This is the first year that I received retirement benefits. Are any of my benefits taxable?

If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable in the year received. Refer to Tax Topic 410, Pensions and Annuities, for detailed information, or Publication 575, Pension and Annuity Income. For social security and equivalent railroad retirement benefits, refer to Tax Topic 423 or Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

What is the maximum amount that I can contribute to my 401(k) plan?

For 2005, the maximum amount an employee can contribute to a 401(k) plan is $14,000 except for catch-up contributions for employees age 50 or over (see the next topic). The maximum amount applies to an employee's aggregate pre-tax contributions to a 401(k) plan and 403(b) plan. There are several different limits that apply to a 401(k) plan in addition to the overall contribution limit. These limits, your salary and the type of 401(k) plan to which you are contributing may limit your 401(k) contributions to a lesser amount.

The rules for retirement plans are complex. Your plan administrator should have written information about your particular plan that explains these limitations as well as other regulations that apply.

For further information, refer to Tax Topic 424, 401(k) plans.

I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed. Refer to Publication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and reporting the amount of the eligible exclusion.

My babysitter refused to provide me with her social security number. Can I still claim what I paid for child care on my taxes while I worked? If so, how?

Yes, assuming that you already meet the other requirements to claim the child care credit, but are missing the required ID number of the provider, you can still claim the credit by demonstrating "due diligence" in attempting to secure the needed information.

When the care provider refuses to give the identifying information, the taxpayer can still claim the credit and is instructed to provide whatever information is available about the provider (such as name and address) on the form used to claim the credit Form 2441 (PDF), Child and Dependent Care Expenses, or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for Form 1040A Filers). The taxpayer should write "see page 2" in the columns calling for the missing information. He/she would write at the bottom of page 2 that the provider refused to give the requested information. This statement will show that the taxpayer used due diligence in trying to secure and furnish the necessary information.

If you pay child support, are you allowed to deduct anything on your taxes or claim the child as an exemption?

Nothing can be deducted for the child support payments. Child support payments are neither deductible by the payer nor taxable income to the payee. You may be able to claim the child as a dependent. Generally, the custodial parent generally is treated as the parent who provided more than half of the child's support. This parent is usually allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be treated as the parent who provided more than half of the child's support if the custodial parent signs a Form 8332 (PDF), Release of Claim to Exemption for Child of Divorced of Separated Parents, or a substantially similar statement.

Please refer to Publication 501, Exemptions, Standard Deduction and Filing Information, and Publication 504, Divorced or Separated Individuals, for more information.

I want to establish a traditional individual retirement arrangement (IRA) for my spouse, and I need additional information. What is the most I can contribute to a spousal IRA during the tax year?

If both you and your spouse work and both have taxable compensation, each of you can contribute up to $4,000 (or the amount of each IRA owner's compensation, if less) to a separate traditional IRA. Even if one spouse has little or no compensation, up to $4,000 can be contributed to each IRA if combined compensation is at least equal to the amount contributed to both IRAs and you file a joint return. You can contribute $4,000 to a separate IRA for your nonworking spouse if you file a joint return. Your total contribution to both your IRA and the spousal IRA for this year is limited to the smaller of $8,000, or your taxable compensation reduced by any contributions you make to a traditional IRA or Roth IRA. You cannot contribute more than $4,000 to either IRA for the year. If you are 50 or older in 2005, the most that can be contributed to your traditional IRA for 2005 is the lesser of:

. $4,500 (up from $3,500), or

. Your compensation that you must include in income.

How do you claim a child if you agree with your ex-spouse to claim him 6 months and he claims him the other 6 months of the year?

The dependency exemption cannot be split. Generally, the custodial parent is treated as the parent who provided more than half of the child's support. This parent is usually allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be treated as the parent who provided more than half of the child's support if certain conditions are met.

The custodial parent signs a Form 8332 (PDF), Release of Claim to Exemption for Child of Divorced or Separated Parents, or a substantially similar statement, and provides it to the noncustodial parent who attaches it to his or her return. Please beware that if the custodial parent releases the exception, the custodial parent may not claim the Child Tax Credit.

Refer to Publication 501, Exemption, Standard Deduction, and Filing Information or Publication 504, Divorced or Separated Individuals, for more information on the special rule for children of divorced or separated parents.

My son was born on December 31st. Can I claim him as a dependent? If so, will he be also qualified for the Child Tax Credit?

