To be included in the following weeks, please use the form at the right side of this page to submit your questions.
Steven Baxter, Crofton: My ex-wife and I split the cost of college tuition for our two children. Can I deduct the portion I pay on my 2004 return?
Wilhelm: Steven, there are deductions and credits available to those who are paying “qualified expenses” for college. Qualified expenses include tuition and fees required for the enrollment or attendance of a student at an eligible educational institution. Fees are only included to the extent that they are required as a condition of enrollment or attendance. Qualified expenses do not include personal expenses such as room and board or transportation. Books, supplies and equipment are also not qualified expenses.
Taxpayers may choose to take one of three options to receive a tax break for qualified higher education expenses paid. Two tax credits, the Hope Credit and the Lifetime Learning Credit, are available for the year in which qualified expenses are paid. Tax credits directly reduce the amount of tax due. Both credits are non-refundable; therefore, they cannot reduce your tax below zero.
These credits are phased out for single taxpayers with modified adjusted gross income (MAGI) between $42,000 and $52,000 ($85,000 and $105,000 for those filing a joint return). A deduction for tuition and fees is also available if your MAGI is under $80,000 for single filers or $160,000 for joint filers.
Deductions reduce the amount of income subject to tax, therefore the net benefit is calculated by multiplying the amount of the deduction by your tax rate. Which option is most beneficial depends on various factors and more information is available in the Internal Revenue Service’s publication 970.
The credits or deduction can be taken by a taxpayer if the following three requirements are met:
A parent can take the credit or deduction for fees paid on behalf of the student only if the child can be claimed as a dependent on their tax return. If the student is not claimed as a dependent of another, the student is entitled to take the credit or deduction on their return. In the case where a parent or third party pays for tuition and fees, but does not claim the student as a dependent, the student is treated as receiving the payment from the other party as a gift, and in turn, paying the qualified expenses.
Jonathan, Baltimore: I plan to fund my SIMPLE IRA (Individual Retirement Account) at the maximum level this year. Can I also contribute to a traditional IRA or a Roth IRA?
Wilhelm: Jonathan, yes, you may contribute to a traditional IRA or a Roth IRA even though you plan to contribute the maximum to a SIMPLE IRA this year. However, traditional IRAs and Roth IRAs deal with contributions differently when the taxpayer is active in an employer-sponsored pension plan (SEPs, SIMPLEs, 401[k]s, etc.).
The maximum contribution for either a traditional IRA or a Roth IRA is $3,000 for 2004. The maximum deductible contribution may be limited based on your MAGI. In addition, there are catch-up contributions available for all types of retirement plans and IRAs for those aged 50 and over — getting older can be good!
For a traditional IRA, a reduced IRA deduction worksheet must be filled out to show the contribution allowable as a deduction on your tax return when the taxpayer is covered under an employer plan. You may still contribute the maximum of $3,000 to the traditional IRA for the year, but you may only be able to deduct a portion of the contribution on your tax return. The nondeductible portion of the contribution should be reported on Form 8606 and filed with your tax return.
If no deduction is available, you might still consider a nondeductible IRA contribution (earnings grow tax-deferred); however, a Roth IRA would be a better idea if you’re eligible.
For a Roth IRA, it is immaterial whether or not you are active in an employer-sponsored plan. Roth IRA contributions are not deductible. When funds are withdrawn for retirement and other qualified withdrawals, there is no tax owed on the earnings of the account. The only reason your $3,000 contribution would be limited is if your MAGI fell within or exceeded the phase-out range. This range is dependent upon your filing status and a worksheet is included with the Form 1040 booklet for 2004.
Sharon Keska, Baltimore: I just e-filed my taxes and found I was eligible for EIC (Earned Income Credit) for $290, but I already sent it. The Web site will not allow me to fix the error. How do I get this adjusted?
Wilhelm: Sharon, to receive your refund (and some interest on that refund amount) you need to file Form 1040X — “Amended U.S. Individual Income Tax Return” — in order to claim this additional credit. Furthermore, this form cannot be filed electronically. First, you need to allow your original return to be processed. Once that process is complete, you should file your Form 1040X as soon as possible.
For additional information, you can return to the IRS Web site and look under “e-file” and then look under the topic “e-file Frequently Asked Questions for Individual Taxpayers.”
You should also review your Maryland return, as your state taxes may be reduced by any federal earned income credit allowed on your amended return.
One final note, if the error is obvious, the IRS may adjust your original return, or send you correspondence indicating the potential error.
Huntley, Randallstown: Will I lose the child tax credit when my child reaches 17 years old?
Harrell: Unfortunately, you will no longer receive the child tax credit in the year your child turns 17. Keep in mind that your child can still be taken as a dependent on your tax return.
Larry, Baltimore: I did a quit claim for a house that my partner and I shared for eight years. What do I have to report to the IRS? I also was given that person’s IRA — what do I have to report?
Harrell: A Quitclaim Deed transfers a person’s entire interest of a real property from one owner to another. Therefore, there is nothing that you have to report to the Internal Revenue Service at this time. However, if you sell the property, the IRS will receive information concerning the sale of the property in your name and you may be subject to capital gains on your income tax returns.
The company that handled the IRA will issue you any documentation to be included on your income tax return. This same information will be reported to the IRS on your behalf.
Mark, Fallston: What Maryland taxes, if any, will I incur when I sell my rental property in Nevada? I lived in the rental property three of the last five years and plan on taking $250,000 of the $340,000 capital gains tax free. I just purchased property in Maryland but won’t be a resident until the Nevada house sells.
Harrell: The capital gain earned from the sale of the rental property will be reflected in the calculation of federal AGI. That is the starting point for the calculation of the Maryland income tax (line 1 on the Maryland return). If you began or ended your residence in Maryland during the tax year, you are considered a part-time resident and you will have to file a Maryland tax return.
