When Must I File a tax return?
Which filing status should I use?
Married filing jointly or married filing separately? ??
What do I do about an incorrect W-2?
Are interest and dividends taxable?
What is this I hear about tax free income?
Are lawsuit settlements taxable?
How do I handle severance pay?
How do I know how much should be withheld from my paycheck?
What is this I hear about estimated taxes?
How do I figure the gain/loss on stocks and mutual funds?
Are moving expenses deductible?
What is this I hear about Roth IRAs?

When Must I File a Tax Return?

Generally, you need to file a return if your income, subject to tax, exceeds the sum of your standard deduction (including additional deductions for age 65+ or blindness) and any personal exemption you can claim. For tax year 2005, assuming you are NOT being claimed by anyone as a dependent, and that you are neither blind nor over age 65 (nor is your spouse, if married), your filing requirement would be:

• Single $ 8,200
• Head of Household $10,500
• Married/Joint $16,400
• Married/Separate $3,200
• If you have children or others you claim as a dependent (Don't count yourself or spouse), for each ADD $3,20 If you are unmarried and either blind or past your 65th birthday at 12/31 ADD $1,200
• If you are married, and you (or your spouse, if filing jointly) is blind or past your 65th birthday at 12/31, for each of you to whom this applies ADD $1,000

EXCEPTIONS:

DEPENDENT FILER. If under age 65 you must file if

• your unearned income was more than $800 or
• your earned income was more than $5,000
• your gross income was more than the larger of:
  1. $800, or
  2. Your earned income (up to $5,000)plus $250

SELF-EMPLOYED. If you have net self-employment earnings of $400 or more, you need to file to calculate your self-employment tax.

SPECIAL TAXES. If you will owe special taxes, such as uncollected FICA tax on tips, alternative minimum tax, tax on a qualified retirement plan or recapture taxes, filing is mandatory regardless of the limits above.

WHEN SHOULD YOU FILE, EVEN IF YOU DON'T HAVE TO?

If you have had taxes withheld, which you are entitled to be refunded to you, or are entitled to the Earned Income Credit or Additional Child Tax Credit, you need to file a return in order to receive your refund.

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Your filing status is determined by a number of factors, including your marital status (determined under your state's laws) at December 31 of the tax year, if you support dependents living in your home, and their relation to you.

Single. Generally, this is the "default" status if you are unmarried at the end of the year and you do not qualify for either Head of Household or Qualified Widow(er) status.

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Incorrect W-2

There is really no way to be able to answer that question for sure, other than by actually preparing both "sets" of returns, and see which ones come out better.

If you live in a community property state, state law may dictate how you need to report your earned income, as well as certain other income and deductions. Local professional guidance is suggested.

Your Form W-2 should accurate reflect your taxable compensation received, and taxes withheld,
during the year. In some cases, this may not reconcile with your actual paycheck stubs for legitimate reasons, such as the inclusion of taxable benefits or adjustments not reflected on the checks. If you believe your W-2 form is in error, the first thing you should do is ask your employer to help you
reconcile the form with the information you have.

If you still believe your W-2 form is in error, and your employer does not agree to change it, you can
call the Internal Revenue Service at 1-800-829-1040 and report the problem. Realize that this means your employer will likely be contacted by an IRS auditor, so be certain that there is a problem you cannot rectify through your employer.

If you need to report income or wages that differs from that reported by your employer, you should complete and attach to your return a Form 4852, listing the correct information. Attach a copy of your original W-2 form with "See Form 4852" written across it, and a schedule showing the differences between the two forms. You should also include copies of any documentation you believe supports
your figures.

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You are taxed on interest or dividends paid or credited to you during the year. The amounts reportable on your tax return will usually be shown on Form 1099-INT or Form 1099-DIV you receive from the payor during the year. However, this income is reportable even if you did not receive such a document.

If you are having interest or dividends reinvested in the account, these are still taxable as credited to
you, even though did not receive the money. If you are holding US Savings Bonds, see the information in the Form 1040 booklet on how to report the interest.

If your interest or dividends exceed $400 for the year, you cannot file Form 1040EZ. You must file Form 1040A and attach Schedule 1, or Form 1040 and attach Schedule B. Always list the payor of each item exactly the way it appears on the statement you received. For example, if your Coca Cola stock is held in "street name", the correct payor to list would be your brokerage, not Coca Cola.

If you have interest or dividends from municipal obligations or funds, these are reportable on Form 1040, even though they are not taxable. See the Form 1040 instructions.

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Interest on municipal obligations is generally tax-free, though it has to be listed on Form 1040 (See instructions). Some municipal interest may be subject to the Alternative Minimum Tax.

Other tax-free income generally includes life insurance payments received on death of the insured, compensatory settlements for physical injuries (such as in a car accident), gifts, health or accident insurance proceeds (unless you deducted the expenses on a previous return and received a tax benefit), child support, scholarships and grants used for educational expenses (not board), veteran's benefits, welfare benefits, food stamps, workmen's compensation benefits, rebates on purchases of personal property, most inheritances.

