Dave's Answers: Your Tax Questions Explained
  • General Tax Questions Close
    • I could be starting a job as a contracted employee. This means I will have to take out my own taxes. How much should I take out and how would I pay the IRS? Close

      It’s important to keep in mind that for tax purposes an independent contractor is different from an employee. Independent contractors are considered to be self-employed and their income and expenses are reported on a Schedule C, Profit or Loss from Business. Independent contractors are responsible for their own self-employment taxes, while an employee only pays half of these taxes.

      TurboTax has a planning tool to help determine what your estimated payments should be. Click "Other Tax Situations" in the "Federal Taxes" section, then click "Start" or "Update" to the right of "Form W-4 and Estimated Taxes." The program will let you know how much to pay and when you should pay it. When you go through the interview be sure to enter your independent contractor income in the self-employment category rather than the wages category so that the program can correctly calculate the amount for you.

    • How long do I have to save my income taxes for before I throw them away? Close

      The IRS recommends that records be retained for "as long as they may be needed for the administration of any provision of the Internal Revenue Code." This generally means until the statute runs out, or as long as the return can be audited, which is generally three years for federal audits in most but not all cases. The statute of limitations varies by state.

      Certain documents should be retained longer, if not permanently. These include copies of old tax returns, divorce decrees, adoption papers, retirement plan documents and basis records for real estate, stock, assets and depreciable property. Make sure you keep receipts for purchases of business property and assets such as cars and computers.

      Here is a link to a really good article on the IRS website that should provide just about everything you need to know on the subject: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records

    • Where or how do I check on the status of a refund? Close

      There’s a great tool on the IRS website you can use to check on the status of your refund. To use the tool you will need to input your social security number, filing status and the amount of your refund. Here’s the link: https://sa1.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

    • I mistakenly reported some income twice, then submitted my tax return without noticing this mistake. How can I correct this now? Do you think the IRS will notice my mistake? Close

      When you report more income than the IRS has source documents, one thing will happen—NOTHING! If you are short income, you will receive a notice or audit, but in your case nothing will happen until you file a 1040X (a tax form to amend your previous tax return) to have your taxes recalculated. You should only amend your return after it has been filed, accepted by the IRS, and the check (to you or to IRS) has been cashed.

  • Deduction and Credit Questions Close
    • I was defrauded using Craig's list on the purchase of a pontoon boat that did not exist. The boat was to be shipped after payment was made. The money was wired but it was a scam and I received nothing for the money sent which was 2,300.00. Can I deduct this loss? Close

      Just so it is clear, a "theft" is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received. So clearly, you will want to make sure you report this to the correct authorities should you have to show the correct documentation in an audit.

    • I work as a Merchant Marine on a ship that sails between four ports. My question is: is there a standard daily deduction I can take for working on this ship? I hear there is a daily amount that is deductible and it varies from port to port. Also, I hear there may or may not be a standard meal deduction even though the meals are provided on the ship. Close

      You have a couple of good questions here, so let’s look at them one at a time.

      1. There is no “standard daily deduction” for working on a ship if you have no expenses.
      2. There is an amount referred to as per diem that can be used for qualified business meals in lieu of actual expenses.  The deductible amount of that is generally 50% [and 80% for workers under Department of Transportation (DOT) which you may be under] of the total.  However, as you are not paying for the meals, based on your question, there is no expense.

      Your tax software, like TurboTax, has explanations for per diem and the different amounts based on locations.

    • Since I’ve filed for divorce, can I get the earned income taxed credit that I am entitled to? Close

      A divorce filing does not impact your eligibility for the Earned Income Credit. As long as you meet all of the requirements for the credit, you should be good to go. You can find out if you qualify by going through the step by step process for the EIC section of TurboTax.

      Please keep in mind that if you have to use the filing status Married Filing Separate (MFS) you are not allowed Earned Income Credit.

    • I use my car in my business. How much of it is tax deductible, and what type of travel is deductible? Are my trips going back and forth to work deductible? Close

      Your vehicle deduction depends on how many miles you traveled for business purposes, not counting regular “commuting miles.” You would enter your business miles and personal miles into the tax program and it would calculate your deduction for you based on the business use percentage and standard mileage rate. (Note that you can use the standard mileage rate or your actual expenses, but in order to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.)

      Generally, miles traveled from home to work and from work to home are considered personal and nondeductible; these miles are known as commute. Miles traveled from your main work location to another location during the day, or from one job to another, would be deductible, as would miles traveled to complete work-related errands for the convenience of your employer. Keep in mind that if your first work place is a qualified home office and you start work there, then the drive from the home to the next work place consists of business miles and not commute miles.

      If you do site visits or sales, the miles traveled from home to your first appointment location and from your last appointment location to home would be considered personal, nondeductible commuting miles. If you have a primary office location that you commute to regularly the deductible miles would be the difference between the distance from your home to your main office and the distance from your home to your first appointment location, and likewise for the return trip. For documentation purposes you should be keeping a contemporaneous anecdotal log of your mileage.

    • I gave my daughter $10,000.00 for a down payment on her house. Is it deductible? Close

      When you give a gift, it is not deductible to you, nor is it taxable to the person to whom you give it. However, you are only allowed to gift a specific amount to each individual person each year. Gifts exceeding this specified amount will require the filing of a gift tax return and use up a portion of your lifetime gift tax exclusion. For 2013, the limit was $14,000 per giftee, so this gift does not need to be reported, nor is it deductible.

    • My mother lived in my household and supported my two children. Can she file head of household and claim my two children as dependents? Close

      These rules are not straightforward and are, in fact, quite convoluted. The general answer is that if your two children lived with both you and your mother for the entire year, then they are “qualified children” of both you and your mother (their grandmother). The choice would then be up to you as to which of you claimed their personal exemption. Now the convoluted part: your mother could not claim them as Qualified Children for Earned Income Tax Credit, Child Care Credit, Child Tax Credit, etc. unless her AGI (adjusted gross income) was higher than yours. And to be Head of Household (HOA), there is another set of rules, one being that you have to pay over 50% support for a home that the qualifying dependent lives in. Now back to your question: if your mother lives in your house that you are paying for more than 50%, she would not qualify as Head of Household.

  • Audits and Red Flag Questions Close
    • If you get audited on your state taxes will you be audited also on your federal? Close

      The individual states and the IRS have long worked hand-in-hand when it comes to income tax audits. If you are audited by the IRS and they find an error, then they will notify the state of the error after the audit. And the reverse order is true as the state will notify the IRS. Many states give you a specific time frame to amend your return or they will impose additional interest and penalties for failure to amend your return. Please keep in mind there are situations when an error on the federal but would not affect the state and vice versa.

    • What are some common red flags on gambling wins and losses? Close

      The biggest red flag is NOT reporting all the winnings that the IRS "knows" about that are found on W-2Gs.The Tax Courts have backed the method that the IRS uses in audits to determine gains and losses, AND it is not how most people, including tax professionals, compute this on their tax returns. The IRS, and tax courts, use the session method meaning that the winnings and losses are determined by session and not by the generally used method of adding up the winnings and losses over the year.