Tax Prophet: FAQ April 9, 1996

Frequently Asked Tax Questions -- April 9, 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Tuesday, April 9, 1996

Twelve Items to Consider Before Filing Your Return


Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.

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  1. Question:The deadline for filing tax returns is rapidly approaching. Does the Tax Prophet have any last-minute tips before I file my return? [Answer]

  1. Answer to Question #1:

    1. Filing Details and Techniques:

    Always double-check your math, names, addresses, social security numbers and the lines of the form where you entered information. Review last year's return for potential unused losses or credits to be applied to this year's return. Send your return by certified mail, return receipt requested, with your social security number on any checks; always keep a copy of your return, along with a copy of the canceled check with your tax records. Maintain tax records in a separate folder for each year. Keep your return, W-2's, Form 1099's and copies of receipts and canceled checks evidencing deductions in this folder. Keep records for at least 6 years, but records of purchase for a capital asset (such as the escrow closing statement for a home) should be retained as long as your own the asset, plus 6 years.

    2. Filing for an extension to file your taxes:

    If you can't file your return by April 15th, use Form 4868 for an automatic extension until August 15th. You must have paid at least 90% of the eventual tax due to avoid penalties. California requires a payment of 100% of the taxes due (use Form 3519 for an additional payment), but grants you a 6-month extension.

    3. Tax Protestor Arguments: Is the income tax system unconstitutional?

    People who claim our income tax system is unconstitutional or that as "freemen" they are exempt from U.S. tax authorities are blowing hot air. No taxpayer has ever prevailed on tax so-called tax protestor argument in any court. In fact, the Supreme Court has dismissed such arguments as frivolous and many taxpayers who refuse to file tax returns based on those arguments have found themselves broke and in jail.

    4. Filing jointly vs. Filing Separate Tax Returns:

    Usually, a joint return will provide a lower overall tax, especially when only one spouse works. Often, however, married couples file joint returns without considering the consequences. When a joint return is filed, both parties are liable for the taxes owed, even if one spouse omits income or overstates a deduction. or In extreme cases, there is relief for an "innocent spouse" but the IRS must be convinced that the innocent spouse was unaware of the additional income or improper deduction.

    5. Filing as Head of Household, even if You are Married:

    When a person is married at the end of the tax year, usually he or she must file either a joint return or a separate return (which could have unfavorable tax rates). If a married person lives apart from their spouse during the last one-half of the tax year, he or she may be able to claim the favorable head of household status, if he or she provides over 50% of the support and the primary home for their child for a least 6 months of the year. This exception is often used by separated couples or when one party is subject to U.S. tax while the other lives in a foreign country.

    6. Creative use of the Dependency Exemption:

    You may claim a dependency exemption if you supply more than 50% of the support for a U.S. citizen or resident, or a resident of Mexico or Canada, provided that person lived in your home as part of your household during the entire year and earned less than $2,500 in 1995. The person need not be a relative. Thus, the dependency exemption might be claimed in same-sex living situations when one partner earns less than $2,500.

    7. What to do if you cannot Pay Your Taxes:

    If you cannot pay your taxes, file your return anyway. Penalties for failing to file a tax return are 10 times greater than penalties for failure to pay taxes. Ask the IRS for an installment agreement to pay our taxes over time. Although you will owe penalties and interest in addition to the taxes, the IRS will not garnish your wages or take other collection measures during the installment agreement.

    8. Handling gambling winnings and losses, including the lottery.

    Keep track of your losses as well as your winnings. Gambling winnings are treated as miscellaneous income. Gambling losses can off-set gambling winnings, but you must declare your losses as an itemized deduction on Schedule "A" and should have evidence of those losses if you are audited. This rule applies to those playing the California lottery as well.

    9. How to Report Game Show Winning and Deductions:

    Game show contestants report their winnings as other income on Form 1040, but expenses incurred with respect to those winnings are limited to the itemized miscellaneous deduction category on Schedule "A." This limitation prevents you from deducting your expenses, unless those expenses exceed 2% of your adjusted gross income (line 31 on your form 1040).

    10. Opening an IRA at the Last Minute to Reduce your Taxes:

    One of the last tax breaks open to you before April 15th is an Individual Retirement Account. As long as you can open such an account before the due date of your return, even when you file for an extension, you can shelter income in an IRA and deduct the payment in tax year 1995. You can also contribute to an existing IRA prior to the due date of your return (including extensions).

    11. Deducting Adult Education Expenses:

    Educational expenses may be deducted if they are either mandated by your employer, or incurred to maintain or enhance your present skills. You cannot deduct educational expenses if the courses qualify you (or retrain you) for a new trade or profession or are part of "entry level" education, such as the minimum educational requirements to become a teacher.

    12. Paying Taxes on Household Workers.

    If a household worker is your employee and earns more than $1,200 per year, you must file a form Schedule H, part of Form 1040. Your employee was entitled to receive a W-2 statement from you by January 31st. You and your employee are required to pay social security taxes (the combined rate is 12.4%) and Medicare taxes (the combined rate is 2.9%). Failure to deduct the employee's share of these taxes makes you liable for the full amount. You must also pay an additional 6.2% Federal Unemployment tax. All these taxes are not deductible; however, you might be entitled to child care credit if the domestic worker cared for your children.



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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**