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Settlements to compensate you for physical injuries or sickness suffered in an accident are tax-free.
So is the amount paid to compensate you for loss of your car, or medical expenses, except to the
extent that those expenses were deducted in an earlier year and provided a tax benefit.

Punitive damages awarded in a lawsuit, and any damages award for non-physical injuries, are
generally taxable.

Your legal expenses in obtaining a judgement in your favor can be deducted only in the same proportion as the resulting damages are taxable to you. For example, if your attorney won damages for your physical injury that were 80% compensatory (not taxable) and 20% punitive (taxable), only 20% of
the fee paid to him can be claimed as a miscellaneous itemized deduction, subject to the 2% of AGI limitation.

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Despite some recent court challenges, alleging that severance pay was actually a settlement to forestall future claims of age or gender discrimination, severance pay is generally taxable compensation.

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Although your tax return is not "due" until April 15th of the following year, you are generally required
to prepay your tax during the year.

In order to avoid an underpayment penalty when filing your return, you must pay in at least the lower
of (1) 90% of your current year's tax liability or (2) 100% of your previous year's tax liability all over again. (Note: If your AGI last year was $150,000 or more - or $75,000 if married filing separately - change the 100% figure to 110%.) These payments may be made by having income tax withheld (in any proportion during the year), or by making four estimated tax payments with Form 1040-ES.

If you need to recompute your withholding, obtain a copy of Form W- 4 from your employer. This form contains a worksheet that allows for most circumstances, and tells you what withholding status and how many "withholding allowances" to claim. Note that your status on Form W-4 could very well be different than your marital status, and the allowances different than the exemptions you are allowed to claim on your actual return. Form W-4 explains how this is done. Generally, if a couple is married filing jointly and both work, the number of allowances they claim in total will be less than they claim on the return itself.

If it is not possible for you to adjust your withholding to pay in enough tax, you will need to make quarterly estimated tax payments for any shortfall. (See next question)

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Estimating Taxes

Although your tax return is not "due" until April 15th of the following year, you are generally required to prepay your tax during the year.

In order to avoid an underpayment penalty when filing your return, you must pay in at least the lower of (1) 90% of your current year's tax liability or (2) 100% of your previous year's tax liability all over again. (Note: If your AGI last year was $150,000 or more - or $75,000 if married filing separately - change the 100% figure to 105% for 1999 estimates, 108.6% for 2000 and 110% for 2001.) These payments may be made by having income tax withheld (in any proportion during the year), or by making four estimated tax payments with Form 1040-ES.

If you need to recompute your withholding, obtain a copy of Form W- 4 from your employer. This form contains a worksheet that allows for most circumstances, and tells you what withholding status and how many "withholding allowances" to claim. Note: that your status on Form W-4 could very well be different than your marital status, and the allowances different than the exemptions you are allowed to claim on your actual return. Form W-4 explains how this is done. Generally, if a couple is married filing jointly and both work, the number of allowances they claim in total will be less than they claim on the return itself.

If you have income that is not subject to withholding, and your tax shortfall will be more than $1,000, you need to file Form 1040-ES and make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and on January 15 of the following year (If a payment date falls on a weekend, the next Monday is the due date). The worksheet that accompanies the form explains the calculations. Generally, each payment should include the taxes you will owe for the period that ended the previous month; for example, the June 15 payment is for the two months ending May 31.

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If you sell shares in a mutualfund, even if you "reinvest" the proceeds in another fund, the transaction is considered the sale of stock and reportable on Form 1040, Schedule D.

The mutual fund should issue you Form 1099-B showing the gross proceeds of the shares you sold. Some companies will also include an "average cost basis" statement, which saves you the trouble of calculating the cost basis of the shares you sold. If this is not available, you will need to calculate this yourself.

Simply add up your total cash invested in the fund, including dividends you retained in the fund to buy additional shares. Divide this by the number of shares owned in the fund before the sale, and this is your average cost basis per share. This is the figure you multiply by the number of shares sold, in order to determine the gain or loss on the sale.

You can further refine this calculation by doing separate calculations for those shares held long term (more than one year) and short term (under one year). Further information is provided in IRS Publication 564.

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If you incur moving expenses in connection with a change in work location, some of your expenses may be deductible, whether or not you can itemize deductions.

In order to qualify for any deduction, your new principal work place must have increased your potential commute by 50 or more miles. That is, the distance from your new work place to your old home is at least 50 miles more than the distance from your old work place to your old home.

Also, you must be employed at your new location for at least 39weeks during the 12 months following your move. If you are self-employed, you must work fulltime in that general area for at least 39 of the 12 months following the move, and 78 weeks during the first two years. (These rules do not apply if you retire due to disability, or you are laid off or terminated for a reason other than misconduct.)

Form 3903 lists the deductible expenses, which are:

1. Transportation and storage of household goods and personal effects during the move, and
2. Travel and lodging (but not meals) of moving you, your spouse and dependents, from your old to your new residence. If you use your personal vehicle, you can deduct either the actual expenses involved for gas and oil (but not maintenance, insurance ordepreciation), or a flat 12 cents (10 cents for 2000) per mile.