If your child was born alive during the year, and the exemption tests are met, you may take the full exemption. You may be entitled to a Child Tax Credit for him. Please refer to Publication 501, Exemptions, Standard Deduction and Filing Information. Please refer to the Form 1040 Instructions for information about the Child Tax Credit.

 Can I deduct the cost of classes I need for work?

In some cases, you may be able to deduct the cost of classes you need for work. This deduction, however, would be subject to the 2 percent of AGI limitation, along with most other miscellaneous itemized deductions you list on Form 1040, Schedule A (PDF), Itemized Deductions.

To be deductible, your expenses must be for education that:

(1) Maintains or improves skills required in your present job, or

(2) Serves a business purpose and is required by your employer, or by law, to keep your present salary, status, or job.

However, these same expenses are not deductible if:

(1) The education is required to meet the minimum educational requirements of your job, or

(2) The education is part of a program that will lead to qualifying you in a new trade or business.

Educational expenses, related to your present work, that are incurred during periods of temporary absence from your job may also be deductible provided you return to the same job or same type of work. Generally, absence from work for one year or less is considered temporary.

For more information, refer to Publication 970, Tax Benefits for Education; and Tax Topic 513, Educational Expenses

I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment and the interest you paid on the second mortgage would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions. For more information, refer to Publication 550, Investment Income and Expenses, and Publication 936, Home Mortgage Interest Deduction.

Is interest on a home equity line of credit deductible as a second mortgage?

You may deduct home equity debt interest, as an itemized deduction, if you are legally liable to pay the interest, pay the interest in the tax year, secure the debt with your home, and do not exceed certain limitations. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

I took out a home equity loan to pay off personal debts. Is this interest deductible? Where do I enter this amount on my tax return?

A loan taken out for reasons other than to buy, build, or substantially improve your home, such as to pay off personal debts may qualify as home equity debt. The interest would be deducted on line 10, Form 1040, Schedule A (PDF), Itemized Deductions. The amount you can deduct as interest on home equity debt is subject to certain limitations. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

How do I calculate the minimum amount that must be withdrawn from my IRA after age 70 1/2?

You will need to refer to chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs) to find out this amount. Generally the minimum distribution is computed using one of three tables found in Publication 590. Table I is used by beneficiaries. Table II is for use by owners who have spouses who are more than 10 years younger. Table III is generally for use by unmarried owners and owners who have spouses who are not more than 10 years younger.

Is the interest amount that we paid to the IRS deductible?

Interest and penalties paid to the IRS on Federal taxes are not deductible. For more information, refer to Items You Cannot Deduct in Chapter 25, Interest Expense, in Publication 17, Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.

I refinanced my home last year and paid points. Are they all deductible this year?

Generally points paid to refinance your home are not deductible in their entirety in the year paid. They are "amortized" or deducted over the life of the loan. For more information, refer to Publication 936, Home Mortgage Interest Deduction, and Tax Topic 504, Home Mortgage Points.

My spouse and I are filing separate returns. How can we split our itemized deductions?

If you and your spouse file separate returns and one of you itemizes deductions, the other spouse will have a standard deduction of zero. Therefore, the other spouse should also itemize deductions.

You may be able to claim itemized deductions on a separate return for certain expenses that you paid separately or jointly with your spouse. Deductible expenses that are paid out of separate funds, such as medical expenses, are deductible by the spouse who pays them. If these expenses are paid from community funds, the deduction may depend on whether or not you live in a community property state. In a community property state, the deduction is, generally, divided equally between you and your spouse. For more information refer to Publication 504, Divorced or Separated Individuals; and Publication 555, Community Property.

Can I withdraw funds penalty free from my 401(k) plan to purchase my first home?

If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules.

I changed jobs and my old employer sent me a check for my 401(k) money withholding 20% for Federal Income Tax. I rolled over the distribution to my 401(k) plan at my current employer within 60 days. Since money was withheld from the 401(k) distribution, do I have to include that money as income?

If the amount rolled over was the net amount, that is, the amount of the distribution less the tax withheld, then the 20% withholding amount not rolled over is included in gross taxable income and may be subject to a 10 percent additional tax on early distributions from qualified retirement plans. Use Form 5329 (PDF), Additional Taxes on Other Qualified Plans (including IRA's), and Other Tax-Favored Accounts, to report the penalty.

