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Don't be confused



Here are some answers


I keep getting phone calls from the IRS saying that I owe back taxes.  What should I do?

 Several things to remember about the Internal Revenue Service:

  • They never call you. They will send letters.
  • They do not use local police. They use Treasury agents.
  • If you owe back taxes and have not responded to them, they will just levy your bank
  • account. They would not have you pay taxes with a pre-paid debit card.
  • They never send emails.


What do I do if I have not received my W-2 or 1099 form? What if it is incorrect?

If you have not received your W-2 or if there are errors, contact your employer. Only your employer can correct a W-2 form. If you are unable to obtain a W-2 form from your employer, you may use Form 4852, Substitute W-2, to file your tax return. You will need your final pay stub with year-to-date totals in order to complete this form.

It is not essential to have 1099s to file a tax return if there is no withholding, but all income must be reported on the appropriate form. If you received a 1099 with errors, contact the issuer for correction. Only an issuer can correct a 1099 form.

My electronically filed return was rejected. Why?

There are two main reasons an electronically filed return is rejected. The first is that the name and social security number on the return do not match the Social Security Administration's records. Be sure that the name on the return matches exactly the way it is shown on the Social Security Card. The second reason is that two returns are being filed claiming the same dependent. This usually occurs between divorced couples.

Last year I had to pay Alternative Minimum Tax. What is it?


The Alternative Minimum Tax is a "shadow" or "parallel" taxing system to the regular taxing method. Several items that are usually included in itemized deductions under the regular tax method are not allowed under the AMT method. These include taxes (i.e.: property tax, state taxes, and license fees) and miscellaneous deductions (i.e.: union dues, tax preparation fees and employee business expenses). There is a larger standard deduction, but no dependency deductions are allowed. The AMT tax rates are 26% and 28%. More middle income taxpayers will be affected by this situation, even though this law was enacted to ensure that wealthy taxpayers couldn't avoid paying taxes.

How much depreciation can I take on my business equipment this year?


There are two ways to accelerate the depreciation on your equipment. You can expense off up to $500,000.00 on your Federal return and $25,000.00 on your State return, under Section 179. The second is on new equipment you can take 50% bonus depreciation in the year of purchase and depreciate the balance.  Bonus depreciation is not available for used equipment.

I was thinking about donating my old car to a non-profit organization. What kind of tax advantage is it?


If you itemize your deductions, you are allowed to deduct the fair market value if the charity retains it for their use, or you can deduct the amount that the car is sold for. The charity will furnish you with all of the paperwork that is required.

If you take the standard deduction, donating a car will have no effect on your taxes.

How do I determine the cost basis of my residence when I go to sell it? What gets included in the cost for computing the gain?


You include the original cost plus everything that stays with the house that was not there when you bought it. The easiest way to compile this information is go from room to room making a list of what changes you have made. Painting is a maintenance item, so do not include it, but wallpaper is included, along with fixtures, flooring, window coverings, etc. Be sure to include all appliances that will be remaining with the home. Any improvements made to the exterior, such as landscaping, fencing, concrete work, gutters, and roofing are also included. Collect the receipts from your back records to be included with all of your other tax information.

I recommend that you take pictures of each room and the exterior. In the event of an audit, you will have visual proof of improvements, in case you do not have all of the receipts.

How much of my student loan interest can I deduct?


You can deduct up to $2,500.00 of loan interest. The loan must have been for education expenses pertaining to undergraduate or graduate level courses. The loan could also pay for room and board if you were at least a half-time student. However, a mixed-use loan (loan proceeds pay for educational expenses and a car) does not qualify for this deduction.

There is a phase-out of this deduction if you are single and your income is $60,000.00-$75,000.00. The phase-out income range is $125,000.00-$155,000.00 for joint filers. The deduction of $2,500.00 will be reduced in proportion to your income level within these income ranges. There is no deduction if your income is over $75,000.00 for single/ $150,000.00 for joint filers. There is a 60 month limit on deductible interest under the State of California tax laws.

During a recent trip to Las Vegas I won $25,000.00 on a Keno ticket. What can I include as my gambling losses for my taxes?


