Michelle Singletary

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The Color of Money:
Last Minute Taxes
with Michelle Singletary
Post Business Columnist
Wednesday, Dec. 5, 2001; 1 p.m. EST

Welcome to The Color of Money with Post Business columnist Michelle Singletary.

Just a few weeks left to get down to business. No, I'm not talking about the number of shopping days until Christmas. I mean you don't have much time to consider which tax-related matters you need to take care of before the end of the year.

In some cases, you may want to pay certain expenses this year because deductions will be worth more for those in higher tax brackets; alternatively, you may want to postpone some purchases or income until next year to take advantage of the new code.

To find out what last minute tax moves you can do to save on your 2001 taxes join me for a discussion with tax attorney Donna LeValley.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Michelle Singletary: Good afternoon. Glad you could join me today. Normally, I try to avoid talking taxes before April but for many people, including me, it may be important to take some steps before the end of the year to improve your tax situation. So let's start and ask away.

Tysons, Va: Hi, I just got married last month, and also just got a raise at work, is there anything my husband and I need to do now to prepare for our 2001 taxes? Thank you.

Donna LeValley: First decide whether you want to take your husband last name or not. If you do you must file for a fromal change with the Social Security administration. The names ona tax return and the SS#'s must match or the return will be refigured using single filing status and rates. Also you may want to look at this year separately than last because your spending and savings habits will probably change. But it is always good to sit down and figure the potential tax savings or consequences when deciding to file as married filing separately or jointly.

Santa Barbara, Calif.: Hello- I am presently receiving Long-Term Disability payments as a work benefit. I paid the premiums as an after-tax deduction.

Are the disability payments subject to Federal tax?
Many Thanks, C.M.

Donna LeValley: Payments that you receive from the insurance policy as a result will not be subject to federal tax if purchased will after tax dollars. Your payments shouldn't be taxed.

Fairfax, Va.: Ms. LeValley --
Thanks very much for your helpful and timely program.

I usually itemize my deductions, however, because I am contemplating paying off all of my mortgage this year, I am also
contemplating "bunching" my itemized deductions into 2001, so that I can take the standard deduction for 2002.

Here is my question: Can I pre-pay my 2002 state income tax, as well as my 2002 local real-estate tax in December of
2001 and deduct it on my 2001 Federal Income Tax? I think I can come up with fairly accurate estimates for what those
amounts will be in 2002.

Sincerely,
A Federal Income Tax Minimizer

Donna LeValley: Yes. And that is a great way for someone that is not currently able to itemize deductions, too itemize. And remember that deductions are worth more than this year then next because of the falling tax rates. The reason prepayment may not be helpful is if you are subject to the Alternative Minimum Tax. This tax could erode the potentail increases tax savings from prepaying state income taxes.

Sterling, Va.: Donna, I have two questions:
1. If I didn't file my taxes last April and I file them now, will I still be eligible for a tax rebate check? I always get a refund every year, but was wondering if I will also get the tax break rebate that went out earlier this year if I file late.

2. Approx how much in tax losses can a person who makes $55 K claim?

Donna LeValley: Tax losses are based on how you may of lost money, ie loss on the sale of a stock, but there is no limit on losses per se. With respect to the rebate or advance payment check, if you failed to file in 2000, but will have, as a single person $6,000 of earned income you will get the "rebate" but you will have to wait until you file your 2001 and your 2001 tax liability will be reduced by the amount of the credit you are entitled to.

Michelle Singletary: A reader sent me an e-mail asking if it was worth waiting until after Jan. to buy a trailer. Does the luxury car tax apply to such vehicles?

Donna LeValley: The luxary tax applies to traliers as well as cars if they exceed the threhhold amount. It may be better to wait until next year if it will be used in a buiness. There may be some favorable legislation with regards to first-year expensing and depreciation.

Washington, D.C.: I got married this year - is there anything I should know about filing taxes jointly? Am I correct to assume that the IRS considers me married as of Jan 1, 2001 and thus I can expect to take a hit tax-wise as the combined income of my spouse and myself will likely boost us into another bracket?

Donna LeValley: The IRS considers you married for all of 2001 as of the day you got married. You may be surprised. If there is a large disparity between you and your spouses income, joint filing could be favorable. But just wait marriage penalty releif included in the new tax law will begin to remove the inequities beginning in 2994.

