Baltimoresun.com's tax-advice column features three experts from the Sparks accounting firm SC&H Group answering questions about preparing your return every Monday until April 15.
Bill, Bel Air: I got an insurance settlement from the other guy's car insurance for medical expenses and pain and suffering. Are these taxable?
SC&H: Any amount received as damages (other than punitive damages) as a result of personal physical injuries and physical sickness is excludable from gross income. Damages received for emotional distress or pain and suffering generally do not fall into the "personal physical injury or sickness" category, unless they are received in relation to a physical injury or sickness. Therefore, in your case, the full amount of your insurance settlement is non-taxable.
Art, Bel Air: I sold shares of stock last year that I bought through payroll deduction over a three-year period. I know the individual purchase prices but I need to know the best way to come up with the "cost basis." Can you help?
SC&H: If you know the individual purchase prices of the stock, the cost basis is the amount paid for each share multiplied by the amount of shares purchased. If stock was purchased at more than one price, then the cost basis starts with the share price of the shares purchased first if not all of the shares were sold. You also have the option of selling shares you specifically identify and using an average cost basis for the shares. See IRS Publication 551 for more information.
K. Adams, Owings Mills: I owned a franchise business which I "closed" on Dec. 31, 2007. Some of the income I had earned in 2007 was not paid to me until January 2008. I'd like to file a final tax return for 2007 and report the January 2008 income in the 2007 tax year. The company issued me a 1099, which, of course, did not include the cash paid in 2008. Can I report the money paid to me in 2008 as part of my 2007 return? As I said, I would like to be done with that business and not have to carry on for another year.
SC&H: The general rule for computing taxable income is that the accounting method used should stay consistent each year and that it "clearly reflects income." If your business reports under the accrual method, then there is no concern, since the income is recognized when earned in 2007. Likely, however, your business is on the cash method, which generally means income is earned when cash is received. You could consider electing to change your accounting method to the accrual method of accounting, or alternately, wait until 2008 to recognize that income.
Answers to selected questions are published in The Sun's Money & Life section on Sundays and online on Mondays.
Bill, Bel Air: I got an insurance settlement from the other guy's car insurance for medical expenses and pain and suffering. Are these taxable?
SC&H: Any amount received as damages (other than punitive damages) as a result of personal physical injuries and physical sickness is excludable from gross income. Damages received for emotional distress or pain and suffering generally do not fall into the "personal physical injury or sickness" category, unless they are received in relation to a physical injury or sickness. Therefore, in your case, the full amount of your insurance settlement is non-taxable.
Art, Bel Air: I sold shares of stock last year that I bought through payroll deduction over a three-year period. I know the individual purchase prices but I need to know the best way to come up with the "cost basis." Can you help?
SC&H: If you know the individual purchase prices of the stock, the cost basis is the amount paid for each share multiplied by the amount of shares purchased. If stock was purchased at more than one price, then the cost basis starts with the share price of the shares purchased first if not all of the shares were sold. You also have the option of selling shares you specifically identify and using an average cost basis for the shares. See IRS Publication 551 for more information.
K. Adams, Owings Mills: I owned a franchise business which I "closed" on Dec. 31, 2007. Some of the income I had earned in 2007 was not paid to me until January 2008. I'd like to file a final tax return for 2007 and report the January 2008 income in the 2007 tax year. The company issued me a 1099, which, of course, did not include the cash paid in 2008. Can I report the money paid to me in 2008 as part of my 2007 return? As I said, I would like to be done with that business and not have to carry on for another year.
SC&H: The general rule for computing taxable income is that the accounting method used should stay consistent each year and that it "clearly reflects income." If your business reports under the accrual method, then there is no concern, since the income is recognized when earned in 2007. Likely, however, your business is on the cash method, which generally means income is earned when cash is received. You could consider electing to change your accounting method to the accrual method of accounting, or alternately, wait until 2008 to recognize that income.
Answers to selected questions are published in The Sun's Money & Life section on Sundays and online on Mondays.