Tax Prophet: FAQ March 23, 1997

Frequently Asked Tax Questions - March 23, 1997

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday March 23, 1997.

ROBERT L. SOMMERS

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.

Questions

Question 1: I have a long-term disability and can no longer work. Will I be taxed on the insurance payments whose premiums were deducted from my paycheck?

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Question 2: I currently hold a student (F-1) visa while working in the U.S. If my status changes to temporary worker holding an H-1 visa, will I be subject to income and social security taxes?

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Question 3: I prepare and file my tax returns with my home computer. May I deduct the cost of
my computer, tax software and electronic filing fees?

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Answer to Question #1:
No. If your injury is permanent, then insurance proceeds are not taxable. The amount paid, however, must be determined by your injury, not by your length of employment or lost wages. This rule applies to an employee, his spouse and dependents who suffer permanent injuries or loss of bodily functions, regardless of whether the employer or the employee paid the premiums. Payments may be received periodically (monthly, quarterly or yearly) or in a lump-sum without affecting this tax treatment.

When the above exception does not apply, usually only that portion of the insurance premiums financed by the employer constitutes taxable income. An employee who pays premiums with his own funds or through automatic deductions from his paycheck (or who has paid the tax on amounts contributed by his employer) receives all proceeds tax free. For instance, if each contributed equally to the policy, then 50% of the payments would be taxable to the employee. Also, insurance reimbursements to an employee for medical care are tax-free.

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Answer to Question #2:
Yes, H-1 visa holders generally owe income, FICA (social security) and Medicare taxes on their salaries, unless there is a specific treaty exception applicable.

As a student working under an F-1 visa, you were not liable for FICA or Medicare taxes. But in all other cases, any services performed by a nonresident alien student are subject to FICA and Medicare taxes, unless there is a specific tax exemption.

Students and temporary workers are taxed on their U.S. earnings at graduated rates. If the taxpayer is not a U.S. resident, then one personal exemption is permitted. If the taxpayer is a U.S. resident, then he should report income and deductions as a U.S. citizen.
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Answer to Question #3:
The cost of tax preparation, including the tax software and filing fees are deductible as an itemized miscellaneous expense on Schedule "A" to Form 1040. The Form 1040PC, generated on a personal computer, is available to most taxpayers. The IRS has published the Handbook for 1040PC Format Preparers, Publication #1678, to assist electronic filers.

A deduction for your computer, however, is subject to different rules (it is considered "listed property" and the availability of depreciation deductions is restricted). In general, you may deduct the business portion of your computer's cost, based on the ratio of business to personal use.

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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.**