Scott, Glen Arm: We bought a Volkswagen Jetta diesel in July of 2005. The car averages 50 miles per gallon on the highway. Does this purchase qualify for a tax credit/deduction per last year's federal energy act?
Jim Wilhelm, a partner with SC&H Group, leads the income tax department, providing tax compliance and consulting services to private and public companies throughout the region.
Stuart Rudo is a tax partner with SC&H Group, focusing his practice on individual and corporate tax services and cost segregation studies.
Greg Horning is a founding partner of SC&H Group. He provides comprehensive tax, investment advisory and financial planning services to high net-worth individuals.
In addition, the act's benefits are for expenditures made beginning in 2006. For tax years prior to 2006, certain clean-fuel vehicles and electric vehicles created tax benefits for their owners. However, diesel cars were not among them.
Tish Gregson, Laurel: Can I have a 401(k) and contribute to an IRA (tax deductible)?
SC&H Group: Yes, it is possible for people who actively participate in an employer-sponsored retirement plan to make payments to an IRA. However, there are restrictions governing the deductibility of these contributions, based on filing status and income.
If you are a single filer, you may make a tax-deductible contribution of up to $4,000 if your annual adjusted gross income (AGI) does not exceed $50,000. However, if your AGI does exceed $50,000, the deductible contribution amount decreases. If your AGI is greater than $60,000, the $4,000 contribution can still be made, but there is no deduction allowed.
If you are a married individual filer, you may make a tax-deductible contribution of up to $4,000, as long as you and your spouse's combined AGI does not exceed $70,000. However, if your combined AGI does exceed $70,000, the deductible contribution amount decreases. If your combined AGI is greater than $80,000, the $4,000 contribution can still be made, but there is no deduction allowed.
If you are married and filing jointly, you may make a tax-deductible contribution of up to $4,000, as long as you and your spouse's combined AGI does not exceed $80,000. If your combined AGI does exceed $80,000, the deductible contribution amount decreases. If your AGI is greater than $80,000, the $4,000 contribution can still be made, but there is no deduction allowed.
And if all that isn't confusing enough, if you have an employer-sponsored plan but your spouse does not, he may be able to make a deductible IRA contribution, depending on your joint AGI. Also, we recommend you discuss the benefits of the new Roth IRA with your financial adviser.
Dimitri Kastor, Baltimore: How is it possible that you pay taxes directly out of your check for an entire year, yet, you still end up owing the government (mainly, the state) at the end of that year?
SC&H Group: While we feel your pain, often, the withholding on your salary income is not sufficient to cover the tax liability you face each year. There are many reasons why this could be happening to you, but here are the most common:
Delores Gregory, Baltimore: In 2002 when I retired, part of my deferred compensation was in stock, which was put in my name, and I paid taxes on it. Last year, I sold the stock at a profit. What portion of the money do I report and what portion is taxable, and how do I report it? I received a [Form] 1099-B for the full value.
SC&H Group: By receiving ownership of the stock when you retired, you should have been treated as having received ordinary income ("deferred compensation"), which was reported on your W-2 and on your 2002 tax return (Line 7 on Form 1040). In addition, any amounts paid by you to acquire the stock are included in the total cost to acquire the stock. These events establish the cost basis for your stock.
The amount you received in 2005 is your gross proceeds. The excess of the gross proceeds over the cost basis, when you sold the stock, is your capital gain. Since your capital gain was for stock held for more than one year, the sale qualifies for long-term capital gains tax rates.
Tom, Accident: My wife's W-2 shows an amount for [Internal Revenue Code] 125. I understand this is a health care spending account. My question is, how is it shown on federal and state returns?