Michelle Singletary
Washington Post Personal Finance Columnist
Wednesday, March 1, 2006; 12:00 PM
Need advice about how to handle your personal finances? Whether the struggle is saving for retirement, organizing your bank files, talking about money responsibility with your spouse or loved one, Post personal finance columnist Michelle Singletary offers her advice and answers your tough questions.
Michelle was online with IRS spokesman Jim Dupree on Wednesday, March 1, at Noon ET to answer basic tax questions. A transcript follows.
Each week since the beginning of the year, Michelle has provided tax tips and posted answers to reader questions in her weekly e-letter. A compilation of her wisdom, with Jim's help, is online here .
For the latest news and information you need to prepare your taxes, visit www.washingtonpost.com/tax .
Read Michelle's latest columns , check out her Color of Money Book Club selection archive or
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Michelle Singletary: Good afternoon everyone. Lots of questions so let's just jump right ahead.
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Virginia Beach, Va.: I am a co-signer of a student loan for my son. The loan is in his name, but I have made all of the payments with the exception of maybe two. How can I file for the interest paid on the loan?
Jim Dupree: You can deduct interest paid on a student loan for your dependent only if you are legally obligated to make the interest payments.
When you make payaments of interest on your son's behalf, they are treated as if he made the payments.
Please see IRS Publication 970, "Tax Benefits for Education."
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Washington, D.C.: I have heard a lot about the Alternative Minimum tax but how do you tell if it might apply to you? I know it is for people who are medium to high income, but what does that mean? There doesn't seem to be a cutoff amount. I made about $48K last year, do I need to worry about the AMT?
washingtonpost.com: AMT Hits In the Middle (February 26, 2006)
Michelle Singletary: The IRS has an Alternative Minimum Tax (AMT) Assistant for Individuals on its Website. Go to www.irs.gove and type in AMT Assistant. It's a new online automated tool to help taxpayers determine whether they are potentially subject to the alternative minimum tax.
The system is easy to use. You just answer a few simple questions about entries on your draft 1040. You will see the results immediately on your computer screen. Based on your entries, the results tell you either you do not owe the AMT or that you must go further and fill out Form 6251 to find out if you owe the AMT.
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Ft Lauderdale, Florida: Hurricane Wilma ravaged the area I live in, reduced work and caused many expenses. What or How can I get my taxes to reflect my losses and possibly get funds from IRS, since I am having difficulty with my homeowners insurance as well as FEMA?
Jim Dupree: There's lot's of help and information available... Check IRS Publication, 4492, "information for Taxpayers Affected by Hurricane Katrina, Rita and Wilma."
You can also visit our link: www.irs.gov and click on the "Help for Hurrican Victims" link.
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Washington, DC: I understand there are changes to the hope/lifetime learning credit this year, is it that they are phasing out it eventually or has the take home income been lowered? If so, that's bad, I was able to finish my undergrad degree with this program. Thank you - Michelle, keep doing what you are doing, the television show is great!
Jim Dupree: Actually, the income levels have increased. Beginning in 2005, the amount of your Hope or LIfetime learning credit is reduced if you modified adjusted gross income is between $43,000.00 and $53,000.00 ($87k and $107k if filing married filing jointly). That's up from the 2004 limits of $42,000.00 and $52,000.00 ($85k and $105k married filing jointly...
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Richmond, VA: Hi Michelle and Jim, could you please explain why it is better to get no refund then to get a refund (mentioned in one Michelle's columns). I know that by claiming 0 exemptions on my 1090 that my paycheck is less than it would be if I claimed myself, but I love to get that nice refund in March. I look at it as a savings account that I can't touch. I know it's an interest free loan to the government but is there any other reason that I shouldn't do this. It's an easy way to save for those of us that have a hard time putting money away and NOT touching it.
