The IRS Deductions Blog

Archive for March, 2009

Question: What are the federal laws for listing a dependent on your taxes?

My friend has been living with me for a year in my house and hasn’t been able to find a job yet. He isn’t related to me either. He is 21 years old and has no income. H&R block says I can list him as a dependent because he: an individual (other than your spouse) who was a member of your household all year will be considered a qualifying relative so long as the relationship does not violate local law, and has no income. Is this true? Do I get any tax credit for him or is it just a deduction. I made less than $20,000. Thanks.

Answer: You can claim him as a dependent if you meet the following 4 tests:

1. Lived with you ALL year.

2. Your relationship does not violate local law.

3. Had less than $3,300.00 in income from all sources

4. You provided more than one-half of the person’s support.

If these requirements are met, you may claim a dependent exemption for this person. That will reduce your taxable income by $3,300.00 You do not get any “credits” or “deductions” for this person.

Your income doesn’t matter.

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Gov. James Douglas’ State of the State address

Following are excerpts of the State of the State address delivered by Gov. James Douglas on Thursday: …

Nearly One-Third of All Tax Filers Pay No Federal Income Tax

Question: California and College Tuition Tax Deduction?

Hello. Does anyone know if College Tuition is tax-deductible in the Stae of California for state taxes, not Federal ones. Any help would be great. Thanks!

Answer: No

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Still a little time to cash in on tax incentive for new car purchase

The Auto Ownership Tax Assistance Amendment applies to those who bought new foreign or domestic vehicles between November 12 of 2008 and December 31 of 2009.

Tips for Filing Taxes : State Tax Tips

Question: When does Roth IRA contribution income limit end?

I heard that soon anyone can convert their IRA to Roth IRA without an income limit. Is this true?

Answer: I, respectfully, disagree with my fellow quite-competent contributor, Judy, Although, this decision should be made (and it need not be all or none) by you and your personal advisor(s), based on your entire financial situation. And, do you have the resources to pay the taxes from another source?

Yes, the income cap for conversions will be lifted in 2010, and I believe you’ll be able to pay the tax over a two-year period. Required minimum distributions won’t apply at your age 70 1/2 and qualified withdrawals from your Roth will be forever tax free to you AND your beneficiaries.

If it makes sense, you could always do half.

PS – I welcome a contact from Judy to find out why she dislikes ROTH IRAs for taxpayers over 35.

Disclaimer. The information in this response is for general purposes only, and shall not be construed as specific tax, legal, or investment advice for any individual. The questioner is urged to contact their own professional advisors before implementing any tax or investment strategy.

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Make HSA investments wisely

Q: I am about to open a health savings account and would like to have my money going to the Vanguard Wellington fund or the Dodge and Cox Balanced fund. However, I noticed that none of the mutual fund companies, including Vanguard and Dodge and Cox, directly offer HSA accounts, as they do with, for example, IRA accounts. So, it would have to be through an intermediary.

Question: Is a prepayment penalty on a home loan tax deductible?

Answer: Yes. Here’s what IRS Pub 936 says on the issue:

“Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.”

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Got cash? Biweekly mortgage payments may work for you

If you are one of the many American homeowners who have recently refinanced their mortgages and are in the fortunate position of having more expendable cash each month, you may be considering whether you should pay off your mortgage early. One common way to accelerate the payoff is to change it from monthly to biweekly. But you should first review the advantages and disadvantages of this …

Question: Can a company claim donation of software, hardware or an employee’s time as a tax deduction?

For example:
Charitable organization A (501(c)(3)) needs software from company B, but they can’t afford it.
Company B “donates” their software, which they typically sell, to charitable organization A.
Can company B claim this deduction for the full value of the software at its fair market value?

Answer: 1) No. They can deduct the cost of the software but not is value (unless its value happens to be lower than the cost)

For example: Company B donates software to A. The software cost $1000 to develop and normally sells for $5000. The deduction is $1000.

2) No. They can only deduct what they pay the employee.

For example: Company B sends an employee to A. They normally bill out at a rate of $200 per hour and pay the employee $50 per hour. Only the $50 per hour is deductible.

Bottom Line: Forgone profit due to the donation of a product or employee’s time is never a deduction.

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Correction with caution

The following are excerpts from Part B (tax proposals) of Pranab Mukherjee’s budget speech. I mentioned last year, that the income tax return forms should be simple and user friendly.

The Charitable Contributions of Michael Jackson Part 4 (1993-1995).