How to file an amended tax return

SC&H Group experts also address filing status exclusions, casualty losses

By Jim Wilhelm, Stuart Rudo and Greg Horning | Special to Baltimoresun.com

March 5, 2006

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.

Sharon, Bel Air: What is the procedure for filing an amended tax return for [a] previous year?

SC&H Group: An amended individual income tax return is filed on Form 1040X. This form may only be used after the original [Form] 1040 has already been filed. It must be submitted within three years of the due date of the original return.

The form has three columns on it. The original amounts are reported in the left-hand column, the amount of change in the center column, and the corrected amounts in the right-hand column. There are also sections on the form to amend your filing status or to correct your dependents.

The mailing address for the 1040X depends on where you live. In Maryland, we mail them to: Internal Revenue Service Center, Andover, MA 05501. Maryland has its own form for amending an individual resident tax return, Form 502X.

John, Baltimore: I have a college loan I am paying for my son. The IRS won't let me deduct the interest because I file married filing separate (MFS). This doesn't seem fair?

SC&H Group: Unfortunately, you are correct about the disallowance for individuals filing married filing separate. This is one of the exclusions for this filing status. While there are some reasons to file MFS, this is a disadvantage.

Maybe you could compare your advantages of filing separate to the advantages of filing married filing joint (MFJ) in order to determine if this filing status is still useful to your fact pattern.

Mark Eisenstadt, Mount Airy: I have a well that ran dry. It was certified by the contractor I used as a sudden event, unusual in nature, and was not caused by degradation -- it was not a sudden event.

Can I take this as a casualty loss or loss deduction for the cost of the replacement, which was $23,000?

SC&H Group: A taxpayer may deduct a casualty loss to nonbusiness property to the extent that the loss exceeds 10 percent of his or her adjusted gross income (AGI). The loss must first be reduced by any insurance proceeds received and by an additional $100 before applying the 10 percent of AGI limit.

Without knowing the actual event that your contractor is stipulating caused the well to run dry, it is difficult for us to reach a reliable conclusion. However, we can tell you that, historically, casualty loss claims related to wells that have run dry are generally rejected by the IRS.

The IRS takes the position that the loss was caused by an extended period of deterioration, whether in the well equipment or the surrounding soil. For instance, well supports may collapse due to extended erosion or soil may shift due to increased or decreased moisture content.

Although the stoppage of running water may in fact be sudden, the causes of it may have developed over a period of time. You should ask your contractor to provide additional information on the actual event that caused stoppage and consider his or her response in relation to the instructions for Form 4684.

Margie, Baltimore: I understand you are entitled to a $250,000 exclusion on the sale of your primary residence. What proof do you have to submit to claim primary residence?

SC&H Group: You can exclude up to $250,000 of the gain on the sale of your main home if all of the following is true:

you meet the ownership test;

you meet the use test;

and during the two-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

You may exclude up to $500,000 of the gain on the sale of your main home if all of the above is true and you are married and file a joint income tax return. If your gain will be below the exclusion amount, you do not have to report the sale anywhere on your tax return.