Tax Q&A

Answers to your tax questions

Home-sale gain • Stock as a taxable dividend • Roth IRA conversion • Child care credit • Filing status when a spouse dies • Charitable deduction for a painting • Amortizing home mortgage points.

By Lawrence Farber, Senior Editor

Q: After my husband and I married in 1999, I moved into the home he'd owned for several years. The title was still in his name alone when we sold the house last year. How much of our gain on the sale can we exclude from tax?

A: $250,000. Your husband can exclude that amount because he owned the house and used it as his main home for at least two of the five years preceding the sale. A spouse who doesn't meet the ownership test is also eligible to claim a $250,000 exclusion on a joint return, but only if he or she can pass the use test. Since you didn't move into the house until after your marriage in 1999, you don't qualify.

Q:Last year, a company I own stock in gave me 50 shares of a subsidiary as a taxable dividend. At the time of the distribution, the subsidiary's shares were trading at 20, but I got only 15 when I sold them later. How do I treat these transactions on my return?

A: The stock was worth $1,000 (50 x $20) when you received it, so report that amount as dividend income. It's also your cost basis for the subsidiary's shares. Since you sold them for $750 (50 x $15), you claim a short-term capital loss of $250 ($1,000 ­ $750). Your basis for the parent company's shares remains unchanged.

Q: Knowing that my adjusted gross income for 2000 would be less than $100,000, I converted a traditional IRA to a Roth account last January. But I got married later in the year, and my wife and I will show a combined AGI above the limit if we file jointly. Will filing separate returns solve the problem?

A: No. Married persons filing separately can't make a Roth conversion if they lived together at any time during the year. You'll pay a stiff penalty unless you undo the conversion by your 2000 return due date, plus extensions. If you transfer the funds (including interest earned) in the Roth account to a traditional IRA by the deadline, you won't owe any tax. Be sure to notify the trustees of the IRAs involved of your intention to "recharacterize" and your reason for doing so.

Q: Last year, my wife and I paid a nanny $8,000 to look after our two youngsters so that my wife could attend college. Can we claim a child care credit?

A: Yes, if your wife was a full-time student for at least five months of the year. To figure the credit, multiply the number of months she was in school by $400 (the maximum if you have two or more children under 13; for one child, the amount is $200). If your wife attended for nine months, say, that totals $3,600. Assuming your adjusted gross income was more than $28,000, you can claim 20 percent of your child care expenses up to $3,600. So your maximum credit is $720.

Q:My father died last year, and my mother is the sole beneficiary of his estate. Can she file a joint return for 2000?

A: Yes, if the estate executor or administrator consents. He or she should sign the return, along with your mother. If she's executor or administrator, she should sign with that designation and a second time as the surviving spouse.

Q:Last year, I donated a valuable painting to my university, with the assurance that it would hang in a gallery there. Instead, the school sold it for $50,000. Can I take a charitable deduction for the painting's fair market value, or am I limited to the $10,000 I paid for it in 1990?

A: You can claim the full value if you had good reason to think the university would stick to its word. But ask the school for written confirmation of your original understanding. Otherwise, an IRS auditor might argue that the university never intended to use your gift directly for a purpose related to its function. Then you could deduct only what you paid.

Q:We bought our first home in December 2000 and paid $4,200 in points to get a 30-year mortgage. We can deduct the points on our 2000 return if we itemize, but we'll save more by taking the standard deduction than by itemizing. Can we deduct the $4,200 on our return for 2001 instead?

A: No. You can immediately write off the full cost of points on a loan to buy or improve your main home only in the year you paid them. But since points represent prepaid interest, you have the option to amortize them over the life of the loan, so you can claim 1/30th of $4,200, or $140, in 2001 and subsequent years.

Q:The divorce agreement my ex-wife and I signed last year allows me to claim exemptions for the children, even though my ex-wife has custody. How do I handle this on my tax return?

A: Attach a statement (such as Form 8332) signed by your ex-wife and waiving her right to the exemptions as custodial parent. Alternatively, you can attach copies of the relevant pages of the divorce decree, but make sure your ex-wife's signature is on it. The waiver must be unconditional, and you should attach a copy to your future returns as well, if the waiver applies for more than the current year. In that case, the waiver should specify which years it covers.

The IRS will be looking for this documentation, since Form 1040 requires you to indicate that the children aren't living with you, due to divorce or separation. Without a properly signed waiver, you risk losing the exemptions.

Q:The investment account I opened for my 12-year-old son last year yielded income of $1,500. How is that taxed, and will I save money if I include his income on my return?

A: A child under 14 with income only from investments gets a $700 standard deduction for 2000 and generally owes 15 percent tax on the next $700. That leaves $100 taxable at your rate. Reporting the income on your return won't lower your child's tax and might lower your itemized deductions by increasing your adjusted gross income.

Q:I decided to convert my second home to rental property last March but wasn't able to find a tenant until August. At what point can I begin depreciating it?

A: Assuming the house was ready for occupancy in March, you can claim depreciation from that month on, regardless of when the tenant moved in. In that case, your depreciation rate for 2000 is 2.88 percent (it would be lower if the property wasn't ready until later in the year). The rate for future years is 3.64 percent, no matter what the starting month was.

 

Lawrence Farber. Answers to your tax questions. Medical Economics 2001;2:95.