Address Change


Q): I am in the process of moving. What address should I put on my tax return?

A): The simplest way to handle this would be to buy a P.O. Box until you establish a permanent address. Another option would be to use a friend or relatives address. If you are expecting a refund you can have it wired directly into your bank account.

 
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Amended Return


Q): If I made a mistake on tax return, what should I do?

A): If you discover an error, you can file an amended return or claim for refund. You should correct your return if, after you have filed it, you find that:

Q): My husband and I already filed jointly, but now we want to file married filing separately. What do we do?

A): If you are making the change in your filing status before the due date of the return, you will need to file an amended return. The person with the primary social security number (the first number listed on the return) will need to file Form 1040X, Amended U.S. Individual Income Tax Return. Be sure to show the original filing status as married filing jointly and the new filing status as married filing separately or head of household. Start with the numbers on the joint return in Column A and show the adjustments in Column B to remove your spouse's income and deductions. The person with the secondary social security number (the second number listed on the return) will need to file a new return with his or her correct filing status (married filing separately or head of household) and show his or her own income and deductions.

After the due date of the tax return, you cannot change from a joint return to a separate return. You can only make the change from filing joint to filing separately if you file the corrected returns by the original due date of the tax return.


Q): I had to file an amended return with the IRS. Do I have to also file an amended state return?

A): You generally have to file an amended state return only if the changes to your federal return affect your state tax liability. Some states require you to report the changes within a specified time after filing the federal amended return.


Q): What do I need to send with the amended form?

A): You should send any schedules that have been changed and any W-2s not included with your original return. Also include forms and schedules for any new credits or deductions, such as an education credit, not claimed on the original return, and any schedules included with your original return that had to be changed because of the other changes you made.

 
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Educational Expense


Q): What types of educational expenses are deductible?

A): Deductible educational expenses include amounts spent for tuition, books, supplies, laboratory fees, and similar items. They also include the cost of correspondence courses, as well as formal training and research you do as part of an educational program. Transportation and travel expenses to attend qualified educational activities may also be deductible.


Q): Can I deduct the cost of classes I need for work?

A): In some cases, you may be able to deduct the cost of classes you need for work. This deduction, however, would be subject to the 2 percent of AGI limitation, along with most other miscellaneous itemized deductions.

To be deductible, your expenses must be for education that:

However, these same expenses are not deductible if: Educational expenses, related to your present work, that are incurred during periods of temporary absence from your job may also be deductible provided you return to the same job or same type of work. Generally, absence from work for one year or less is considered temporary.


Q): My employer is including my graduate school tuition reimbursements on my W-2 as wages. Where do I claim these education expenses on my Form 1040?

A): If your graduate school tuition is deductible and the reimbursements are included in your income as wages, you may take the expense as a miscellaneous itemized deduction on Form 1040, You may also need to attach Form 2106 Employee Business Expenses. For more information, please feel free to contact Infotax Square (718)558-4333.


Q): How do I claim an educational expense on my return?

A): When job-related educational expenses are involved. Educational expenses are deducted as miscellaneous deductions, on Form 1040, Schedule A , Itemized Deductions. Alternatives to educational expense deductions should also be considered, such as the Lifetime Learning and Hope Credits.


Q): Last year, my parents took out a student loan for me in their name and I also took out a student loan. My parents received Form 1098-E for their loan and I also received Form 1098-E for my loan. Can we both claim the interest from the loans on our tax returns? Last year, I was not their dependent.

A): In order for a taxpayer to claim a deduction for student loan interest, the loan must be incurred for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan. Since you were not your parents' dependent when they took out the student loan, the interest they paid on the loan does not qualify for deduction. However, the student loan interest payments you made on the student loan you took out on your behalf are eligible for deduction.


 
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Filing Status


Q): I live in the same apartment with my girlfriend and am planning to marry her. Can I file a joint return with my girlfriend?

A): A couple can only file a joint return if they are treated as married under United States law. There may be situations where a couple is considered married without having gone through the official ceremony. An attorney who specializes in these matters should be consulted if there is a questionable situation.

Example: A couple has been living together for two years and gets married in February 2005. A month after the wedding the newlyweds would like to file their 2004 tax return jointly. Because they were not married at the end of 2004, they still have a single filing status and should file their tax returns separately.


Q): Am I better off filing a joint return with my wife, or should each of us file separately?

A): Generally speaking, the tax rates are structured such that if a couple is married they are best off filing jointly. When a married couple files separately there is often a non-financial reason for doing so. In exceptional cases, it may pay to file the return married filing separately.

Example: A husband and wife both work full time and keep track of all of their finances separately. They allocate joint expenses, like rent and utilities. The husband and wife both file separate tax returns to simplify their financial lives even though filing jointly would save them some taxes.


Q): Last year, my parents took out a student loan for me in their name and I also took out a student loan. My parents received Form 1098-E for their loan and I also received Form 1098-E for my loan. Can we both claim the interest from the loans on our tax returns? Last year, I was not their dependent.

