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Filing as the head of household

Baltimoresun.com's tax-advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return every Monday until April 17. To be included in the following weeks, please use the form at the right side of this page to submit your questions.

Hilda Snipe, Baltimore: Can you file [as] head of household without claiming the household and without itemizing?

SC&H Group: One of the requirements of filing as head of household is that the taxpayer must maintain as his/her home a household that is their principal place of residence for more than half of the year. In addition, the household must be the principal residence for a qualifying child or other dependent.

A qualifying child must satisfy four criteria. First, he or she must be the taxpayer's child, stepchild, adopted child, foster child, sibling or stepsibling. Secondly, they must also live with the taxpayer for over half of the tax year. Thirdly, the child must be 18 or younger. An exception is made with children that are 23 or younger if attending school for at least five months of the year or are disabled. And finally, the child qualifies if the taxpayer provided more than one half of their support for the year.

The taxpayer may also claim this status if they provide more than half the support for a dependent parent. This could be true even if the parent lives in a separate household.A head of household filer may choose to either itemize their deductions or take the standard deduction and must be unmarried at the end of the tax year. The taxpayer can choose whichever strategy creates the larger benefit.

Pat, Baltimore: My husband inherited his father's house about five years ago. His brother lived in the house expense-free. The house was sold in 2005. What figure do we use to pay capital gains?

SC&H Group: Generally, inherent income tax gains on a house acquired through inheritance disappear at death. When the house is sold again at a later date, the basis is "stepped-up" to fair market value at the date of death. In other words, the gain would be the difference between the fair market value when his father passed away and the current net sales price.

Randy, Randallstown: I paid the full cost for a parent's funeral. Am I able to deduct any of that cost?

SC&H Group: Funeral expenses are only deductible on a descendant's final federal estate tax return. Any payment from a relative to cover the costs is nondeductible for income tax purposes.

If the parent was considered your dependent for more than half of the year, any medical expenses should be claimed on your individual tax return, but not the funeral expenses. If you provided more than one-half their support -- but because of their income levels, did not claim the parent as a dependent -- you may still be eligible for a medical expense deduction.

A baltimoresun.com reader from Baltimore: This may be rhetorical, but every year the government checks our returns with information it receives from our employers, county real [estate] tax office, banks, retirement and investment companies. In essence, the tax return is merely an honesty test to see if what we report matches what they found out about us. This being said, why doesn't the IRS just send a bill or refund based on the information and eliminate all the needless paperwork on April 15?

SC&H Group: You are partially correct in saying that filing a tax return is like an honesty test. The IRS does check each return for the W-2, Form 1099 income and other types of income that we report on our returns for accuracy. There are additional items that go into a tax return that the IRS does not check for on each individual return.

Certain deductions such as charitable contributions, miscellaneous itemized deductions, medical expenses, self-employed business deductions and rental deductions are not checked on every return. Many of these items that are not verified by the IRS would require documentation upon an IRS examination.

If the IRS did what the reader wanted, what would accountants do with the extra 60 hours per week from February to April 15?

Esmail Essajee, Camp Hill, Pa.: From January to August 2005, I worked in Pennsylvania. Since September, I work for a Maryland employer who, by accident, deducted Maryland state taxes, even though I was and am a Pennsylvania resident. I have received W-2 forms from both my Pennsylvania and Maryland employers. Can I get a Maryland state tax refund, and what income do I list on the Maryland state form? Just the Maryland income earned, or both Pennsylvania and Maryland income?

Also, what form do I need to use to get the refund? Thanks much.

SC&H Group: Pennsylvania and Maryland have what is known as a Reciprocal Compensation Agreement. Basically, what that means is that one state will not tax a resident of the other state on compensation that is subject to employer withholding. For your situation, this means that Maryland will not tax you on your wages that you earned in Maryland, but you will have to pay Pennsylvania tax on those wages.

You can get a Maryland tax refund of the entire amount withheld and you will not report any income on the Maryland Form 505. You will also need to attach a copy of the W-2 showing the Maryland tax withheld equal to the refund you are claiming.

It is a good idea to file the Maryland return as soon as possible so that you can use your refund to pay your Pennsylvania tax liability. You could have an issue with underpayment penalties in Pennsylvania due to having Maryland income tax withheld.