If the amount rolled over was the gross amount, that is, you added an amount equal to the withholding to the amount that was rolled over, you would not add any of that amount to gross taxable income this year or owe a 10 percent additional tax on early distributions from qualified retirement plans.

How long do I have to roll over a retirement distribution?

You must complete the rollover by the 60th day following the day on which you receive the distribution. (This 60-day period is extended for the period during which the distribution is in a frozen deposit in a financial institution). The IRS may waive the 60 day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain the waiver in most cases, a request for a letter ruling must be made which include the applicable user fee. Refer to Internal Revenue Bulletin 2006-01 to get the Internal Revenue Procedure for requesting a letter ruling. A written explanation of rollover must be given to you by the issuer making the distribution. For information on distributions which qualify for rollover treatment, refer to Tax Topic 413, Rollovers from Retirement Plans. For information on the Direct Rollover Option, refer to Chapter 1 of Publication 590 , Individual Retirement Arrangements (IRA's).

I got married and I have not changed the name on my social security card to my married name. My Form W-2 is in my married name but my tax forms came in my maiden name. Should I file with my maiden name or married name?

It is important that the name the Social Security Administration (SSA) has in its system for your social security number agrees with the name on your tax return. You have a choice. You can file with your maiden name and contact the Social Security Administration after you file your return. Or, if you have enough time before the due date of your return, you can contact the Social Security Administration and have your records changed. Please wait 10 days to file your tax return.

To change the name shown on your social security card, you need to complete Form SS-5, Application for a Social Security Card. You can obtain Form SS-5 by calling SSA at 1-800-772-1213 or visiting your local SSA office. Note: Form SS-5 is filed with SSA.

The Social Security Administration will issue you a new security card reflecting your married name and automatically send an update to us.

My father is in a nursing home and I pay for the entire cost. Can I deduct the expenses on my tax return?

You may deduct qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a Multiple Support Agreement. You can also deduct medical expenses you paid for someone who would have qualified as your dependent for the purpose of taking personal exemptions except that the person did not meet the gross income or joint return test.

Nursing home expenses are allowable as medical expenses in certain instances. If you, your spouse, or your dependent is in a nursing home, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a medical expense. If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a medical expense, and the cost of the meals and lodging is not deductible.

You deduct medical expenses on Form 1040, Schedule A (PDF), Itemized Deductions. The total of all allowable medical expenses must be reduced by 7.5% of your Adjusted Gross Income. For more information, refer to Publication 502, Medical and Dental Expenses.

How do I know if I have to file quarterly individual estimated tax payments?

Estimated tax payments can be used to pay Federal income tax, self-employment tax, and household employment tax. To estimate if you need to pay tax on income not subject to withholding or on other income from which not enough tax is withheld, you need to calculate if the total tax you'll owe on your annual income tax return will be covered by the amount of tax you have already had either:

·         withheld from wages and other payments, or

·         paid in earlier estimated payments for the year, or

·         credited to your account from adjustments or overpayments to previously filed returns.

Generally, you should make estimated tax payments if you will owe tax more, than an amount specific by law, after withholding and credits, and the total amount of tax withheld and your credits will be less than the smaller of:

1.       90% of the tax to be shown on your current tax return, or

2.       100% of the tax shown on your prior year's tax return, if your prior year's tax return covered all 12 months of the year. However, if your prior year's adjusted gross income exceeded a certain amount based on your filing status, then you must pay 110% instead of 100% of last year's tax. (Note: the percentages change depending on the tax year. Refer to Publication 505, Tax Withholding and Estimated Tax.)

Estimated tax requirements are different for farmers and fishermen. Publication 505, Chapter 2, 3, & 4, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules and about estimated tax in general. Get Form 1040-ES (PDF), Estimated Tax for Individuals, to help you figure your estimated tax liability.

When are the quarterly estimated tax returns due?

Your first estimated tax payment is usually due the 15th of April. You may pay the entire year's estimated tax at that time, or you may pay your estimated tax in four payments. The four payments are due April 15th, June 15th, September 15, and January 15th of the following year.

If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday.

I retired last year, and started receiving social security payments. Do I have to pay taxes on my social security benefits?

