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Personal Finance: Tax Questions and Answers

Compiled by Michelle Singletary
Washington Post Staff Writer
Thursday, April 7, 2005; 7:32 AM

Starting Jan. 6, Michelle Singletary began devoting space in her weekly personal finance e-letter to answer reader questions about income taxes. A representative from the IRS -- Jim Dupree, IRS spokesman for Maryland and Metropolitan Washington -- is helping write answers. Readers can send tax questions to colorofmoney@washpost.com. In the subject head put "Tax Question."

From April 7 E-letter:

Q: I bought a house in Maryland last year and moved there right after Christmas. I still own my condo in Virginia. Do I have the option of which mortgage interest I can deduct or does it depend on where my primary residence was at any particular time? Also, do I have to break everything down between Virginia and Maryland just for the last 5 days of the year?

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Dupree: The mortgage interest on both houses is deductible if certain conditions are met. For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

When it comes to your main home, you can have only one main home at any one time. This is the home where you ordinarily live most of the time. A second home is a place that you choose to treat as your second home. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10 percent of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property see IRS Publication 527, "Residential Rental Property."

Q: I am a graduate student, and was wondering what educational expenses are deductible? Tuition? Any books, supplies, etc.? Can I deduct any of the expense for a study abroad trip that I earned credit for?

For Dupree's answer to this question, go to this page where all his tax tips are compiled.

Dupree: You should consult IRS Publication 970, "Tax Benefits for Education."

If you are an employee and able to itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2 percent of your adjusted gross income. An itemized deduction reduces the amount of your income subject to tax.

The following education expenses can be deducted: tuition, books, supplies, lab fees and certain transportation and travel costs. Other education expenses, such as costs of research and typing when writing a paper as part of an educational program, also qualify.

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

* The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.

* The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it is needed to meet the minimum educational requirements of your present trade or business, or is part of a program of study that will qualify you for a new trade or business.

Q: I am a 25-year-old legal assistant and I have a 401(k) account through my employer. A couple of years ago, I set up a mutual fund IRA through my bank to supplement my 401(k). Last year, when preparing my taxes, I was informed that I had exceeded the number of retirement accounts I could have and was penalized. I made (and continue to make) less than $34,000 a year. I still have the mutual fund IRA, and am very confused because all of the financial advice/columns, etc. advise people to supplement 401(k)s with IRAs or mutual fund accounts. Specifically, was my tax preparer correct?

Dupree: The amount an employee may elect to contribute to a 401(k) plan is limited. During 2004, an employee may contribute up to $13,000 for all 401(k) plans in which the employee participates. If the employee participates in a simple 401(k) plan, the limit for 2004 is $9,000.

One can contribute to a 401(k) and to an IRA at the same time. For 2004, a traditional IRA can be fully deductible if you are single and your income is less than $45,000 ($65,000 if married filing jointly).

You can contribute up to $3,000 to your IRA if you are under 50. For more information see IRS Publication 590, "Individual Retirement Arrangements (IRAs). You can also check chapter 18 of IRS Publication 17, "Your Federal Income Tax for Individuals."

Q: I recently relocated at the government's expense for work. My agency reimbursed me (income) for the realtor fees incurred. Can these fees be deducted?

Dupree: If you included the reimbursed realtor fees as income, the fees are considered an expense of selling your home. Selling expenses, however, are not deductible. Rather, selling expenses reduce the gain you realize on your home sale. See IRS Publication 523, "Selling Your Home."

Q: I'm a partner in a law firm. The IRS considers me self-employed for tax purposes. I'm single, and I know I can deduct most of my health insurance premiums. Is dental insurance included in the umbrella of "health insurance premiums" such that I could deduct that as well?

Dupree: You may be able to deduct 100 percent of the amount paid for medical and dental insurance and qualified long-term care insurance for you, your spouse and your dependents if you are one of the following:

* A self-employed individual with a net profit reported on Schedule C, C-EZ, or F.

* A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), box 14, code A.

* A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2.

The insurance plan must be established under your business. You may be allowed this deduction whether you paid the premiums yourself or your partnership (or the S corporation) paid them and you included the premium amounts in your gross income. Take the deduction on line 31 of Form 1040. For more information see IRS Publication 535, "Business Expenses." Specifically, look for the section titled "Self-Employed Health Insurance Deduction."

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