Michelle Singletary: I basically understand the Alternavie Minimum Tax but why and who should run the numbers to see if the ATM applies to them? Are there some trigger points (amt. or number of deductions, income) that would make one more likely to be subject to the ATM?

Donna LeValley: The biggest trigger that mast people will be familiar with are ISO's or incentive stock options. Preference items trigger a recalculation of you income taxes when your income exceeds a certain amount. The number of personal exemptions and captial gains are two of the biggest triggers.

California: Just bought my first house (escrow comes to a close in another week). What does this mean for my 2001
taxes? Are repairs/remodeling projects items that can be written off? I'm new to all of this. Thanks.

Donna LeValley: General repairs and maintance that are not expected to add to the life of the house are not deductible. The cost of major repairs, new roof, or a major remodel, new bathroom/kitchen are costs that are added to the price of your house. So when you sell the house you will relaize less gain because the difference betwwen the selling price and what you paid will be defrayed by the addition of the cost of the major repair/remodel job.

Arlington, Va.: I have a question regarding capital gains tax on the sale of a house. I realize that you need to live in the house for an aggregate of 2 out of the past 5 years to claim the $250,000 exemption. I also understand that there are a few exceptions to that rule. I will be selling my home in the next 6 months, to return to the country where I grew up. I will have owned the house roughly 18 months. I am not being transferred, but have made the decision to return to be closer to my aging mother, particularly as her brother just died.

Would I qualify for an exemption or not? If I do, must I prorate it?

Donna LeValley: You willnot qualify for the expemtion as the ruled currently stand. There is an excpetion to the two year period for certain circumstances. These circumstances have not been completely fleshed out by the IRS. Other than death and forced relocation, I don't know of any other accepted circumstances. Although your situation is certaintly sympathetic, I don't think the IRS would or could give you the benefit of the exclusion.

Michelle Singletary: Can taxpayer deduct the cost of life insurance from their taxes?

Donna LeValley: There is no specific deduction for insurace preimums. If the premimums are paid as a business expense or on behalf of an employee, the premimums may be deductible.

Expat in Indonesia: Hi there -- I'm hoping you might have an answer for my question:

I need help with my foreign earned income exemption (based on physical presence test). I was in Indonesia all year and was expecting to meet the physical presence test; however, I was in the U.S. on regular business when the U.S. Embassy issued an authorized evacuation and I was not allowed to return to Indonesia for two months -- thus ruining myability to meet the test. Do you know of any way to get relief for this situation? Can I just pay taxes on the time I was in the U.S.?

Would it help if I moved up my wedding date to sometime this month?

Thanks for your help! I'm in a messy situation!

Donna LeValley: Contact the IRS for some specific help, but relax your situation doesn't sound so dire. The fact that there was a forced evacuation freom Indonesia works in your favor. That time away will not cout against you. Additionally that buiness trips are also not a liability. However, contact the IRS your situation is a little complicated, but looks like ont that can be resloved in your favor.

Wash DC: I received a money market fund as an inheritance. Is it taxable?

Donna LeValley: Yes. Any income is taxable unless a specifically excluded by the tax code. But you may deduct the estate tax paid, if any , on that account when it passed to you. You would prorate the taxes paid for the account over the amount you received.

Michelle Singletary: Do married people have to wait until 2994 or did you mean to say 2004? How exactly are married people penalized for walking down tebh aisle and filing jointly?

Donna LeValley: Yes, 2004. To say it simply, as it currently stands standards for married people are different. For instance If you look at a tax brackets, logic would dictate that you simply double the number for single people to get the number for married people. that is not the case. It is less than double. It is the same for deuction amounts and phase-out ranges. Historically is was a benefit when you had single earnung households.

Fairfax, VA: Hi Donna,

I'm 19 years old and this will be only my third year filing my taxes. I work full-time. There are lots of things I have questions about, and when I look around the IRS website everything is so complicated and confusing, I just give up. Are there any good resources (websites, books, etc.) for a young taxpayer, to help me understand the tax system?

Donna LeValley: I'm biased, so I would start with JK Lasser's Your Income Tax Guide 2002. It is a comprehensive tax preparation as well as tax planning tool. At 19 you will find information to help you pay your college tuition and get started saving for yes retiremet. You may also want to read a few good newspapers daily, like the Washington Post to stay abrest of pending legislation. What is signed into law will have enormous impact on the taxes you pay now and will be required to pay later.

