Jim Wilhelm, Stuart Rudo and Greg HorningSpecial to Baltimoresun.com
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.
Barbara Smith, Baltimore: I worked for a company that filed for bankruptcy. When they filed, they owed me 20 days of vacation. I filed as a creditor on the bankruptcy. I have been notified by the court that the 10 years is up and the company never came out of bankruptcy. Can I claim this as a loss, as the debt will never be paid?
SC&H Group: Individual taxpayers file on the cash basis method of accounting. Since you did not include any of the accrued vacation in your income in previous years, you do not get a bad debt or other deduction for the lost income.
Julie, Pasadena: Is Catholic school tuition tax deductible?
SC&H Group: Private school tuition continues to be nondeductible for income tax purposes. There are several tax-favored ways to save and fund such expenses (education savings accounts, trusts, [Uniform Transfers to Minors Act] accounts), but no federal or Maryland deduction is allowed.
Julie, Chicago: I cashed in the total amount of mutual funds in 2005 that were all purchased in 1997. The 1099-B forms did not give me a starting cost, but did let me know whether I had a loss or gain in the total amount received. I am lost on how to report this information on Schedule D.
SC&H Group: You will need the cost basis of the security in order to properly report the sales and to avoid paying unnecessary gains. Many Forms 1099-B do not provide cost basis of the security sold. You could contact your broker or the mutual fund company to determine if they have any records regarding your tax basis.
Additionally, if you receive monthly statements for your account, you could review the statement for the month in which the funds were sold. The cost basis may be provided in the sale transaction detail. You should also consider dividends that were reinvested into the mutual fund, as they would increase your basis.
Susan DeGrandis, Ellicott City: We filed a married joint tax return. Our son lives with us. He turned 24 on Nov. 10, 2005, and he was a college student from August 2005 through December 2005 and worked part time with an income of $3,500 last year. Are we able to claim him as an exemption for our 2005 taxes?
SC&H Group: Your son is no longer considered a qualifying child as he was over the age of 24 at the end of the tax year. However, you may claim a dependency exemption for him if he is a "qualifying relative" that meets the following conditions:
He has a specific relationship to you or his principal residence is with you.
He has gross income that is less than the exemption amount ($3,200 for 2005)
He has more than half of his support provided by you.
Lucille Margulis, Reisterstown: Is there a deduction line where I can report a cash gift that I had given my grandchild?
SC&H Group: Unfortunately, gifts to any individual are not deductible for income tax purposes. If you have made a gift to one or more individuals for more than the annual exclusion amount ($11,000 per donee for 2005), then you should consult your tax adviser regarding the possibility of needing to file a gift tax return.
Ron, Bel Air: I have been declared disabled and [have] receive[d] benefits by the U.S. Social Security Administration since 2004. Do I qualify for Maryland's pension exclusion as being "totally disabled" for the 2005 tax year?
SC&H Group: If you are over age 65 or totally disabled, then you are eligible for a $21,500 pension exclusion as long as you have received a pension from an annuity, pension plan or endowment plan. Distributions from retirement accounts such as an IRA, a [Simplified Employee Pension Plan] SEP-IRA or a Keogh do not qualify.
Please note that this exclusion is reduced by the amount of Social Security benefits you receive. Furthermore, Maryland requires a certification to be filed that keeps you from engaging in substantial gainful activity. Also, you must expect the impairment to be of long, continued or indefinite duration or to result in your death. This certification must be certified by a qualified physician.
Ann, Abingdon: We forgot to claim the $5,000 for the IRA we just invested in on our 2005 tax return. Should we file an amended return? Would it make that much difference in the bottom line?
SC&H Group: First, I want to clarify that the maximum contribution for 2005 is $4,000 per person ($4,500 if you are over 50). I am guessing that this amount is for you and your spouse. Nonetheless, if the contribution is made before April 15, 2006, you can count it as being made in 2005.
If you contributed to a Roth IRA, there is no deduction available. If you contributed to a regular IRA, there could be a deduction available, depending on whether or not you have earned income or if you or your spouse participate in a retirement plan through your employer.
It is possible that you may need to file an amended return, but you should talk to a tax professional as there a number of questions related to your specific scenario to determine if the contribution is deductible or not. If deductible, the amount of the benefit would depend on your marginal tax rates.
Roger, Parkville: I understand that capitalized student loan interest is deductible up to $2,500 as student loan interest "in most situations." When would it not be? At the end of my deferment period, October 2005, the interest that accrued was added to the principal. After that, I made regular payments and received a form saying I paid $360 in qualified interest, but the letter didn't say anything about the capitalized amount, which was over $2,000.
SC&H Group: Taxpayers can deduct up to $2,500 of interest paid on qualified education loans for college or vocational school expenses as an adjustment to income. This deduction phases out for taxpayers with adjusted gross income above $50,000 ($105,000 for joint filers).
The taxpayer taking the deduction must be the individual legally obligated to make the loan payments. The capitalized interest that was rolled into the principal of your loan is deductible as it is paid. You should be able apply your payments first to the unpaid capitalized interest. In this manner, you would deduct the $360 reported to you, as well as the amount of capitalized interest paid during 2005.
Roger Campos, Baltimore: Explain the rules for [the] up to $60,000 tax deduction for a [sport-utility vehicle].
SC&H Group: Companies generally can take a deduction for depreciation of business vehicles. The Internal Revenue Code allows up to $105,000 of new property purchased to be entirely expensed in the current year, subject to additional limitations.
I believe your question refers to the tax law change that limits the cost of an SUV that may be expensed under the IRC. If the gross vehicle weight of an SUV is more than 6,000 pounds, the code could apply. The American Jobs Creation Act of 2004 does not eliminate the exemption from luxury car depreciation limitations for SUVs. The new law instead limits the cost of an SUV that can be expensed under the code to $25,000. The remaining cost is then depreciated over the normal automobile depreciation rules.