You may not deduct: pre-move house hunting trips, temporary living expenses, costs of selling/renting/buying your old or new home.

If you are reimbursed by your employer for deductible moving expenses, the total of those reimbursements will be listed as a "memo entry" on Form W-2, but will not be included in your taxable wages. No deduction is allowed or necessary.

However, if your employer paid other expenses for your relocation that are not allowed as deductible moving expenses, these are taxed to you as additional wages.

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What Are The Rules For Roth IRAs?
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A Roth IRA is, by definition, a non-deductible IRA, regardless of your income and regardless of whether or not you are covered by a pension plan. Therefore, unlike a deductible IRA, contributing to a Roth IRA provides no immediate tax savings. Like with any IRA, the earnings in the account are tax deferred while remaining in the IRA.

Like a regular IRA, you (or your spouse, if filing jointly) must have earned income in an amount that is not less than the IRA contribution, in order to make a contribution to a Roth IRA. You can have both a Roth IRA and a regular IRA for the same year, but the amount contributed to your Roth IRA reduces the amount you may contribute to a regular IRA, dollar for dollar. Unlike regular IRAs, you are free to continue to contribute to a Roth IRA after age 70 1/2, if you otherwise meet the rules.

Where a Roth IRA differs primarily is in several rules concerning withdrawals.

1. Withdrawals from a Roth IRA are assumed to come from your non-deductible contributions first, then from amounts you converted from regular IRA accounts (on which you already paid tax). You only incur a tax liability once you deplete those and are taking out the deferred earnings. (By comparison, each dollar you withdraw from a regular IRA is taxed based on the ratio of pretax to total funds in *all* IRA accounts you have at the time.)

3. Once your Roth IRA account has been open for five years, you can take "qualifying distributions" from the Roth IRA, which would be completely tax free (including the deferred earnings!), under one of three circumstances:

- After you turn age 59 1/2 or
- Upon death or permanent disability or
- A special withdrawal by a "first time homebuyer" (maximum $10,000 lifetime), defined as someone who has not owned an equity interest in a home for the past two years, and uses the money within 120 days of withdrawal for such purposes.

IMPORTANT: Unlike a regular IRA, there are AGI limitations that affect your ability to contribute to a Roth IRA (even though it is non-deductible, and regardless of whether or not you have pension plan coverage). If you are unmarried, your allowable contribution to a Roth IRA phases out over $95,000-110,000 of AGI. For those married filing jointly, your allowable Roth IRA contribution phases out over $150,00-160,000 of AGI. If you are married filing separately - and you lived with your spouse during the year, you allowable Roth IRA contribution phases out over $0 and $10,000. Allowable contribution limits are rounded to the next higher $10 multiple.

Taxpayers have the option to "convert" existing traditional IRAs to a Roth IRA. Unlike a regular IRA rollover, this is not tax-f ee, but is considered a taxable *distribution* of the IRA funds to you (although the 10% early distribution surtax is waived). You are not permitted to convert a regular IRA to a Roth IRA in a year in which your AGI (before the taxable portion of the IRA being converted) exceeds $100,000 (any filing status). For IRA-to-Roth-IRA conversions made before the end of 1998, there was an option to include the taxable portion ratably over four years. That option is no longer available. Any conversion after 1998 will be taxed in full for the year of conversion. You may be required to make estimated tax payments of this liability, in order to avoid an underpayment penalty.

See FAQ: Do I Need To Pay Estimated Taxes?

For the purposes of converting to a Roth IRA, funds in a SEP-IRA or SIMPLE-IRA are considered to be in a regular IRA, and conversion is allowed (Note that a penalty exists for a SIMPLE-IRA, unless you have had the funds in there for two full years.) You cannot convert any other type of employer plan directly to a Roth IRA.

If you convert your IRA to a Roth IRA, and then change your mind for any reason, you can "recharacterize" the transaction (essentially, reverse the process as if it never happened, and the money remained in a regular IRA) anytime up to October 15 of the year following the actual conversion.

Make sure your IRA trustee properly records the conversion as having been recharacterized. Starting for recharacterizations after 1999, you would be prohibited from again converting the account to a Roth IRA until the later of (1) the start of the tax year following the year of conversion, or (2) no less than 30 days after the date of the recharacterization. This is to prevent taxpayers from "locking in" a temporary decline in the market value of the stock, by recharacterizing the conversion and then immediately converting it again at the lower value. In effect, this puts them "at risk" for market fluctuations for at least 30 days.

This is primarily a financial planning decision, rather than a tax planning choice. Obviously, you are electing to pay *now* a tax liability which you otherwise would have been able to defer to a future year, perhaps when your rates might be lower. The taxes you pay today must come from sources other than the converted IRA, which means you will lose the earning power of those funds as well. Finally, at a time when tax reform is the mantra of Congress, who is to say that the "tax free" aspect of Roth IRA withdrawals will be allowed to continue indefinitely? We wouldn't venture a guess what tax laws will be like two years from now, let alone 10 or 20 years. This is a decision you really should discuss one-on-one with a local financial planner or tax professional.

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