Michelle Singletary: You are right that getting a refund is often used by folks as a savings tool. But I agrue that you should strive for more financial discpline and save the money yourself. It's not just about saving. People do this and then carry credit card balances thu the year. A balance they could reduce -- and ths cut interest expenses -- by getting more money in their paycheck during the year. If people ever want to rise to the level of a great saver they HAVE to put these poor habits behind them. You can achieve the same "forced" savings plan by signing up to have the money directly deposited in your credit union or bank savings account. That way it's available to you during the year to pay off bils, invest, etc.
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Washington, DC : What is the correct (read LEGAL) way to handle who claims the dependent(s) for the uncommon situation of single, never married, parents who share 50-50 the financial and physical responsibilities of child rearing AND have pretty equal incomes?
Jim Dupree: If more than one person qualifies to claim the same qualifying child, tie -breaker rules apply...
If the parents do not file a joint return together, and the child lived with each parent the same amount of time during the year, the parent with the highest adjusted gross income is eligible to claim the child.
For more info, see IRS, Publication 501, "Exemptions, Standard Deductions and Filing Information."
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washingtonpost.com: Color of Money: Tax Withholding, Expectations About Helping Family Members Sometimes Need Adjusting (February 9, 2006)
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Burke, VA: Good day to both of you,
I've heard the main argument against those who like to get a substantial tax refund each year - in essence, it is giving the U.S. Govt an interest free loan. No argument there, but lets face it. Most people, if they adjust their withholdings to reduce that refund amount, won't put the few extra bucks (average refund $2K/26 pay periods = $77 extra per paycheck) in each paycheck aside. If not, I'd argue they are better off getting $2K and doing something significant with it (major purchase, loan payoff, investment)than watching $77 at a time evaporate every two weeks. Thoughts?
Michelle Singletary: I hear you (see prevous answer) but I see this issue in a larger context. People you have got to develop better money management skills. Doing the same old thing because it's the easy way won't help you achieve prosperity. I personally fight hard to prevent the waste of even a penny. Because trust me there may come a time when every penny counts. So why give the government your money for a year when you could take that $77 per paycheck and invest it or pay off a bill. Let's say you wait a year for the money and use it to pay off a credit card bill lump sum. Well you've been paying interest on that bill all year. That's MONEY out the door for no good reason other than you can't trust yourself to do the right thing with that $77 thu the year. Get a financial backbone and change your ways and stop getting a big refund because it's the easy way to save.
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Important Tax Tip for Consumers: Please remind your readers to be very careful when pursuing any of the so-called "quick cash" refunds, also known as Refund Anticipation Loans. Loans such as these can have remarkably high interest rates or loan fees, and can wind up costing consumers much more than if they waited to receive their refund from the government. While "quick cash" is always compelling, it is too often also not a good deal for consumers.
Sarah Ackerstein
Office of the Attorney General for the District of Columbia
Consumer & Trade Protection Section
Michelle Singletary: Listen to the woman!
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Langhorne, PA: If I borrowed money on a principal residence to pay cash for a second residence (a condominium), is there any way to deduct a prorata share of the interest on the second property? How would I accomplish this?
Jim Dupree: Generally, home mortgage interest is any interest you pay on a loan secured by your home(main home or second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest only if you meet all of the following conditions:
- Must file Form 1040 and itemize deductions on Schedule A
- You must be legally liable for the loan
- The mortgage must e a secured debt on a qualified home.
For for information, please see IRS, Publication 936, "Home Mortgae Interest deduction."
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Rock Hill, South Carolina: Hi Michelle, Our company put part of our bonus into our 401k plan. Do this extra money get counted at all as a contribution on my taxes or is it just blended in with the 401k plan?
Jim Dupree: This money is considered an employer contribution to the 401k. It is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to Social Security and Medicare taxes. See IRS Publication 525, "taxable and Non-taxable Income," for more info...
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Married in 2005: My husband and I were married on November 12th of 2005. Should we file as singles or married filing seperately (or jointly)? I have heard that unless you were married before June of the tax year--you were not married in the eyes of the IRS.
