exclusively, you can claim expenses that are not related to the home (supplies, equipment, etc.).

It's a bit tricky if you've never done this before . . .you may want to get some help.

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Kathy Burlison: Thanks for all the great questions! I've enjoyed spending this time with you.

Try to take a deep breath and look over your tax return one last time before dropping it in the mail or hitting the "send" button.

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