Tax Time Tips

Haven't filed your taxes yet? Still have a few questions left unaswered? With only a few weeks left until the tax deadline (April 17, this year), Kathy Burlison , director of tax implementation for H&R Block corporate headquarters in Kansas City, Mo. was online to answer those last-minute questions.

A transcript follows.

For complete Tax Time coverage go to washingtonpost.com/tax .

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Alexandria, Va.: My wife received short-term disability payments while on maternity leave (about 12 weeks worth). The company making the payments did not set aside federal taxes. I believe that short term disability is covered by my wife's company (but she pays for long term). Do we treat these insurance payments as income on our tax return? If so, this is an unfortunate surprise to us.

Thanks.

Kathy Burlison: Yes. When disability premiums are paid by the taxpayer with after-taxfunds, any benefits are not taxable. However, when the premiums are paid by the employer or with before-tax funds, the benefits are taxable.

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Gaithersburg, Md.: For the first time ever, I owe Uncle Sam. How come there's no payment plan??? Geez, why do they make you come up with one big humpin' sum??

Kathy Burlison: You can set up an installment payment by submitting Form 9465. The IRS will assess a fee (it's $43 or $45, I don't remember which off-hand) for setting up the installment plan.

If you expect to be able to pay the entire amount within about two months, go ahead and submit what you can now (without the 9465). The IRS will send you a bill for the remainder (plus interest).

Make sure you file (or file a valid extention of time to file) by April 17 in order to avoid failure to file penalties of 5% a month (up to a maximum of 25%).

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16th and M Streets, D.C.: What do you think of doing your taxes online, say with someone like TaxAct?

Kathy Burlison: As an employee of H&R Block, I'd rather recommend you use TaxCut online. I think that online tax preparation is an excellent solution for many taxpayers . . .convenient and readily available. One of the advantages of TaxCut online is that if you get stuck, you can easily transfer to an H&R Block tax pro to finish up.

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Ocean Springs, Miss.: I lost a large number of personal items (not my home) in Hurricane Katrina and think I may itemize (joint return) rather than take the standard deduction. But the idea of listing every last pot and tee-shirt, giving the original price, etc., seems cumbersome. Is there a simpler way? My landscaping was messed up and will need a lot of work. Insurance settlement for all was about $600 because it was flood surge rather than wind that caused the loss.

Kathy Burlison: You're right, it is cumbersome. You'll need to have a decent record of what was lost, but you can try to consolidate as much as possible by grouping items. For example '25 t-shirts' rather than each one. Before you do all the work, you may want to make a ballpark estimate of your total loss after reimbursements and see if the savings are enough to make it worthwhile.

If you don't usually itemize, you may not be used to thinking about the other things that are deductible. Be sure to have information about state income taxes and personal property taxes, real estate taxes, mortgage interest, charitable contributions, medical expenses, and work-related expenses.

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Arlington, Va.: Thanks so much for taking the time to answer a difficult question during this busy time of the year! I over-contributed to my Roth IRA by about $2000, and am withdrawing the amount of my excess contribution as well as any gains on that amount. Do you know whether I can make all of these corrections on this year's return, or whether I need to file an amended return next year once my bank issues a corrected 1099 on the excess gains? Thanks again!

Kathy Burlison: Have you considered recharacterising the contributions as a traditional IRA? You won't be able to deduct the contribution, but you can keep in it the IRA as long as the total is not more than the annual limit (generally, $4,000 for 2005, not to exceed earned income).

If you do take the money out, the earnings will be taxable in 2006. The original contribution will not be taxed.

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Phoenix, Ariz.: I purchased a mutual fund in 2005 with an upfront load in 2005. It has not returned anything to me in 2005 or even 2006 yet I received a capital gain form. Do I have to pay taxes on this capital gain. Thank you

Kathy Burlison: Yes. Mutual funds have to report to investors the amount of capital gain that was realized by the sale of assets held by the fund. Your portion is reportable on this year's return. It will also be used to increase your basis in the fund, thereby reducing any gain when you sell all or part of your investment.

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Fairfax, Va.: Hi,

I've contributed to my children's education 529 plan. What do I need to file and what kind of deductings should I expect?

Thank you.

Kathy Burlison: There is no deduction on the federal return and there is nothing to file for the federal return. Some state allow deductions for contributions to the state-sponsored plan.

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Anonymous: Have 3 nephews living in Mexico...who are supported 100%. Can I claim them as dependents. Have been supporting them for 5 years now. Thanks you!

Kathy Burlison: Yes if the following apply:

They are not married, or if they are they do not file joint U.S. returns.

They each have gross income of less than $3,200.

