It’s that scary time of the year again. The tax man cometh and, no matter how well we prepare, most of us find ourselves with at least one question we just can’t answer.
To help our readers solve these tax mysteries, five tax experts from the Savannah CPA firm of Hancock Askew & Co. gave up their lunch break — and then some — to man the phones for two hours this week, taking calls and giving readers guidance on their most pressing tax questions.
The following are answers to their most commonly asked questions as well as some involving unique tax situations:
Q.Who must file a 2014 income tax return?
A. You are required to file a return if your gross income is at least $10,150 for single filers ($11,700 if age 65 or older), $20,300 for married joint filers ($21,500 if one spouse is 65 or older and $22,700 if both spouses are 65 or older), $3,950 if married filing separate, $13,050 for head of household ($14,600 if age 65 or older), and $16,350 for qualifying widow ($17,550 if age 65 or older).
If you are a child or other dependent, you are required to file if you have unearned income greater than $1,000 or earned income greater than $6,200 (based on single filing status and under age 65).
Q. Can I contribute to a Roth IRA? What do I do if I was not eligible to make a 2014 Roth contribution?
A. For 2014, you may contribute the lesser of $5,500 (plus $1,000 if age 50 or older as of year-end) or compensation. The annual contribution is further limited based on your modified adjusted gross income (MAGI).
For 2014, the phase out for single and head of household filers begins at MAGI of $114,000 and is fully phased out at $129,000. The phase-out ranges for married joint or qualifying widow are $181,000 to $191,000 and $0 to $10,000 for married filing separate.
If your MAGI is within or exceeds these thresholds and you’ve already made a Roth contribution for 2014, take action before April 15. The excess deferral amount will be treated as a distribution of the contribution and related income.
The contribution portion will not be included in income as long as the corrective distribution is made by April 15 of the year following the tax year for which they are contributed and the income attributable to the contributions is taxed when distributed.
If the corrective distribution is not made by this date, both the contributions and earnings are taxable when distributed.
Q. Is my Social Security taxable?
A. While you may have some special circumstances that would make a difference, generally if you add half your social security to all of your other income and it is less than $25,000 if you are single, head of household, a qualifying widow(er) with a dependent child, or married filing separately and did not live together during the year, then your Social Security is not taxable.
That cut-off is $32,000 if you are married filing jointly. All of your Social Security is subject to income tax if your filing status is married filing separately and you live together.
Q. My daughter lived and worked overseas the entire year. Does she have to file a tax return?
A. Yes. U.S. citizens and resident aliens (green card holders) have to file a tax return even if they live and work overseas. The United States taxes its citizens and resident aliens on worldwide income, so the income your daughter earned overseas is taxable in the U.S.
If she meets the requirements (either physically out of the U.S. for at least 330 days in a consecutive 12-month period or a bona-fide resident of another country), she can exclude up to $99,200 of foreign earned income, so it is possible she will owe no U.S. income tax.
If she earns more than that and pays tax to the country where she is working, she can take a tax credit against her U.S. income tax.
Q. What are the benefits of making a stock donation to charity?
A. Donating publicly traded stock and other securities you’ve held for more than one year can be a great charitable gift. Generally, you can deduct the current fair market value and avoid the capital gains tax you would pay if you sold the property.
This may be especially beneficial to taxpayers facing the 3.8 percent Medicare tax on net investment income or the 20 percent long-term capital gains rate. Donations of long-term capital gains property are subject to tighter deduction limits.
The contribution is limited to 30 percent of adjusted gross income — or AGI — for gifts to public charities and 20 percent of AGI for gifts to non-operating private foundations. Any contributions that exceed these AGI limits may be carried forward for up to five years. Please note this strategy is best for appreciated stock. If you have stock that is worth less than your basis, you should consider selling the stock so you may deduct the loss and then donate the cash proceeds to charity.
Q. How do I know if I am subject to the Medicare tax on net investment income?
A. Under the health care act, starting in 2013, the net investment income tax applies to net investment income to the extent Modified Adjusted Gross Income (MAGI) exceeds $200,000 if single or head of household, $250,000 for married filing jointly or $125,000 for married filing separately.
If your MAGI is at or above these thresholds, you may be subject to the net investment income tax. The tax equals 3.8 percent of the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
Q. I received a form 1099-INT with an amount in box 11. I do not recall seeing this before, and I do not know where to put it on my return.
A. The amount in box 11 is amortized bond premium. If you bought a bond and paid a premium for it, that premium is amortized (or taken into income) over the remaining life of the bond. The amount in box 11 is a reduction in interest income. If the bond is taxable, you should report the amount in box 11 as a subtraction on schedule B. If the bond it tax-exempt, you should subtract it from the amount you are reporting in box 8b of the 1040.
Q. My spouse died in 2014. In past tax years I filed Form 1040 (including Schedules A, B, & D) jointly and will do so again for this 2014 tax year. My spouse’s death created a trust for a portion of our assets. What additional tax filing forms and requirements must I consider this year (2014) because of the death of my spouse?
A. Typically, when a trust is created through a will and assets are transferred to that trust, this creates a separate income tax filing requirement for the trust, on Form 1041. Form 1041 is filed for each calendar year and is due April 15.
The terms of the trust agreement dictate how the items of income and deductions are treated and how the trust and beneficiaries are taxed. To give you a more definitive answer on how the trust is taxed, a review of the trust terms from the will would need to be reviewed.
Q. My husband and I moved here and purchased a house before we were able to sell our old home. How does that affect our taxes?
A. The two events are separate. If you occupied the sold house as your primary residence for two of the five years prior to the sale (the years need not be consecutive), you can exclude up to $500,000 in capital gain ($250,000 if you were single).
The exclusion can be used multiple times, but a primary residence must be owned for at least two years to be eligible. There are exceptions to the two-year rule that make you eligible for a reduced exclusion, so you should talk to a tax advisor if you must sell a home before occupying it for two years.
Q. Are my investment fees deductible? I have a brokerage account with stocks and some tax-exempt bonds.
A. Investment fees are deductible on schedule A as a miscellaneous itemized deduction subject to the 2 percent floor (meaning that all miscellaneous deductions are combined and only the amount that exceeds 2 percent of your AGI is deducted). However, if your portfolio contains both taxable and tax-exempt income, you must allocate the investment fees between the two kinds of income because you cannot deduct an expense used to generate tax-free income.
Q. I obtained health insurance last year from the exchange and received a premium credit. I had my tax return prepared by someone who is telling me they completed form 8962 and I owe almost $10,000 in taxes. The only income I had was my salary and a $10,000 distribution that I took from my IRA. How can this be possible?
A. It is hard to know exactly without seeing the details of your return, but yes, it is possible. If you are under 59½, you have to pay a 10 percent penalty on your early withdrawal in addition to the income tax on the withdrawal.
When you signed up for health insurance and told them your expected 2014 income, you probably estimated your salary but didn’t think to tell them you were going to take a withdrawal from your IRA. So the premium was based on less modified adjusted gross income than you actually ended up having.
This means your premium credit was more than you are entitled to. If your modified adjusted gross income exceeds 400 percent of the federal poverty line, there is no limit on the repayment of your premium credit.
Depending on the amount of premium credit you received, the credit repayment plus the penalty on your early withdrawal plus the tax on the IRA distribution could amount to around $10,000.