To determine whether any of your benefits are taxable, compare the base amount for your filing status with the total of one half of your social security payments plus all your income from other sources, including tax exempt interest. If you are married and file a joint return, you must combine your incomes and your social security and equivalent tier 1 railroad retirement benefits when figuring the taxable portion of the benefits.

The taxable amount of the benefits is figured on a worksheet in the Form 1040 (PDF) or Form 1040A (PDF) instruction book, or in Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Refer to Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits, for base amounts, and additional information regarding taxability and reporting requirements.

For business travel, are there limits on the amounts deductible for meals?

Meal expenses are deductible only if your trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of your meal expenses you can generally use a standard meal allowance ranging from $36 to $64 in 2005 depending on where and when you travel.

Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

For more information on business travel expenses and restrictions, refer to Tax Topic 511, or Publication 463, Travel, Entertainment, Gift, and Car Expenses, and Publication 1542, Per Diem Rates .

What box on the Form W-2 do I use to determine my income to go on my tax return? What are all of these other boxes for? Does the amount from any other box go anywhere on my tax return?

For most people, only the amount in box 1 (wages, tips, other compensation) needs to be reported as income on your tax return. If you are an employee who receives tips, you may have to include the amount from box 8 (allocated tips) as income on your return.

Any employer-provided dependent care benefits listed in box 10 that are not excludable from income must be reported as wages on Form 1040 (PDF) or Form 1040A (PDF). Any credit taken for child and dependent care expenses must be reported on your return. Refer to Form 2441 (PDF), or Form 1040A, Schedule 2 (PDF) Child and Dependent Care Expenses, to determine the amount, if any, of the exclusion or credit.

Employer-provided adoption benefits that must be used to complete Form 8839 (PDF), Qualified Adoption Expenses, appear in box 12 with a code T. Employer contributions to a medical savings account (MSA), which you report on Form 8853 (PDF), Medical Savings Accounts and Long-Term Care Insurance Contracts, also appear in box 12 with a code R. Employer-provided benefits may be taxable as compensation under certain conditions. Refer to the relevant form instructions.

If you received advanced earned income credit payments from your employer (box 9), you must include the amount on your individual income tax return Form 1040 (PDF) or Form 1040A (PDF).

The other boxes either display information that the employer wanted to provide to you, or contain information that must be reported to the Social Security Administration or to the IRS.

I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your sole proprietorship on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business.

If the total of your net profit from all businesses is $400 or more, you must pay into the Social Security and Medicare systems by filing Form 1040, Schedule SE (PDF), Self-Employment Tax. Self-Employment tax consists of the Old-Age, Survivors, and Disability Insurance (social security) and the Hospital Insurance (Medicare) taxes. For more information refer to chapter 1 of Publication 334, Tax Guide for Small Business.

The Federal tax system is based on a pay-as-you-go plan. Tax is generally withheld from your wages or salary before you get it. However, tax is generally not withheld from self-employment income. Thus, you may be required to make estimated tax payments. Publication 505, Tax Withholding and Estimated Tax, provides information on making estimated tax payments.

We hired a nanny to look after our baby while we work. How do we pay her social security taxes and properly report her income?

A nanny is considered a household employee. A household employer only has to pay social security and Medicare tax only for the employee(s) that receive $1,400 or more in cash wages for the year 2005. If the amount paid is less than $1,400, no social security or Medicare tax is owed. If social security and Medicare tax must be paid, you will need to file Form 1040, Schedule H, Household Employment Taxes. You must withhold the employee's portion of the social security and Medicare unless the employer chooses to pay both the employee's share and the employer's share.

The taxes are 15.3% of cash wages. Your share is 7.65% and the employee's share is 7.65%. You may also be responsible for paying federal unemployment taxes. For directions on household employees, refer to Publication 926, Household Employer's Tax Guide.

I own stock which became worthless last year. Can I take a bad debt deduction on my tax return?

If you own securities and they become totally worthless, you can take a deduction for a loss, but not for a bad debt.

The worthless securities are treated as though they were capital assets sold on the last day of the tax year if they were capital assets in your hands. Report worthless securities on Form 1040, Schedule D (PDF), in Part 1 or 2 depending on whether you held the stock short term and write "Worthless."  In the applicable column of Schedule D. For additional information, refer to Chapter 4 of Publication 550, Investment Income and Expenses (Including Capital Gains and Losses). For more information on bad debts, refer to Tax Topic 453, Bad Debt Deduction.