Woodbridge, VA: Hello,

Question, If we did not file taxes last year but expect a refund, will we be able to credit or write off the tax rebate that was given out earlier this year?

Donna LeValley: If you didn't get any or the full advance payment and are otherwise eligible, you will receive the benefit as a tax credit against your 2001 tax laibiliy when you file your 2001 return.

Kathleen GSA: I am retired military. I have to give my ex wife a portion of my military retirement pay. How do I report this so that I don't pat taxes on her portion? Have been told by a CPA that it is not alimony.

Thanks

Donna LeValley: You may want to check your divorce decree or similar legal instrument. I'm puzzled as to why payments, I assume maintance payments, are not deductible as alimony. it is possible that the way you divorce decree was preparaed was defficient and has resulted in you being deprived of a typically staright forward deduction. If you are still able, I would also see if the military has a civil attorney that could be assistance to you.

Washington, D.C.: I've never itemized before but this year I will. Can I claim the 2000 state taxes I paid (paid in spring 2001) as a deduction? Thanks.

Donna LeValley: No. They were due in 2000. You can only deduct state taxes as an itemized deduction when both the taxesa are due and youa re eligible to itemize.

Unmarried homeowners: This year, my partner and I bought the house we'd been renting for two years. The sale was financed by the owners (our former landlords)--we own the house outright and they hold a lien for the balance, around $180,000. I'm self-employed, he's not. Is our situation as complicated as I think it is, and do you have any advice?
Thanks!

Donna LeValley: I'm not sure if your question is about taking a mortgage interst deduction. But just because you are unmarried doesn't mean joint ownership of property more complicated then it already is. There are some types of tax and survivorship benefits that reserved exclusively for those that are married, but ypu and your partner are free to create just about any type of ownership arrangements with the use of legal instruments.

Bethesda, Md.: I just moved from Bethesda, Md. to Arlington, Va. this past August. Since I never did Virginia income tax, what should expect? What problems should I expect to have?

Donna LeValley: State income taxes are not my speciality, but I can offer some advice. You should start looking in to residency requirement etc. to see whether you can recoup any tax you may have paid to your former home state. Because you lived ther more that half the year you are probably liable for state taxes up until then, but not after. Also you may need to show proof to you new home state of the taxes you paid to the other state in 2001 because they may calculate your tax laibility for the entire year and then provide you with a credit for the amount paiud to the other state.

Arlington, Va.: I received money as gifts from many guests at my wedding, is that taxable? does it make a difference if it was used to pay off wedding expense debt?

Donna LeValley: Thank goodness the IRS has yet to come up with a competing gift registry. Generally gifts under $10,000 do not have to be reported. Even then the gift tax is usually paid by the benefactor. If someone directly paid off a creditor you could have discharge if indebtedness income, but I have a difficult time coming up with a scenario where the IRS would "find out". Enjoy your gifts.

Follow up: When CAN you deduct state taxes from your federal income tax?

Donna LeValley: You deduct then in the year paid. On the filp side if you itemize, you have to report any state tax refund as income when you receive the refund check.

Washington, D.C.: Oooh, I think I've made a mistake on past taxes. Question for the future:

If I sent a big check to VA in April 2001 (for 2000 taxes) can I write this off on my 2001 Federal return?

I itemize and knew about real estate tax write off, but not state tax.

Thanks for your help!

Donna LeValley: You may be able to . Just make sure to correct the matter before the time to amend a return has passed

Washington, D.C.: I think you gave an incorrect (or at least incomplete) answer to the person who inherited the money market fund.

She may have meant to ask if she had to pay taxes on the inheritence. The answer to that is no (the estate does if it is large enough).

Yes, she does have to pay tax on any income earned afterwards though.

Donna LeValley: Correct. The estate pays the inheritence tax, but she will have income tax due when she receives the distributions.

Woodbridge, Va.: We bought a new home in October and have paid the property tax for our land (no improvments) but have not received our bill for the full value (construction) of the house. How can we prepay our real estate and state income taxes?

Donna LeValley: You will have to wait. Until you have a way to value the house. Unless the local tax authority has assessed a tax for you.

Penalty charged in error: I am subject to quarterly estimated payments because I am self-employed. My electronic payment for 3rd quarter 2000 was not credited properly: my partner and I made electronic payments at the same time from the same account and they were both credited under his SSN due to an error either at the bank or at the IRS. The result was a big fat refund for him and a $500 penalty for non-payment for me. What can I do?