Michelle Singletary: You heard wrong. If you are married on the last day of the tax year (December 31) you are considered to be married for the whole year. Conversely, if you are divorced during the year and don't remarry before December 31, you will be considered unmarried for the entire year.
You might want to talk to a tax professional about your filing status but it's not true anymore (or in most cases that is) that getting married results in a bad tax situation. In many cases filing jointly will result in a lower tax bill.
Also, if you changed your name don't forget to report it to the Social Security Administration. If you file a joint tax return with your new name, the IRS computers will not be able to match the new name with the Social Security Number if you haven't informed the SSA.
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Harrisburg, PA: Where do I report my 1099B? It was money that went for my medical insurance.
Jim Dupree: You must complete Schedule D of IRS Form 1040... See IRS Publication 550, " Capital Gains and Losses" for more info.
You can deduct only the amount of your medical snd dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38). IRS Publication, 502, "Medical and Dental Expenses," has more information.
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Washington, DC: I was thinking of just not paying my taxes. If I got caught, would I just have to pay the taxes, a fee and interest? Or could they send me to jail? If it's just the fees and interest then I'm willing to try it but if they can send me to jail then I don't think I will. What is the law? Can they send me to jail for this or is it just fee and interest?
Thanks.
Jim Dupree: You may be subject to criminal prosecution (brought to trial) for such willfull actions as:
1. Tax evasion
2. Willfull failure to file a return, supply information, or pay any tax due.
3. Committing fraud or false statements, or
4. Preparing and filing a fraudulent return.
There are several people sitting in jail now that wish they had not done the above!
Michelle Singletary: I'll just assume you are joking and not really a bum.
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Maryland: After repeated phone calls and e-mails to a company I worked for over the summer, I STILL have not received my W-2. What should I do?
Michelle Singletary: According to the IRS Website you should contact the agency for assistance at 1-800-829-1040. When you call, have the following information handy:
A(e employer's name and complete address, including zip code, the employer's identification number (if known), and telephone number,
Aour name and address, including zip code, Social Security number, and telephone number; and
@n estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.
You should know that you still have to file your tax return on time even if you do not receive your Form 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 due while the information is verified.
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Washington, DC: I got divorced last year. Do I file as single or married filing separately?
Jim Dupree: If you were divorced under a final decree by the last day of the year, you are considered "unmarried" for the whole year and you cannot choose married filing jointly as your filing status...
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Washington, DC: If you are married, do you get more money back filing together or married, but filing seperate?
Jim Dupree: It may depend, but when you're married you do have the option to choose whichever filing staus gives you the greater tax benefit.
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Bowie, Maryland: What is the criteria for having to pay estimated taxes. This year we owe over $6000 in Federal taxes. Last year we only owed $500. I believe the difference is a bit higher income, last year we had capital gain losses from the sale of stock, this year our investments did well.
Thank you.
Jim Dupree: GENERAL RULE:
You must pay estimated tax for 2006 if both the following apply:
1. You expect to owe at least $1,000.00 in tax for 2006 after subtracting your witholding and credits.
2. You expect your witholding and credits to be less than the smaller of:
- a. 90% of the tax to be shown on your 2006 return, or
- b. 100% of the tax shown on your 2005 tax return. Your 2005 tax return must cover 12 months.
See IRS PUblication 505, "Tax Witholding and Estimated Taxes" for additional information.
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Michelle Singletary: Well that's it folks. I know. I know. We didn't have time to get to all your questions (or most). There were so many. But Jim will be answering some more in my print column. So look out for that one soon (probably next week).
Also, I invite those of you who haven't already signed up for my weekly e-letter to do so. In it I point you in the direction of any number of personal finance stories that I'm sure you can use. I answer leftover chat questions and questions sent to me via e-mail. It's an easy, fun read. To sign uip go to the business section of the Post then click on personal finance. From there you can click on the link on my page. You will see a link to sign up.
Thanks and see you back here in two weeks.
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You can sign up for Michelle's weekly e-letter here.
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