Tax Tips From Michelle Singletary

Each week since the beginning of the year, "Color of Money" columnist Michelle Singletary has provided tax tips and posted answers to reader questions in her weekly e-letter. Below is a compilation of her wisdom with the help of Jim Dupree, IRS spokesman.

Tips:

1. Gather your records in advance including W-2s and 1099s. Don't forget to save a copy for your files.

2. Get the right forms. They're available around the clock on the IRS Web site, www.irs.gov .

3. Take your time. Rushing produces mistakes.

4. Double-check your math and verify all Social Security numbers. These are among the most common errors found on tax returns. Taking care will reduce your chance of hearing from the IRS and speed up your refund.

5. Get the fastest refuld. When you file early, you receive your refund faster. When you choose direct deposit you receive your refund sooner than waiting for a check.

6. E-filing is easy. E-filing catches math problems, provides confirmation your return has been received and gives you a faster refund.

7. Don't panic. If you have a problem or a question, remember the IRS is there to help. Try the Web site or call IRS customer service number at 1-800-829-1040.

Tax Questions and Answers:

Q: My husband and I are about to close on the purchase of our first home. I know that we will be able to deduct interest paid on our mortgage this year, but are there other tax benefits? And how should I adjust my federal tax deductions?

A: Dupree says you should grab a copy of IRS Publication 530 (2005), "Tax Information for First-Time Homeowners." It's available online here (PDF file) or you can order it by calling 1-800-828-3676. This publication provides tax information for first-time homeowners. Your first home may be a house, condominium, cooperative apartment, mobile home, houseboat or house trailer.

This publication explains many topics, including:

How you treat items such as settlement and closing costs, real estate taxes, sales taxes, home mortgage interest and repairs.

What you can and cannot deduct on your tax return.

The tax credit you can claim if you received a mortgage credit certificate when you bought your home.

Why you should keep track of adjustments to the basis of your home. (Your home's basis generally is what it costs; adjustments include the cost of any improvements you might make.)

What records you should keep as proof of the basis and adjusted basis.

For more information on what a home owner can deduct, read Benny L. Kass's article, "Interest and Points Create Potent Tax Breaks for Homeowners," (Jan. 14). For example, Kass points out that points paid to obtain a new mortgage are fully deductible in the year they are paid by the borrower.

Q: Can you explain the sales tax rule? I save all my receipts because I itemize my deductions, but obviously can't deduct groceries, furniture etc. purchased during the year for personal use. Can I deduct the sales tax, though?

A: Yes, you can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5. Generally, you can use either your actual expenses or the state and local sales tax tables, located in the IRS Publication 600, "Optional State Sales Tax Tables," to figure your state and local general sales tax deduction.

For more on the state sates tax deduction and other tax advice, read these articles:

Passing On Tax Advice to His Little Deductions, Peter G. Miller, April 18, 2005 

A Half-Dozen Tips for 11th-Hour Filers, Albert B. Crenshaw, April 10, 2005 

Tax Changes That Merit Remembering This Spring, Albert B. Crenshaw, Jan. 9, 2005

Q: My family owns 15 percent (two four-week intervals out of 13) of a beachfront home and we rent it out whenever possible. There has just been a homeowner's association formed with two other properties built at the same time, and I understand that this association claims real estate taxes and upkeep expenses so that we owners may no longer do so on our own tax returns. Is this correct? As a member of the homeowner's association do we get any kind of "credit" for our portion of this? I realize there are other rules for deductibility that must be met in terms of how often we use it compared to how often we rent it, but assume that we meet those rules.

A: Generally, the taxpayer who owns the property and pays the expenses is entitled to the deduction for such expenses. The law does not allow me to deduct the expenses attributable to your property if I don't pay them and I don't own the property. This is the case even if you agree to allow me to deduct the expenses. But, if the association is somehow entitled to the deduction, you would not also be entitled to it.

Q: Our son started receiving a Stafford Loan ($8,500 a year) in September. Are we eligible to continue claiming him as a dependent? We pay all his expenses (rest of tuition, room and board, auto, auto insurance etc).

A: Just so you know, a dependency exemption may be claimed for a "qualifying child" or a "qualifying relative". For someone to be your qualifying child or qualifying relative, a number of tests -- including a support test -- must be met. This qualifying child-support test is met as long as the son in the above question did not provide more than 50 percent of his own support for the calendar year. In determining whether the support test is met, the proceeds of the Stafford Loan that he used to pay his tuition, fees, etc. would count as support provided by the son for himself. You can use Worksheet 1 of IRS Publication 501 "Exemptions, Standard Deduction, and Filing Information" to determine if the support tests are met.

 Q: What if you haven't received your W-2 form and your employer isn't helping? What should you do?

A: If you haven't gotten your form by yesterday, call the IRS for assistance at 800-829-1040. Have the following information handy:

The employer's name and complete address including Zip code, the employer's identification number (if known), and telephone number.

Your name and address including Zip code, Social Security number, and telephone number.

An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your form, contact your employer. Your employer can replace it with a "reissued statement." Be aware that your employer is allowed to charge you a fee.

You still must file your tax return on time even if you do not receive your W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund while the information is verified.

Q: I have a general question that I think could affect many people out there. During college I took out government student loans in my name. My parents took out a Parent Plus government loan in their name. I have been paying on both loans since they originated. Am I able to claim the interest I paid on the student loan that is not in my name if I can show that I have been paying the loan?

A: Generally, a taxpayer is entitled to a deduction for student loan interest only if the taxpayer has a legal obligation to make interest payments under the terms of the loan.

Under the Plus loan program, the parents typically are the ones obligated to make the payments on the loan, so you would not be entitled to deduct the interest she pays on the PLUS loans because you are not legally obligated to make the payments under the terms of the loan.

However, your parents may be entitled to deduct the interest that you have paid on their behalf. Section 1.221-1(b)(4) of the Internal Revenue Code provides that if a third party who is not legally obligated to make interest payments makes a payment on behalf of a taxpayer who is so obligated, the taxpayer is treated as having received the payment from the third party and, in turn, paying the interest.

Q: I have spent hours on the phone with the IRS and looking through books and have found differing information. I prepaid a lump sum for PMI at closing and I thought it would be tax deductible (according to a Suze Orman book I had read) because it becomes part of the mortgage. What do you think? If so, where would I report it?"

A: Mortgage insurance premiums are not interest, and thus not deductible as an interest expense. They also are not deductible as points in the year paid or over the life of the mortgage. See page 150 of IRS Publication 17 (2005), "Your Federal Income Tax." Also note page 2 of IRS Publication 530 (2005), "Tax Information for First-Time Homeowners." FHA or other mortgage insurance premiums, which may be included in a monthly house payment, cannot be deducted.

From the question as posed it is not entirely clear what the reader did at settlement, but we're not aware of anything a taxpayer could do as part of a settlement transaction that would convert mortgage insurance premiums charged to a purchaser from a nondeductible to a deductible expense.

Furthermore, even in situations in which insurance premiums are a deductible expense (for example, a business expense), a prepayment in the current year of premiums for insurance to be provided in future years is not deductible in the current year. Instead, the prepaid premium must be allocated to and deducted ratably over the future years in which the insurance will be provided.