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Leesburg, Va.: Thanks for the discussion. My employer's 401K plan failed the Non-Discrimination Testing and as a result I've been returned excess 401K contributions for calendar year 2005. I now have to account for that additional income on my tax return but my W-2 will not reflect my correct income. Where in the tax forms would I account for this return of excess contributions?

Kathy Burlison: Include it on line 7. If you're using software with the option to enter a 1099R form, create a 1099R using code 'P' as the distribution code and '2005' as the year to which the distribution applies.

You will receive a 2006 1099R with the information listed above, but it can't be reported in 2006. SO if you take care of reporting the refunded amount with your original 2005 return, you won't have to file an amended 2005 return when you get the 2006 1099R.

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Burke, Va.: I have a question on charitable contributions. I give cash, donate goods and deduct mileage for volunteer work. At what point do I need to attach an additional form? No one thing is over $200, but all together they add up to $1200.

Kathy Burlison: If your total noncash contributions are more than $500, you need to attach Form 8283 detailing your noncash contributions.

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Indian Head, Md.: I beame a realtor (sole proprietor) in Feb of 2005 and bought a new Toyota SUV at a cost of $35,000. I use it 80% for taking my clients around and this year I registered as a business use at my friends suggestion also with the dept of Motor vehicles.

Can I qualify to deduct the expense as section 179 in 2005? If not in 2006?

If I qualify in 2005 what do I need to deduct in 2006?

Kathy Burlison: You can take a 179 deduction in 2005 (you can't in 2006 because it wis not the year placed in service). THere is a dollar limit on the amount you can take, which varies depending on the gross vehicle weight and whether the vehicle is built on a truck or on an automobile frame.

In 2006, you will take a depreciation deduction , using the percent of business use, less the 179 deduction, as the depreciable basis.

If you depreciate the SUV, you'll also deduct a percentag eof your other vehicle costs (gas, oil change, repairs, maintenance, cleaning, etc.) and will not take the standard mileage rate.

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Washington, D.C.: Hi Kathy- As a young 20 something in their first job, I was shocked to see that I owe a decent amount this year, especially after friends with similar situations (pay range, same amount of student loan interest claimed) are getting sizeable returns. I know there is the idea that not getting a return is actually better for an individual, but I can't help but wonder if I am doing something wrong, since so many in my same situation are getting something back. Anything you can shed on the matter would be great.

Kathy Burlison: You may want to look at the amount of tax being withheld. Perhaps your friends claimed Single and 0 allowancesa and you claimed Single and two allowances?

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Laurel, Md.: I own some stocks with automatic dividend reinvestment plans (all dividends go to buy more shares). Can I just ignore the distributions and then count it all as a capital gain when I sell?

Kathy Burlison: The dividends are taxable in the current year and will add to the basis in your shares when you sell them. Each reinvestment is buying shares or fractions of shares, and the dividend amount becomes the basis in those shares.

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Annapolis, Md.: I owe a small amount on taxes this year. Can I send a Western Union money order to pay my tax bill instead of a personal check?

Kathy Burlison: Yes. Make the money order payable to 'United States Treasury.'

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Bethesda, Md.: Hi, My withholdings for 2005 were $12,304. My tax bill was $13,861. My withholdings for 2004 were $12,143. It appears I am short the 90% of my 2005 tax bill by only $143. Do I need to determine my penalty or is this amount small enough to be overlooked by the IRS. I have just adjusted my withholdings to prevent this from happening next year. Thank you for taking my question.

Kathy Burlison: No penalty for several reasons (given that taxes were paid through withholding rather than with estimates):

1) Your balance due is less than $1,000.

2) You've paid in 90% of your tax liability.

3) You paid in at least 100% of last year's tax liability amount.

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Arlington, Va.: I owned a duplex, living in one half and renting out the other, and sold it in 2005. I sold the entire property in one transaction but now I am being told that I owe taxes on the capital gains for the rented portion. Is this correct, I thought I could avoid this since I lived on the property for over 2 years. Thanks for your response.

Kathy Burlison: Because the property consists of two units, and you only lived in one of the units, only one unit is treated as your principal residence and qualifies for the exclusion.

Hind sight being 20/20, you could have lived in one unit for two years, then moved to the other unit for two years and qualified for the exclusion on the entire property (with the exception of the amount that you deducted over the years in depreciation).

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Washington, D.C.: I work for the federal government. Can I put the maximum amount into a Roth IRA if I also contribute the maximum amount to my Thrift Savings Plan (the government's 401(k) plan?)

Kathy Burlison: Yes, as long as your income is below the limits for Roth contributions (the phase-out is $150,000 to $160,000 for married filing jointly).

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Potomac, Md.: I got married last year. Since my husband currently has a child support arrearage which will trigger a refund intercept by IRS; shouldn't I file taxes as -married, filing separately- so that I can recieve my full refund?

