Editor's note: Every Sunday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax advice column featuring experts from the Sparks accounting firm SC&H; Group answering reader questions. Submit questions at www.baltimoresun.com/taxtalk
I sold shares of stock last year that I bought through payroll deduction during 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?
-- Art, Bel Air The cost basis is the amount paid for each share multiplied by the amount of shares purchased. If the stock was purchased at more than one price, then the cost basis starts with the price of the shares purchased first if not all were sold. You also have the option of selling shares you specifically identify and using an average cost basis for those shares. See IRS Publication 551 for more information.
I owned a franchise business, which I closed Dec. 31. Some of the income I earned in 2007 was not paid until Jan. 15. I'd like to file a final tax return for 2007 and report the January income as part of that. The company issued me a 1099, which did not include the January income. Can I report it as part of my 2007 return? I do not want to carry that income over for another year.
-- K. Adams, Owings Mills
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, the income is recognized when earned in 2007. More likely, however, is that your business reports under the cash method, which means income is earned when cash is received. You could change to the accrual method or wait until 2008 to recognize that income.
Can I claim the amount of my daughter's braces on my taxes?-- Shalanda, Baltimore
Braces are an allowable itemized deduction. But all medical deductions will be reduced by 7.5 percent of adjusted gross income. Therefore, you may not receive tax savings from this itemized deduction if your income is too high or if you do not have enough other medical deductions. You should consider this expense when participating in a flexible spending account, where medical expenses can be funded with pretax dollars from your wages.