Money Management Q&A

How divorce affects tax on a home sale

My husband and I are getting divorced and will divide the profit on the sale of our home. The problem is that we bought the house just a year ago. Does that mean we'll have to pay tax on the gain?

Partly. Legal separation and divorce are considered unforeseen circumstances, so the tax code makes an exception to the rules requiring that you live in and own the home for at least two out of the five years preceding the sale. But the maximum exclusion-normally $500,000 for married couples-is reduced. Your exclusion amount will depend on how long you wind up owning your current home. If you excluded gain from the sale of another principal residence within the two years before the upcoming sale, the amount of time between the two transactions will also get factored in. For more, see IRS Publication 523 (available at http://www.irs.gov/pub/irs-pdf/p523.pdf).

My insurer now offers coverage for identity theft as a rider to its homeowners policies. It's only $49 a year, but is it worth it?

That depends on what kind of protection you're hoping to get. Typically such riders cover only certain costs associated with cleaning up the mess after you've been victimized-for instance, bills for related phone calls, fees for notarizing and sending documents, and possibly attorney's fees. If you take time off from work to handle the problem, your lost wages may also be reimbursed. The total payout is capped, and the most you're apt to get is $25,000. Some insurers also help by contacting the major credit bureaus as well as creditors and financial institutions for you. But you'll get no safeguards to prevent theft, nor compensation for the intangible cost of having your credit record ruined.

If you review your credit card and bank statements promptly, check your credit record periodically, shred documents listing sensitive personal or financial data, and take other precautions to keep personal data private, chances are you'll never need this insurance. But if you still find it tempting, read the fine print to find out what's included, what's not, and whether filing a claim is likely to be a hassle.

Do credit card rebates count as income?

I pay for office supplies with a credit card that gives me cash rebates. Will I owe tax on the money I get back? And what about rebates for personal purchases?

The rebates you receive for business purchases are taxable. Assuming you made the purchases and received the corresponding rebates in 2006, you must subtract the rebates from the amount you deduct for business expenses on your 2006 return. If you receive rebates in 2007 for purchases you made in 2006, report those as income on your 2007 return. Rebates on personal purchases are considered nontaxable price adjustments, however, so you needn't report them on your tax return.

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics, 123 Tice Blvd., Suite 300, Woodcliff Lake, NJ 07677-7664, or send an e-mail to memoney@advanstar.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.