Kathy Burlison: You can do so but may want to work your return both ways. Married filing separately makes you ineligible for certain tax deductions and credits. If your combined refund is better filing married filing joint, you can do so and still get your portion of the refund by filing Form 8879, Injured Spouse Allocation.

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Nowheresville, USA: I own a condo in VA. I lived in the condo for 7 years. Now it is occupied by a very good tenant for the past year. What costs can I deduct? (Condo fees, property taxes, etc..) Exactly how does depreciation work when renting a condo?

Thanks!!!

Kathy Burlison: ALl of your expenses related to teh condo are deductible. Mortgage interest, real estate taxes, maintenance fees, condo association fees, repairs, cleaning, advertising for tenants, insurance, utilities that you pay for the tenant.

Any improvements are depreciable as is the condo itself. In determining the basis to depreciate, take the lesser of the cost of the condo or its fair market value at the time you converted it to a rental. Be sure to take into account any improvements made while you lived there.

Do the same calculation for any appliances or other property that is rented with the condo.

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Washington, D.C.: Are there any limits to when/how much the interest from a home equity loan can be deducted? I've always thought the full amount of interest paid can be deducted regardless of the use the money was put to; for example, painting a home, various upgrades to a home.

Kathy Burlison: So long as the proceeds are used for home improvemnets, the full amount is deductible (unless the total amount of mortgage principal is more than a million dollars).

If the proceeds are used for non-home-improvement purposes, the interest can only be deducted up to $100,000 of the loan amount used for other purposes.

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Boston, Mass.: I have not filed 2004 fed taxes, however i have filed and recieved a refund for 2005. Is filing now too late or is there still time?

Kathy Burlison: YOu should still file yoru 2004 tax return. Three years after the filing deadline, you will not be able to receive any refund you're due (but you'll still owe any balance due!)

So, the deadline for getting a refund by filing your 2004 tax return is April 15, 2008. However, the IRS doesn't always know that you're due a refund. If they think you might owe money on an unfiled tax return, they may hold up refunds on returns in future years.

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Arlington, Va.: I am a homeowner but also own a small piece of rural property that I go camping on. Can I include the interest paid on the mortgage for this other property in my interest deductions?

Kathy Burlison: The land will not qualify as a second home (for which the mortgage interest deduction is allowed) if it does not have living quarters (mobile home, house boat, permanent structure with facilities) on it. Your real estate taxes are deductible.

If the land was purchased primarily as an investment (so that you can sell it at a gain), you may be able to deduct the interest as investment interest. The deduction is limited to the amount of your investment income, but any amount not used because of this limit can be carried to future years.

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Alexandria, Va.: Each of the past few years I am closer and closer to having to pay the Alternative Minimum Tax (AMT). Is Congress considering adjusting the threshholds for qualifying for the AMT for inflation? Is there any hope in sight?

Kathy Burlison: It is considered on a regular basis but there's no great promise of a real solution. THe long-term cost of eliminating it is high (of course, so is the cost to the taxpayer of paying it!).

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Arlington, Va.: To the 20-something who is owing while all of her friends are getting refunds: If she has enough money to pay what's owed on Apr. 15, and the amount is not large enough to trigger an underpayment penalty, she is better off than her friends. They are making an interest-free loan to the government, while she is holding on to her own money as long as she can. She may want to leave her exemption status just the way it is.

Kathy Burlison: Good point! I was too targeted on answering her question about the reason for the differences!

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Washington, D.C.: I am a landlord who pays a property manager (a relative) to manage the property. What do I need to provide the property manager for tax purposes? An I-9? Is there anything else I need to do from a tax perspective?

Kathy Burlison: If the property manager is an independent contractor, you'll need to provide a Form 1099-MISC showing the amount paid. If he's an employee, you'll need to provide a W-2.

You'll also file the 1099-MISC with the IRS (if earnings are more than $600 for the year); if it's a W-2, you'll also file Fomr W-3 with the Social Security Administration and will need to file 940-series forms to report withholding and employer taxes.

Next year, you'll want to have the appropriate forms to the property manager by Janaury 31 and submitted to the IRS (or SSA) by February 28.

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Arlington, Va.: I made an error on my 2003 Tax Return (did not reduce Child Care Deduction based on income level). Got notice last fall from IRS (not called an audit) and agreed to the error and paid an addtional $900 in tax. Doesn't that then effect my state tax return for 2003 and then my 2004 returns?

Kathy Burlison: It might, depending on the rules for your state. If it does, you shoudl file an amended state return for 2003. Any additional amount of state tax you pay in 2006 for this change will be deductible on your 2006 return as state income tax paid (if you itemize). The extra amount paid in federal taxes may be deductible on your 2005 state return if your state allows you to deduct federal taxes paid.