All gambling expenses incurred during the year would be a miscellaneous itemized deduction. You can deduct gambling losses and expenses up to the amount of your winnings.  The losses for that "session" are directly deducted against the winnings. The problem that arises is proving your losses. Casinos are now offering "tracking" for their patrons and at the end of the year they will send you a statement of wins and losses. If you do not have this available to you, you will need to keep all Keno tickets played, lottery tickets, and scratchers to prove your losses. Just cashing a check at a casino is not considered proof that you lost the money gambling. Your travel expenses are also deductible, such as airfare, hotel, and meals.

Everyone says I should set up a living trust. What's your opinion?


See an attorney who specializes in this. This may seem as if I'm avoiding the question, but everyone's situation is different. Trusts address both tax issues and important legal issues. It is essential for all aspects to be considered in your estate planning. An attorney who specializes in trusts, probates, and estates should be able to answer all your questions and give you the best advice for your situation.

How long should I keep my records?


You should keep all financial records for five years. I recommend to my clients that they keep all income tax returns, with W-2 forms, until they start drawing Social Security. You must also keep the records for any asset that you still own. Let's say you bought stock ten years ago and you sell it this year. On the tax return, the selling price and the cost will be reported. In case of an audit, you need to be able to prove both amounts. A Net Operating Loss Carryover would be another instance where you would need to keep your records for longer than 5 years.

It is essential to keep the annual statements when you own stock or mutual funds and are having the dividends reinvested. Each year you pay taxes on the dividend income reported by the stocks and funds. The income should be added to the cost (basis) of your investment. The easiest way to keep this information is to create a file for each stock that you have dividends re-invested. Each year put the December statement in the file. When you sell your investment, the total of the original cost plus all dividend income already taxed, is your cost basis for determining the Capital Gain or Loss.

How long do I have to hold an asset to qualify for the" long-term" tax rates?


You have to hold it for more than one year. The holding period begins on the day after you buy an asset and ends on the day you sell it. A year and a day will qualify for the lower "long-term" tax rates of 0% or 15%. Short term gains are taxed at the same rate as ordinary income at whatever tax bracket you are in.

Obviously, tax rates are only one aspect to consider when determining whether or not to sell an asset. With the volatile stock market, potential future losses, larger than the additional taxes for short-term gains, must be seriously considered. If it is income property that is being sold, remember that the depreciation previously taken will be taxed at the time of the sale.

My tax preparer gave me estimated tax payments to pay. Do I have to?


The tax law states that, to avoid penalties, you must owe less than $1,000.00 with your return, or 90% of the tax due must have been paid in. This can be accomplished by either withholding from income sources or estimated tax payments. Taxpayers with wage income have income taxes withheld from their paychecks. Income tax can also be withheld from pensions, unemployment, and now social security income. If you have under-withholding from these income sources, estimated payments may be necessary to avoid future penalties. This may be the reason your preparer furnished you with estimates. Another solution would be to increase your withholding, equal to the amount on the pre-payment vouchers, therefore making the estimate payments unnecessary. This solution may make it easier for you to budget your money.

Taxpayers with income from sources that have no withholding, such as investments, business income, and rental income, generally pay their taxes with estimated tax payments based on projected income for the current year.

There are exceptions to the penalty rules. The one most used, is to pay in 100% of the tax shown on the previous year's return. Your income must be under $150,000.00 to qualify for this exception. If your income is over $150,000.00, you must pay 110% of the tax shown on the previous year's return.

Should I contribute to my 401K plan at work?



This will reduce your taxes because the contribution is deducted from your earnings before the income taxes are computed. If you work for a company who will match a percentage of your contribution, your investment will grow that much faster. For the year 2013 the maximum contribution is $17,500.00, unless you are 50 years or older, then it is $23,000.00. The funds you contribute and your employer's matching contributions are not taxable until you make withdrawals. At the time of your retirement, it is more likely that you will be withdrawing these funds while you are in a lower tax bracket than during your peak earning years when the contributions were made.

Remember, any withdrawals made before you reach the age of 59 ½ are subject to penalties. The penalties total 12.5% between both the Federal and State agencies. Do not think of this as a savings account, it is a long term investment.

With the dire predictions about Social Security, I advise all of my clients to assume that it won't be in existence when they retire. So plan accordingly. If Social Security is still alive and well, you will be in an even stronger financial position when you retire. The earlier you start contributing, the better.

Also, remember the adage, "Don't put all of your eggs in one basket". Treat your 401K as you would any other investment, diversify and monitor your investment. Don't just sign up for the contribution and forget about it. The employees of Enron and Worldcom who lost all of their 401K investments would have been wise to remember this.