A): In order for a taxpayer to claim a deduction for student loan interest, the loan must be incurred for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan. Since you were not your parents' dependent when they took out the student loan, the interest they paid on the loan does not qualify for deduction. However, the student loan interest payments you made on the student loan you took out on your behalf are eligible for deduction.


 
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W-2

Q): What is W2 Form?

A): The federal government document used to report the amount of wages paid to an employee during a calendar year. The W-2 Form includes gross wages paid in addition to Federal and State taxes withheld, as well as Social Security, Medical, and Local Taxes withheld. Also, the W-2 Form includes any payments made to a 401-K. It is the employer's responsibility to send a W-2 Form to all employees.

The employees must attach copies of any W-2's they received to the first page of their individual Form 1040 if any taxes were withheld from their wages. If an individual plans to e-file his or her return, than additional employer information must be entered into the return, such as Employer ID number and employer address.



Contact Infotax Square now for more information about W- 2 Forms


 
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Interest Itemized Deduction


Q): I paid mortgage interest, but I did not receive a 1098. How should I go about figuring how much I can deduct?

A): In this situation the first thing to do is to try to contact the institution where the interest was earned and ask them to issue or re-issue the 1098. If that is not possible, calculate the interest paid based on the statements that were issued or based on your own records.

Example: A taxpayer makes monthly payments of $2,000 on her house but can not find the 1098 stating how much interest was paid. The taxpayer contacts the lender and asks for a copy of the 1098 so she will have the exact amount to report.


Q): Is there a limitation on the amount of deductible mortgage interest?

A): Mortgage interest can be taken on a home loan as long as the loan is under $1,000,000. Interest on loan amounts over $1,000,000 would be excluded.

Example: A taxpayer buys a $3,500,000 home. The taxpayer finances $2,000,000 through a mortgage secured on the house and makes interest payments of $100,000 over the course of the year. $50,000 of the interest is allocable to the loan amount under $1,000,000 and is tax deductible. The other $50,000 of the interest is not tax deductible.


 
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Dependent & Exemption


Q): I have a child who is in an out of state college. Can I claim him as a dependant?

A): A child who is no longer living with his parents can still be claimed as a dependent as long as certain conditions are met. The child must be under 24 at the end of the year and a full time student for some part of each of five months during the year.


Q): I am adopting a child and do not yet have a social security number for the child. How can I claim the exemption for the child?

A): Parents in the process of a domestic U. S. adoption who do not have and/or are unable to obtain the child's Social Security Number (SSN) should request an Adoption Taxpayer Identification Number (ATIN) in order to claim the child as a dependent.


Q): Is there an age limit on claiming my children as dependents?

A): Age will not prevent you from claiming your children as dependents. As long as the following four dependency exemption tests are met, you may claim him or her:


Q): How do you claim a child if you agree with your ex-spouse to claim him 6 months and he claims him the other 6 months of the year?

A): The dependency exemption can not be split. Generally, the custodial parent is treated as the parent who provided more than half of the child's support. This parent is usually allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be treated as the parent who provided more than half of the child's support if certain conditions are met.

The custodial parent signs a Form 8332 (PDF), Release of Claim to Exemption for Child of Divorced or Separated Parents, or a substantially similar statement, and provides it to the noncustodial parent who attaches it to his or her return. Please beware that if the custodial parent releases the exception, the custodial parent may not claim the Child Tax Credit.


Q): If I pay child support, am i allowed to deduct anything on my taxes or claim the child as an exemption?

A): Nothing can be deducted for the child support payments. Child support payments are neither deductible by the payer nor taxable income to the payee. You may be able to claim the child as a dependent. The parent who the child lived with for the greater part of the year is the custodial parent. Generally the custodial parent is allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be allowed to claim the exemption for the child if the custodial parent signs a Form 8332 (PDF), Release of Claim to Exemption for Child of Divorced of Separated Parents, or a substantially similar statement.


Q): My daughter was born on December 31st. Can I claim her as a dependent? If so, will she be also qualified for the Child Tax Credit?

A): If your child was born alive during the year, and the exemption tests are met, you may take the full exemption. You may be entitled to a Child Tax Credit for her.


Q): My daughter was born at the end of the year. We are still waiting for a social security number. Can I send in my return and later supply the social security number for her?

A): If you file your return claiming your daughter as a dependent and do not provide her social security number on the return, the dependent exemption will be disallowed. You have two options. You could file your income tax return without claiming your daughter as a dependent. After you receive her social security number, you could then amend your return.You have three years from the later of the due date of the return or from the date the return was filed to amend the return.

The other option is to file Automatic Extension of Time To File U.S. Individual Income Tax Return. This would give you an additional six months to file your return; by then you should have your daughter's social security number.


Q): My child died right before he was delivered. Can I claim my child?

A): You cannot claim a dependency exemption for a stillborn child.


Q): My daughter is a full-time college student, can I claim her as my dependent. When she file her return can she claim herself as a dependent?

A): If you claim your daughter as a dependent on your income tax return, she cannot claim herself on her income tax return. If your daughter is filing her own tax return, then she can be claimed as a dependent on your return, but she cannot claim her own personal exemption. In this case, your daughter should check the box on her return indicating that someone else can claim her as a dependent.


