How to file an amended tax return

Special to'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. In order to meet the ownership and use tests during the five-year period ending on the date of the sale, you must have:
  • owned the home for at least two years (the ownership test);
  • and lived in the home as your main home for at least two years (the use test). For more information, you may want to review IRS Publication 523, Selling Your Home. Jack l. Schubert, Westminster: If I claim no exemptions, use standard deductions [and] have very little other income than wages, why do the withholding tables leave me with a large tax due? SC&H Group: Typically, the withholding tables are fairly accurate in determining your tax liability when dealing with your taxable income attributed to wages. If you have little income other than your W-2 wages and you claim no exemptions, the withholding tables generally would not leave you with a large amount due. Please check with your payroll/human resources department to ensure that they are withholding the correct amount from your paycheck. Also, you may want to get a tax professional to check your return(s) to make sure you are calculating your tax liability correctly. If you are married and your spouse earns income, often the "marriage penalty" creates a trap when it comes to withholding. This is because the tax tables assume a tax rate based on only one spouse's income. If your spouse's income, or non-wage income, elevates your effective tax rate, you can find yourself owing tax every year. Marci, Baltimore: I just purchased a home in 2005. How much of the mortgage interest is tax deductible, and is there a minimum amount of deductions I must have before I can claim the mortgage interest? Thanks. SC&H Group: Generally, you will have no problem deducting the mortgage interest paid on home acquisition debt. The rule states that such interest is fully deductible to the extent that acquisition debt is not greater than $1 million. Home equity loans present a more restrictive set of limitations. Mortgage interest attributable to home equity indebtedness is deductible to the extent that such indebtedness does not exceed $100,000 and the excess of the home's fair market value over the home acquisition debt. To reap the benefits of the mortgage deductions, you must be itemizing deductions on Schedule A of your Form 1040. For 2005, the standard deduction for joint taxpayers is $10,000 (single is $5,000). Therefore, the aggregate of your itemized deductions, including mortgage interest, must exceed this amount to make itemizing advantageous. Ngoan Vo, Baltimore: We live in Baltimore. We received five acres of land in Ohio from my in-laws about 10 years ago. It was valued at $10,000. We have just sold it for $90,000. What are our tax liabilities from Ohio, Maryland and the [federal government]? SC&H Group: It would be beneficial for you to know the cost basis your in-laws had in the land when they gifted it to you. In computing gain on gifted property, for federal purposes, the gain will be the excess of the sales price over your tax basis. If you cannot obtain the basis, then compute the gain using the value at the date of the gift as an estimate. You should know that the IRS can presume a basis of $0, unless you can prove otherwise. For federal purposes, the gain will be subject to the long-term capital gains rate, which, for 2005, the maximum rate is 15 percent. For Ohio purposes, capital gains and losses from the sale or disposition of real property in Ohio are allocable to Ohio. Therefore, you will file Ohio Form IT-1040, Schedule D, for nonresidents. Though you must report the gain on your Maryland return as a Maryland resident, you will not be taxed by two states on this gain. Instead, you will receive a credit for some or all of the tax you pay to Ohio. To obtain this credit, complete Maryland Form 502-CR and submit it with a signed copy of the Ohio return, along with the rest of your Maryland return.
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