Q) A section of the Internal Revenue Service booklet "Explanation of the Tax Reform Act of 1986 for Individuals" has us concerned. My wife and I are not legally separated, but have chosen to separate by mutual agreement and have routinely filed a joint return for some years. The IRS, on Page 5 its publication, says, "Generally, if the spouses do not live together at the end of the year, each spouse must file a return if his or her gross income is $1,900 or more... . " Later in the publication, the IRS says that in this situation, "the spouses still may choose to file a joint return." Can we still file a joint return? Must we calculate our taxes as if we are married and filing separately?
A) You may file a joint return if you wish. The two statements you quoted are correct and not contradictory, but they must be read carefully. In the absence of a divorce or legal separation, a married couple who has not lived together during the year may choose to file either separate returns or a joint return.
If either spouse has gross income of $1,900 or more, then that spouse must file a return. He or she may file separately, in which case the other spouse is not required to file a return if his or her gross income is less than $1,900. If the spouses decide to file a joint return, the minimum gross income for either spouse still is $1,900, rather than the $7,560 filing trigger normally allowed for a couple younger than 65.
The $1,900 base for either spouse applies in determining if a return, either separate or joint, is required. Keep in mind that the option of filing jointly still is available. If you file jointly, use the "married filing jointly" tax rate schedule just like others taxpayers who file jointly.
Q) In June 1987 I retired from the public school system. Since September I have been working as a substitute teacher, and I'm not covered by the school's pension plan. Can I put $2,000, or at least part of it, in my individual retirement account for 1987?
A) Participation in the public school pension system for the first six months of 1987 disqualifies you for the automatic IRA tax deduction and makes you subject to the adjusted gross income rule. That is, you still may make a tax-deductible IRA contribution for 1987 if your adjusted gross income for the year was $25,000 or less on a single return, or $40,000 or less on a joint return.
If your adjusted gross income exceeded either of those two amounts, you lose $2 of IRA eligibility for each $10 of adjusted gross income. The deduction disappears at $35,000 on a single return or $50,000 on a joint return. You may still put the excess dollars, up to the $2,000 annual ceiling, into your IRA, but without a corresponding tax deduction. Taxes will be deferred, however, on earnings in the account until withdrawn.
If you make nondeductible contributions, keep track of them to avoid double taxation on the same dollars on withdrawal.
A) We own two rental properties. An agent collects the rent and, upon our approval, arranges for repairs. We've heard about "passive activity" and are having difficulty understanding how it would affect us under the new tax law. Does our property ownership fall under the passive activity rules? Can losses from repairs, insurance and depreciation on the rental property be used to offset income from other sources?
A) If you actively participate in management of the property and your adjusted gross income is $100,000 or less, you may deduct up to $25,000 of net loss each year against income from other sources, like wages, pensions or interest. When adjusted gross income exceeds that amount, the deduction phases out at $1 for every $2 of excess adjusted gross income. The deduction is eliminated when the adjusted gross income hits $150,000.
There are no firm rules on what constitutes active participation. If the deduction is questioned, each case will be considered individually.
Generally, however, you meet the requirements if you have ultimate responsibility for such things as selecting tenants, approving major repairs and establishing rent levels, even though you may have an agent for management.
Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business & Finance News, 1150 15th St. NW, Washington, D.C. 20071.