 
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Withholding

Q): I own a small business. Do I need to pay Social Security tax?

A): If your net income from the business is $xxx or more, you must pay self-employment tax, which is the Social Security tax for a self-employed individual. The good news is one-half of your self-employment tax is deductible from your adjusted gross income.


Q): I acquire company stock by exercising company options and sell it the same day. What is my basis in the stock I'm selling?

A): Your employer will include the excess of the fair market value over the option price in your W-2 wages. Therefore, your basis is the amount you paid plus the amount included on your W-2 plus the commission you pay.


 
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Wages


Q): There is an amount on line 12 of my W-2. Is this information relevant when preparing my tax return?

A): Yes, in some situations the information is relevant. This information can have a dramatic affect on certain items. One example is that it can trigger a "Saver's Credit".


Q): I worked in one state for the first part of the year and then I moved to another. To which states do I need to send a state tax return?

A): A state tax return generally should be filed for states where income has been generated.

Example: A taxpayer works in California, New York, Nevada and Florida during the course of the year. The taxpayer needs to file only a California and New York tax return because Florida and Nevada do not have an individual income tax therefore no tax return is required in those states.


Q): My W-2 shows that my state tax withholdings were withheld in the wrong state. What should I do to set things straight?

A): One way to handle this would be to simply file state tax returns for both the state where you owe taxes and the state where withholdings where mistakenly withheld. You would receive a tax refund from one state, and you would owe the full amount of your annual taxes to the other state.


 
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Interest

Q): I know I earned interest on money I have in an account, but I did not receive a 1099. How should I go about figuring out how much money to report?

A): Make sure the interest is not earned on money in an IRA account. If that is the case the interest does not need to be reported. Assuming the interest is earned on money in a regular account try to contact the institution where the interest was earned and ask them to issue or re-issue the 1099. If that is not possible, calculate the interest earned based on the statements that were issued on that account.

Example: A taxpayer has $20,000 in a money market account but can not find the 1099 stating how much interest was earned on that investment. The taxpayer contacts the bank and asks them to fax him a copy of the 1099 so he will have the exact amount to report.


Q): I earned interest on government bonds. How should I report this?

A): If the interest is earned on a state bond, and you live in that state, no tax is payable but you still need to report the amount of interest you earned. If you do not live in the state where the bond was issued you will have to pay state taxes.


Q): I earned interest on money in a foreign bank account. How should I report this?

A): Americans are taxed on their worldwide income so this interest must be reported and it will be taxable. If foreign taxes were paid on this income the amount that was paid can be offset against US taxes using the foreign tax credit. This tax credit prevents double taxation.

Example: An American citizen owns a one year Canadian Dollar CD. The American citizen receives a notice from the bank where his CD is held informing him of the amount of interest he made and the amount of Canadian taxes that were paid to the Canadian Government. The American citizen must report the amount of interest earned on his tax return, but he can offset some of the taxes he will owe using the foreign tax credit.


Q): I earned interest on money held in a partnership. How should I report this?

A): Money that you made in a partnership will most likely be reported to you using a K-1 form. There is a special line on this form for interest income. The interest should be reported along with other interest income separate from the rest of the partnership income.


 
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Charitable Contribution

Q): Is there a limit to how much charity can be deducted on my tax return?

A): Generally, contributions to public charities cannot exceed 50% of a taxpayer's income.

Example: A taxpayer made $50,000 in a year and contributed $500 to a hospital. The entire amount is deductible because the $500 is well below the 50% of the taxpayer's income.


Q): May donations given to a foreign charity be treated as an itemized deduction?

A): In general, foreign organizations are non-qualifying and donations given to them may not be deducted. However, certain Canadian, Israeli, and Mexican charities may be an exception


 
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Dividend


Q): I know I earned dividends on an investment, but I did not receive a 1099. How should I go about figuring out how much income to report?

A): Make sure the dividends are not earned on an investment in an IRA account or tax deferred account. If that is the case the dividends should not be reported. Assuming the dividends are earned on a regular account try to contact the institution and request a duplicate 1099. If that is not possible, calculate the interest earned based on the statements that you have available.


Q): I earned dividends on municipal bonds. How should I report this?

A): If the dividends are earned on municipal bonds issued by the state in which you are a resident, no tax is payable but you still need to report the amount of dividends you earned. If you are a non-resident, you will have to pay state taxes.


Q): I earned dividends on money in a foreign investment. How should I report this?

A): Americans are taxed on their worldwide income so these dividends must be reported and it will be taxable. If foreign taxes were paid on this income the amount that was paid can be offset against US Federal taxes using the foreign tax credit. This tax credit prevents double taxation.

Example: An American citizen invests in a Canadian company. The American citizen receives a year-end statement detailing the dividends he earned and the Canadian taxes remitted to the Canadian Government. The American citizen must report the dividends earned on his tax return, but he can offset some of these taxes using the foreign tax credit.


Q): I earned dividends on investments held in a partnership. How should this be reported?

A): Earnings generated through a partnership will be reported to you on a K-1 form. There is a special line on this form for dividend income. The dividends should be reported along with other dividend income separately from the rest of the partnership income.


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