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Falls Church, Va: I am divorced-single male and I pay child support (2 kids) on a regular basis, How do I qualify for Head of Household?

Kathy Burlison: You can only qualify for head of household if at least one qualifying child lived with you for more than half the year and you provided more than half the household support.

You may be able to claim the children as dependents and claim the child tax credit if your divorce decree allows you to do so (without any contingencies)or if your ex allows you to do so by providing Form 8332.

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Raleigh, N.C.: My wife (we've been married since 1998) has owned a second home (in another state) for the last 25 years. Home is paid for. Was "given" to her back in 1980 by grandmother (while grandmother still alive--not an inheritance) to help her build credit. Home actually intended for my wife's mother, but because my mother-in-law had lawsuit, they decided to keep in my wife's name. But my mother-in-law is the one who's looked after home, paid taxes and insurance, made repairs, and when rented, received all rental income (it's been vacant for last 3 years). My wife never contributed to upkeep or received any income.

In 2005, home (uninsured) suffered major fire damage. In late 2005, my wife transferred title ("gave back") of the home to her mother. She didn't receive any money from mother (in their eyes it never belonged to her). The home has not been sold. Still owned by mother-in-law.

QUESTION 1 - Does my wife have any tax liability for "owning this home"?

QUESTION 2 - Can someone (wife or mother-in-law) claim a casualty loss on home for 2005?

Thanks!!

Kathy Burlison: Question 1: NO income tax liability. She may need to file a gift tax return if the value of the home when it was given to her mother was more than $11,000.

Question 2: Because the home was owned by your wife at the time of the fire, any casualty loss on the home is claimed by her.

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Palo Alto, Calif.: In response to the participant from Bethesda, you gave three reasons why he/she didn't owe a penalty, but from my reading, (1) doesn't apply, because they owe over $1,500, (2) doesn't apply, because they paid less than 89% of their 2005 taxes via witholding, and therefore only (3) applies--saving the day--because they -did- pay at least as much in 2005 as they did in 2004 meaning no penalty is owed. I assume that that's what you meant?

Kathy Burlison: I must have misread the original. I thought the number indicated they owed only $143 and they said they had paid in 90%. If that is not accurate, please accept my apologies.

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Bethesda, MD Tax Withholdings: Hi, Thank you for the info but to clarify, I do owe $1,535 this year and was short the 90% tax liability for this year by $143. And I also did not withhold to 100% of last year tax liability as you stated. Please help. Do I owe a penalty??

2005 tax bill 13,861 -- withheld - 12,304 - owe about $1,557

2004 tax bill 13,069 -- withheld 12,143

Thanks

Kathy Burlison: Again, my apologies. I read through the numbers much too quickly! You will owe a penalty . . .calculated on Form 2210.

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Sterling, Va.: Received 1099 for consulting services. Should the 1099 include only actual payments received for the year or the total dollar amount of the timesheets submitted though some payments were received in 2006.

Kathy Burlison: It shoudl include all checks made out to you in 2005. (The last check of the year may have been received in 2006 but will still be included in 2005 income.)

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Arlington, Va.: I am confused about the limits on deducting mortgage interest. During the last 5 months of 2005, I had two homes with the mortgages totaling $800K. I know I cannot deduct all of the interest as the limit for married, filing separately is $500K. I am stumped when it comes to figuring out how much I can deduct. Any help? thank you so much!

Kathy Burlison: If one mortgage is less than $500,000, first take that one in full. Then prorate the remaining loan by the remaining amount up to $500,000 over the total loan amount. Apply that ratio to the interest on that loan.

Alternatively, take $500,000 over the total loan amount and apply that ratio to the total interest paid.

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Montreal, QC: Hi Kathy, I worked in the US in 2005 from January to the end of June. Then I began working in Quebec mid-October through the end of the year. I started my federal filing with TurboTax online and it seems like I owe money based on my total (US + world income). Does this sound right? Do I really need to count what I earned in Canada as income for last year when filing for the US (and convert amount to US dollars)? Will I need to wait until after I file in Canada/Quebec to file in the US?

Kathy Burlison: If you are a U.S. citizen or resident you will need to include the Canadian income. You can claim a credit for the taxes paid to Canada using Form 1116 (once you have your final Canadian information).

Depending on your plans for living in Canada in 2006, you may also qualify to exclude the Canadian earned income from U.S. tax using Form 2555.

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Kathy Burlison: I'm afraid we're out of time for today's chat. Thank you for your questions (and clarifications!). Best wishes as you complete your returns!

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washingtonpost.com: Our thanks to Kathy Burlison for joining us today. For more tax related tips and resources, be sure to checkout post.com's Tax Time Special Report .

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