Show us your tax savvy. You may win $2,001
Thats one payoff from our contest. The other: You may learn ways to cut your IRS bill.
By Doreen Mangan
A year ago, when we published a quiz like this one, the entries revealed our readers tax smarts. So heres your chance to wow us again. Send us your answers to the questions below, and in the spirit of the new year we may send you $2,001.
The prize goes to the entry with the most correct answers. If theres a tie, well draw one winner. That entrants name, and the correct answers, will appear in our March 13 issue.
The questions concern Andrew Royce, 45, a fictitious pediatrician; his nurse practitioner wife, Anna, 43, who works in his solo practice; and their 13-year-old son, Joseph. You dont have to pore over tax books to find the answers. Theyre all right here in this special section.
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All entries must be received by Feb. 28, 2001.
- Andrew Royce opened a money-market account for his son last February, under the title, "Andrew Royce as custodian for Joseph Royce. " But the 1099 form that reports the accounts earnings lists Andrews name only. Does that mean Andrew must pay the taxes on the earnings?
Yes. Even if they contain errors, 1099 forms are never reissued.
Yes. There was no error. Custodians must pay the taxes on such accounts.
No. It was an error, and Andrew can request a corrected 1099.
- Ten years ago, at a cousins suggestion, the Royces bought stock worth $5,000 in a new company. The company went bankrupt in 1996, but the Royces didnt realize they could deduct a capital loss on their tax return for that year. They figure they can take the deduction on their 2000 return. Correct?
No. The deadline for such claims is three years.
No. To claim the loss, theyll have to file an amended return for 1996.
Yes. They can declare the worthless securities on their current return, even though the bankruptcy happened several years ago.
- The doctor provides health insurance for his entire staff, which includes his wife. On Schedule A he deducts 60 percent of the cost for insuring his family. Is there any way he can deduct 100 percent?
Probably not. He could deduct the balance on Schedule A, but only if the familys total out-of-pocket health care expenses exceed 7.5 percent of adjusted gross income.
Yes. If the family policy were listed in his wifes name, the entire amount of the premium could be deducted as a business expense on Schedule C.
No. The most he can deduct is 60 percent.
- Last June, the Royces sold at a $25,000 profit the home they had purchased a year earlier, and moved to a larger one, so that Annas aging parents could live with them. They intend to apply the tax exclusion to the $25,000 gain, so they can put the money into their sons college fund. Can they do that?
No. The sellers must be older than 55 to qualify for the exclusion. The Royces arent.
Yes. The IRS permits the exclusion if the proceeds of the home sale will be used for education.
No. They only lived in the house for one year.
- Andrew and Anna want to open a Roth IRA account for Joseph as a birthday gift and deposit $2,000 in the account. Good move or bad?
Good. A Roth IRA produces tax-free income at retirement. Or, when Joseph grows up, he could withdraw up to $10,000 to put toward the purchase of a first home.
Bad. Joseph hasnt started earning income yet, and contributions to Roth IRAs can be made only for those with earned income.
Bad. Roth IRAs arent available to anyone under 18.
- Andrew contributed $400 to his favorite baseball players charity, and received some baseball memorabilia worth maybe $50. Is he right in assuming that he can deduct the entire $400?
No. He must reduce the donation deduction by the value of the items.
Yes, as long as the value of the items didnt exceed 25 percent of his contribution.
Yes. Only the value of meals and performances must be subtracted from the donated amount.
- Anna inherited a ski condo in Colorado from an uncle. The Royces rent it out and never use it themselves. However, they travel to Colorado twice a year, to check on the property and its managers. They can deduct the cost of those trips, correct?
Yes, as a business expense.
Possibly, as a miscellaneous itemized deduction.
No, Uncle Sam views trips like this as vacations at his expense, and doesnt allow such deductions.
- A doctor friend suggests that Andrew employ his son to do filing and other clerical work after school or during the summer. Joseph could earn up to $4,400, tax-free. Andrew, meanwhile, could take a practice-expense deduction for those wages, and wouldnt have to pay FICA (Social Security and Medicare) tax. If he follows his friends advice, will Andrew run afoul of the IRS?
No, this is a great idea.
Yes. The IRS is on to the fact that parents try to reduce their own income tax by hiring their kids. So wages paid to a minor are not deductible as a business expense.
Yes. All kids who work have to pay FICA taxes.
- The same friend (who brags that hes never been audited) suggests that the Royces take out a $70,000 home-equity loan to pay off their two car loans and invest whats left over in stocks. His selling point: Theyd be able to deduct all the interest. Correct?
No. You can deduct interest on a home-equity loan only when you use the money for home improvements.
Yes. Interest on a home-equity loan of up to $100,000 is a legitimate deduction for a single taxpayer or a couple filing jointly.
No. You can only deduct interest on a home-equity loan of $50,000 or less.
- Andrew Royce sold stock for $100 per share last year. He neglected to specify that he was selling the shares hed purchased at $50 last June not those hed bought a few years earlier at $15 and $30 per share. How much tax per share does he owe, assuming hes in the 40 percent bracket?
$13.66. The tax is based on the average of the stock prices.
$34. The IRS uses a "first-in; first-out " formula.
$17. Andrew bases the calculation on the price of the first shares purchased and benefits from the long-term capital gains tax rate.
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No purchase necessary. All entries must be received by Feb. 28, 2001. Only MDs and DOs based in the US are eligible to win. The entrant with the most correct answers will win. If multiple entries are tied for most correct answers, the winner will be chosen at random from those entries. Participants may submit only one entry each. The prize will be awarded by Medical Economics magazine as independent judges, and the independent judges decisions will be final. Employees of Medical Economics Company and its affiliates, and family members of those employees, are not eligible to win. Odds of winning will be determined by the number of entries received. The prize will be awarded. If it is forfeited, another winner will be chosen. The prize is nontransferable, and no substitutions can be made. Winner will be contacted by mail or phone. For the winners name, please send a self-addressed, stamped envelope to Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, Attn.: Linda DeVenuto. Total value of the prize is $2,001. All entries are the property of Medical Economics magazine, and none will be returned. Not responsible for lost, late, illegible, misdirected, mutilated, incomplete, or postage-due mail entries. Winners will be required to sign an affidavit of eligibility and a liability publicity release upon redemption of prize. Void where prohibited by law. Participants are bound by the Official Rules. Medical Economics is a registered trademark used herein under license.
Doreen Mangan. Show us your tax savvy. You may win $2,001.