Is the mortgage interest on a second home deductible?


Yes, if the combined acquisition debt of your personal residence and the second home is under $1,100,000.00. Transient second homes, such as motor homes and boats that are fully contained, also have deductible interest on Schedule A. The interest on a transient second home is not deductible for Alternative Minimum Tax purposes. The property taxes paid on a second home are also deductible.

I have a new grandchild. How can I put money aside for college?


There are two ways to save for your grandchild's college education, an Education Savings Account or a Qualified Tuition Plan. The contributions to either plan are not tax deductible to you. However the interest earned is not taxed. The withdrawals of both principal and interest by your grandchild are tax free, if used for qualified education expenses.

A Qualified Tuition Plan, or 529 Plan, has a total maximum contribution of $100,000.00 per child. Funds can only be used for undergraduate or graduate college expenses. Contributions are considered gifts and subject to gift tax rules.

Individual States are offering QTP's. For information on the California state plans go to the For information on plans that other states offer go to the website If you choose a state plan, make sure it complies with the Federal rules for QTP's.

I want to put money into an IRA. Which is better, a regular IRA or a ROTH? When do I have to do it?


Money deposited into a regular IRA may be deductible, but would be taxable when you start drawing it out. If you make a withdrawal before you are 59 ½ there will be penalties on both the Federal and State returns. Money deposited into a ROTH is not tax deductible. However, it is not taxable when you withdraw it, provided you have left it in the account for 5 years. If you are over 59 ½ and the contributions have been in the account for 5 years you can make withdrawals, including the account's earnings, tax free.


If you are not involved in an employer sponsored pension plan or deffered compensation plan (ie:401K), making a deposit into a regular IRA would be deductible if your income is under $150,000.00 and you are not 70 ½ . If you are under 50 you can contribute $5,500.00. If you are 50 and over you can contribute $6,500.00. If you meet these restrictions and you want a tax deduction, this is the best choice for you.

If you are trying to defer taxes on earnings and your income is under $150,000.00, then a contribution to a ROTH IRA would be the best choice.

Contributions have to be made by April 15th.

I have heard that dividends aren't taxable this year. Is that true?

No. Qualified dividends will now be taxed at the new lower Capital Gains rates, depending on your tax bracket. If your tax bracket is under 25%, the rate is 0%. If your tax bracket is over 25%, the rate is 15%.

Qualified dividends are income from RICs (regulated investment companies), REITs (real estate investment trusts), domestic corporations, and qualified foreign corporations. At this time, dividends passed through to the taxpayer from S Corporations, partnerships, estates, and trusts, are not deemed to be qualified. It is expected that the Ways & Means committee (the Senators who write the tax laws) will address this issue in 2004.

The 1099DIV form that you receive will have the dividends separated as to qualified and non-qualified. It is expected that there will be some confusion with the reporting of dividend income this year. It is quite possible that you will receive an amended 1099 form from your brokerage firm.

What if I owe taxes, but don't have the money to pay them?

If you can't pay the tax due, or charge payment on a credit card, you have two options.

If you will be able to pay the tax due in a month or so, you can send a partial payment with your return. The taxing agency will send you a bill in 4-6 weeks for the balance plus penalties and interest computed on the unpaid portion.

If you know it will be considerably longer, then you need to set up a payment plan with the taxing agency. You need to file form 9465 with the Internal Revenue Service or form 3567 with the Franchise Tax Board. You will be contacted for information pertaining to your income and living expenses to determine the amount of payment you can afford.

Do not ignore this situation. As daunting and overwhelming it can be in some circumstances, if you set up a payment plan, you will avoid having your bank accounts levied and your wages attached. Once a payment plan is in place, do not miss a payment. That is considered to be a breech of contract and the government can take more drastic measures to obtain the money owed to them.

I need to file an extension. How do I do it?

You file form 4868 with the IRS. The State of California has an automatic, paperless, 6 month extension. If State taxes are due, file form 3519.

It is essential to understand that an extension is an extension to file the paperwork only. NOT TO PAY THE TAXES DUE. Estimate your tax liability as accurately as possible. Pay whatever tax might be due by April 15th. Any unpaid taxes will be charged penalties and interest from April 15th until the date of payment.