Donna LeValley: This is quite a complicated situation. I recommed you contact the IRS for guidance. Cooperation from you partner would aslo be very helpful if the IRS can do something to unwind this transaction. Also you may want to contact someone with the EFTAPS program and the bank that holds the account from where the payments came from.

Unmarried homeowners again: Thanks for your response. Sorry not to be clear--I meant to ask how we go about taking the mortgage interest deduction. Just split it down the middle? We bought the house as "joint tenants with rights of survivorship." We're in VA, and I make twice as much money as he does.

Donna LeValley: The mortgage interest deuction could be split but the IRS nmay disallow it in the case of your partner because he may not have enough income to support the deduction. For instance, does he earn enough to actually pay half the mortgage every month? and it may be better, under current circumstances, for you to take the entire deduction. It may be worth more to you if your bracket is signifigantly higher. But can two unmarried individuals that jointly own property split the interest deduction absolutely. Just attach copies of the 1099 to both of your tax returns with an explination if you want. They may coming looking for more information later, but you don't have anything to worry about.

Washington, D.C.: Not a question, but a reminder: Low-income and elderly filers may be eligible for free tax preparation. Contact the AARP (http://www.aarp.org/taxaide/), the IRS (http://www.irs.gov/tax_edu/teletax/tc101.html, or 800-829-1040), or Community Tax Aid (http://www.gwscpa.org/cta/, or CTAvol-aol.com) for more information.

And if you have a tax, financial, or legal background, consider volunteering through one of these groups. I've volunteered with CTA for the last few years. (Our low-income clients often receive large refunds, which makes for a very happy atmosphere.)

Michelle Singletary: What a great public service.

Donna LeValley: The IRS does offer some opportunities to volunteer and help modest-income and the eldery with return preparation. If anyone out there is inrterested you can visit the IRS web site and you can find information about how to help locally.

Tarrytown, N.Y.: Hi. I just got married a few weeks ago and I am wondering how I should file? Can I file as a married person jointly? Also I haven't formally changed my name but I intend to, how should I file?

Donna LeValley: It is best to sit down and work out the tax consequences of filing married jointly or married filing separately. That result will change year to year. And until you formally change you name with the Social Security Administration, use your madien name. It takes the SSA about 2 weeks to update their files so leave yourself time to do the paperwork.

Marriage penalty: I didn't really follow your explanation of the marriage penalty. I always thought hit the type of couple you indicated it would help (one high wage earner, one low wage earner). In that situation the low wage earner is pushed into a higher tax bracket. i.e. both single may have paid 20% on x and 32% on y, but being married they pay 34% on x+y, or even 32% on x+y which comes out to more money paid on the income of the lower person.

Donna LeValley: That is true. But if you have a large disparity the income that is shifted to the lower bracket spouse saves money that woudl have been paid by the higher earing spouse if it were all taxed at the maximum rate. Some times its pennies, somtimes the difference is dollars, but it is all your money.

Montgomery Village, Maryland: I was told by a friend that I can deduct what I have paid for daycare from my taxes. Is this true and if so is there an income limit on the deduction?

Donna LeValley: There are a few restrictions on deducting child care expenses. In addition to income limits you can only deduct a percentage of expenses. I suggest you hold on to your daycare expenses receipts and check for the most current limitations.

Alexandria, Va.: If we choose to pay taxes on the gains on stock as of Jan 2, 2001 (in order to qualify for the lower long-term capitol gain rate), do those gains count as "income" in determining whether we make too much to contribute to an IRA or convert an IRA into a Roth?

Donna LeValley: No. You just need to examine you earned income and the other noteable addbacks to determine your Modified Adjusted Gross Income(MAGI). Your MAGI and your or a spouses particiaption in a employer run retirement savings program can both limit any potential contribution to an IRA. But may people in the higher income bracket might be surprised at how much they are eligible to contribute.

Michelle Singletary: As always thanks for joining me today to talk money. I think Donna was great so a very big thank you to her. If you have a burning desire to read up on the new tax changes be sure to pick up the book that Donna helped write. It's called "New Tax Law Simplified:Your Guide to the Major New Tax Act" by J.K.Lasser's. Just what you need for your winter reading list. Remember, I'll be back in two weeks. Until then I hope your money worries are kept to a minimum. See ya.

Michelle Singletary:

That wraps up today's show. Thanks to everyone who joined the discussion.

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