Scott, Baltimore: I recently won approximately $3,700 in an online poker tournament but have lost about that much gambling in Las Vegas. How exactly do I go about claiming this, or do I even have to since it is basically a wash? Problem is, I have proof of one but only hotel receipts and a plane ticket to show for the other. Thanks.

SC&H Group: The IRS requires that you report all gambling winnings on Line 21 of Form 1040 (other income). The IRS allows the deduction of gambling losses, but only to the extent of gambling winnings. You would report your gambling losses on Schedule A of Form 1040, Line 27 (other miscellaneous deductions).

You will need to keep receipts or other sufficient evidence to substantiate the losses you claim on your return. The receipts do not need to be attached to the return, but should be available upon an IRS examination.

Linda Harris, Baltimore: What should be done when a company you pay interest on your mortgage to does not send you a 1098 form?

SC&H Group: If your mortgage company does not send you a Form 1098, Mortgage Interest Statement, you have a few options. First, try calling your bank. They may be able to mail you another 1098 or tell you the amount over the phone. Some institutions allow you to enter your account number over the phone and an automated message will tell you the details of your account.

Second, if your mortgage company offers online account access, you can log on and see all information pertaining to your mortgage.

Lastly, check the year-to-date interest paid on your last mortgage statement. If you acquire the amount that you have paid without receiving a 1098, it should be entered on Line 11 of Schedule A on your Form 1040, instead of Line 10, where interest reported to you on Form 1098 would be entered.

O. Lyonsons, Baltimore: Two vehicles were purchased (with cash) in 2004. Was there some tax form that was to be filed?

SC&H Group: You are not required to fill out any tax forms when purchasing a car regardless of payment method. Check each receipt for the amount of state and local general sales tax paid. You will need these amounts if you itemize your deductions and want to determine if it is more advantageous to deduct state local income taxes versus state and local general sales taxes.

The IRS provides guidance on the calculation of the sales tax deduction in the instructions for Schedule A "Itemized Deductions." Also, if either of the cars you bought are hybrid vehicles, then there is a credit available for those vehicles, as well.

John, Baltimore: What, if any, IRA options are available to someone over 71 years of age? Can a self-employed person continue to contribute to a[n] SEP IRA after the age of 71? Is it similar to Social Security, where you continue while you are withdrawing and adjust the amount you withdraw based upon how much more you contribute?

SC&H Group: Anyone who reaches the age of 70 1/2 during the tax year is not permitted to contribute to a traditional IRA. An individual who is over 70 1/2 years of age, however, may still contribute to a Roth IRA.

Also, any individual who will be 50 or older at the end of the tax year is permitted to make a catch-up contribution of $500 in 2005. The maximum amount for both a traditional and a Roth IRA is $4,000 for 2005, $4,500 if catch-up contribution is available.

SEP plans are nondiscriminatory and are required to cover all employees who meet three criteria. Those criteria are employees who:

  • are at least age 21;
  • have worked for the employer for at least three of the five years immediately preceding the tax year;
  • and have received from the employer at least $450 in compensation in the tax year.SEP plans have minimum distribution requirements that prevent unreasonably deferring tax. For 5 percent owners, minimum distributions cannot be delayed past the age 70 1/2 deadline. Required minimum distributions must be sufficient in amount to distribute the employee's entire benefit over his/her expected life, or the expected life of the employee and his/her designated beneficiary.There are no rules that prohibit an employer from contributing to an employee's IRA under an SEP agreement for the year the employee attains the age of 70 1/2 or thereafter. The minimum distributions will change annually as they are based on the account balance and the life expectancy.Sandra Matanane, Aberdeen: I need to do last year's taxes because I wasn't able to get all my documents before the deadline. Is there a Web site that will help me do them?SC&H Group: You can go to www.irs.gov and print a tax year 2004 Form 1040. Maryland's tax Web site is www.marylandtaxes.com.You could also go to a local accounting firm's Web site to find contact information to seek help from a tax professional. You will want to file as quickly as possible because if you owe tax from 2004, penalties and interest have been accruing on the tax since April 15, 2004.
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