In your case, distributions from a health savings account (HSA) used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from federal and Maryland taxable income. If you deferred income related to day care expenses, you should utilize that data when preparing Form 2441.
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.
SC&H Group: The question you are asking is of a legal nature and therefore we are not qualified to respond. You should discuss this issue with an attorney familiar with such matters.
Gail Gallon, Forest Hill: I am using TurboTax. My husband is on active duty with the U.S. Coast Guard. Is his income from Maryland or not?
SC&H Group: Your husband's income from the Coast Guard must be reported on your Maryland income tax return provided he maintains a legal domicile in Maryland. State residents are required to report all income on their return regardless of where the income was earned. He may, however, be entitled to exclude up to $15,000 of military pay if it was earned outside of U.S. boundaries or possessions. See the Military Overseas Income Worksheet and Instruction No. 29 included with the Maryland 2005 forms instructions.
Bettye Campbell, Parkville: My son is a full-time college student. Last summer, he was in a federal summer internship program. He received a stipend of just under $6,000 for the 12 weeks. He was not asked to fill out a W-4, [and] no taxes or [Federal Insurance Contributions Act] contributions were withheld. He received a [Form] 1099 with the amount listed as "taxable grants." This was the only income he had in 2005. Does he owe taxes? Does he even have to file a return? Thank you.
SC&H Group: The minimum federal and Maryland filing requirement for a single taxpayer (not claimed as a dependent) is $8,200. The minimum filing requirement for a dependent taxpayer for a federal return is $5,000 of earned income or $800 of unearned income. Assuming that you claim your son as a dependent since he is a full-time student, your son would be required to file a federal return for 2005 since his earned income exceeds the $5,000 filing requirement.
He will have a small federal tax liability for 2005. He will not, however, have to file a Maryland return since his income is below the $8,200 filing requirement. This income should be reported on Line 7 of Form 1040.
Teresa, Lothian: My husband and I are recently separated and we will be filing separately. I was told by H&R Block that I could not submit all of my day care expenses (camp, after care, day care). Is this true? It did not seem right.
SC&H Group: If you file married filing separately, you cannot take the credit for dependent care expenses. But if you are considered unmarried at the end of 2005, you may be able to file as head of household and claim the credit.
In order to be considered unmarried at the end of the tax year, you and your spouse must have lived apart for the last six months of the tax year, you must have provided over half the cost of keeping up your home and your child must have lived in your home for more than half of the year. If you meet all of the requirements listed above, you will need to submit Form 2441 along with your Form 1040 in order to take the credit for dependent care expenses.
Louis, Joppa: In 2005, I cashed out $25,000 in a self-directed IRA in M&T Bank and immediately put [the] full amount in [an] Allianz plan, but because the proper paperwork was not submitted, they sent me back the amount in a check made out to me. I immediately put the full amount in another self-directed IRA through Smith Barney. I never touched or spent any part of the money. But in January 2006, I received from Allianz a [Form] 1099 for the full amount of the $25,000. My question is, do I have to pay taxes on this money?
SC&H Group: It sounds like you did a qualifying rollover, so that amount should not be taxed to you. As long as you contribute the funds to another IRA within 60 days (or recontribute to the same IRA within that time frame), the distribution is not taxable to you. You report the distribution on your tax return, but it is not subject to income tax.
Ed Garvey, Crofton: I purchased replacement windows in 2005. Does this qualify for the energy tax credit? How do I claim it?
SC&H Group: The credit for qualified energy efficiency improvements is effective for property placed in service after Dec. 31, 2005, so these windows would not qualify. If they were placed in service in 2006, you would need to first establish that they meet criteria set forth by the 2000 International Energy Conservation Code. The manufacturer of the windows should be able to tell you whether or not they meet these standards.
Once you confirm that the windows qualify, you can take a credit for 10 percent of the amount paid or incurred for the windows during the tax year, up to $200. The credit is also subject to other limitations if you have taken a similar credit in prior years.
Harriet Cooper, Mount Washington: I am in the process of doing my 2005 tax return, and I have a question about an energy rebate on certain purchases for the home. I did hear of something about this a few months ago. In 2005, I purchased a new heat pump and furnace, replaced all of my windows with new, energy efficient windows, purchased a new Energy Star dishwasher, a new stove and [a] microwave. Is there some kind of rebate/deduction on income tax returns for this? I thought I read something that President Bush was presenting.
SC&H Group: The credits for qualified energy efficiency improvements and residential energy property expenditures are effective for property placed in service after Dec. 31, 2005, so your improvements would not qualify. Starting Jan. 1, 2006, certain improvements and expenditures can qualify for these credits if they are installed in the taxpayer's principal residence.
Qualified energy efficiency improvements include certain insulation materials and systems, exterior windows and doors, and certain metal roofing. All of these improvements must meet standards set forth in the 2000 International Energy Conservation Code. The improvements must also be originally placed in service by the taxpayer and reasonably expected to be in service for at least five years.
Residential energy property expenditures include certain heat pumps, water heaters, central air conditioners, furnaces, hot-water boilers and advanced main air-circulating fans that meet certain standards set forth by the Department of Energy. These expenditures must also be originally placed in service by the taxpayer.
The credits for qualified energy efficiency improvements and residential energy property expenditures are both subject to certain limitations. You should consult your tax adviser for assistance in calculating them.
Louis Mason, Baltimore: I own a home with an assessed value of $370,000 in Baltimore City. My current taxes are based on a phase-in of $173,000. My parents live with me in this home. My question is, if I declare part of the home as a rental to my parents and collect rent from them, will my city taxes still be based on my current phase-in, or are city taxes different for a rental property? For example, by charging them rent, will my taxes rise to the $370,000 assessment value of the property?
SC&H Group: We would need more information to directly answer your question. However, you should consider the purchase date, purchase price and qualifying factors for the Homestead Credit. The Homestead Credit was established to help homeowners deal with large assessment increases and requires jurisdictions to limit taxable assessment increases to 10 percent or less each year. The state of Maryland limits the increase of taxable assessments to 10 percent each year, while Baltimore City limits the increase to 4 percent each year. The qualifying factors for the Homestead Credit are:
A further condition is that the dwelling must be the owner's principal residence and the owner must have lived in it for at least six months of the year, including July 1 of the year for which the credit is applicable. The Homestead Credit is granted by the treasurer's office when calculating the property tax due.
We suggest you seek professional advice.