ask the taxgirl

Taxpayer asks:

I had to put almost $100,000 worth of medical bills on credit cards. Three to be exact. Can the interest on these loans be deducted as medical expenses as I continue to pay the bills down over the next five years?

Thank you,

Taxgirl says:

Sorry, no. As I pointed out on a prior post, credit card interest is not deductible on your personal income tax return.

That’s the bad news.

The good news is that the medical expenses are deductible in the year that you make payment to the medical provider, not the credit card company. For more on timing of medical bills, see this recent “ask the taxgirl” post.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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Taxpayer asks:

Thank you for taking my question. I do not know who else to ask. This is the first year for me to file taxes and I do not see where to put the interest that I paid on my credit card. I live with my grandmother and she says I can take it off my taxes. Thanks.

Taxgirl says:

Eke, I hope your grandmother doesn’t have a credit card! Credit card interest used to be deductible “back in the day” but the deduction was eliminated by Reagan. The 1986 tax bill was part of a sweeping set of changes introduced during the Reagan era which changed the way that Americans thought about borrowing. Deductions for almost all individual consumer debt - except for home mortgages and home equity loans - were eliminated.

Interestingly, when this happened, economists warned that it would single-handedly destroy the markets by cutting consumer spending. That never happened. For good or for bad, individual consumer spending on credit is at all time high, almost 25 years after the deduction was cut.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! - Now on Facebook!

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Taxpayer asks:

Hey, is this where I can ask questions for TaxGirl? Hope so, cuz here goes!

A co-worker told me this long, sad story last week. I’ll shorten it here. She has been working part time since August of 2007, and was supposed to be on half salary. Well, it was JUST determined that she had been getting her FULL salary ever since she got back. Neither she nor the company had noticed the mistake. Of course, the company now wants their money back. She doesn’t have a problem with paying them their money back. However, she wants to be sure she pays back the right amount, and be sure her withholding and W-2 and other related stuff are all correct. Should she try to correct her 2007 tax return as well? How can she make sure this adjustment is handled correctly? Thanks TaxGirl! You’re the Best!

Taxgirl says:

Wow, this is my first “ask the taxgirl” question on Facebook! Thanks for writing in!

This is a great question. I have a couple of thoughts here…

The easiest solution, if your friend can swing it and her employer agrees, is to have her employer subtract the gross pay overage from future paychecks. If the gross pay is adjusted via paycheck deductions, FICA (Social Security and Medicare) and other taxes would be adjusted accordingly, which is much easier on the employer and employee than trying to back it out.

As for the 2007 tax return, it would be technically incorrect, but it depends on the tax bracket as to whether it matters. If there is no difference in tax brackets, it won’t really matter, relatively speaking, if the next year (or 2009) reflects lesser compensation.

Here’s an example: Let’s say her compensation for 2007 was supposed to be $20,000 but she was paid $30,000 - same tax bracket for a single person. There’s likely no real difference, then, in keeping the old tax return and then reporting reduced income on a future return (in fact, it could be more advantageous). The form W-2 for 2007 would not need to be adjusted or corrected. This is the cleanest solution.

Writing a check for the overage is more complicated. Verify all gross amounts and withholding amounts with a repayment schedule. The employer should issue a corrected form W-2 for any affected years which reflects the corrected gross amounts and withholding, including FICA, UC and other deductions.

With a corrected form W-2, your friend can amend her 2007 income tax return. Depending on when the check is written, it may also be necessary to do the same thing for 2008.

It’s a tricky situation. Tread carefully. Double check everything.

There are a lot of unknowns here, the biggest being the amount of compensation, which would affect tax rates and possibly Social Security. Ceilings and floors for deductions and credits could be affected. So, hire a tax professional. Think of the cost of hiring a tax pro as an investment. A few dollars up front could save you a handful of dollars down the road. Our firm often jokes, “You can pay us now or you can pay us later.” Later always costs more.

Any other tax pros want to weigh in here?

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! - Now on Facebook!

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Taxpayer asks:

Tax girl, I have been seperated from my wife for over 20 years. But we have never had a legal seperation on paper.
Can I file single or do I still have to file Married filing seperate?
Thank you for any information you can give.

Taxgirl says:

The feds look to state law for the answer to this one. Your filing status, for tax purposes, is determined as of the last day of the tax year (December 31). You can file as “single” if you were legally separated or divorced according to the laws of your state as of that date. If you live in a state like Pennsylvania where there is no legal separation, your choices are only “married” or “divorced.” If you’re still legally married, you must file as such (so it sounds like, from your question, that you would file as MFS - married filing separately).

There is an exception to this rule which might apply: you may be considered “unmarried” and eligible to file as Head of Household (HOH) if you meet certain criteria. That criteria can be found at my prior post on filing status.

It’s not that odd a situation. I’ve had clients married for much longer than 20 years that have refused to get a divorce for a number of reasons - religion, finances, etc. Sometimes, it just didn’t seem convenient to “bother” with a divorce. But remember that your legal marital status affects other facets of your finances, too, such as inheritance/estate tax and intestacy and probate laws. And it makes it awfully hard to find a date…
For more on divorce and taxes, check out this prior post that I wrote for The Modern Woman’s Divorce Guide.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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Taxpayer asks:

While we were out shopping, I put a $20 in the Salvation Army kettle in front of the store. I say we can take that as a deduction but my husband says no. Who is right?

P.S. I have a new digital camera riding on your answer.

Taxgirl says:

Gosh. I hope your old digital camera is working just fine… The answer is that your husband is right.

The IRS changed a number of rules effective January 1, 2007, for charitable giving. One of the rules is that all charitable donations of cash (or cash equivalent), no matter what the amount, must be supported by written documentation. This means that checks and credit card sales are generally okay so long as you can clearly identify the donation portion. Cash is okay, too, but only if you can get a receipt.

Handing cash over to an organization without getting a receipt? Not deductible.

This isn’t to say that you shouldn’t do it. I gave my kids a couple of dollars to put in the red kettle the other day (and the bell ringer let them each give the bell a go, which they thought was awesome). If you’re inclined to support charitable causes like the Salvation Army and Alex’ Lemonade Stand that may ask for cash on the street, don’t let the lack of a tax deduction keep you from doing it. You might consider giving a dollar or two on the street and then going home and writing a check or making a donation online - that way, you get the immediate warm fuzzies for making a donation on the street AND you get the benefit of the tax deduction for your larger donation.

I had a similar question last year about making donations to churches for needy families - make sure you check it out.

Speaking of, the end of the tax year is rapidly approaching. You only have a few more weeks to make a donation to a qualified charitable organization in order to claim your federal tax deduction. Why not double your impact by telling us about your favorite charity? Leave a note in the comments at this prior post (click here) and the charity that you name may get an additional contribution.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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Taxpayer asks:

Hello Taxgirl,

My girlfriend and I were common law married in 2005. We filed our own taxes for 2006. In 2007, we went to a tax accountant. He says we cannot file as married on our tax return. I say we can since we’re common law married. Who’s right? We live in Pennsylvania.

Taxgirl says:

Unfortunately for you, your accountant is right on this one.

For the most part, the feds follow the state’s definition of married (as we as separated and divorced) when it comes to tax status; a notable exception is gay marriage which is not recognized at the federal level.

And you’re right that it would make sense to file as married on your federal income tax returns if you’re legally common law married - tax returns are often considered good evidence that you treated yourselves as actually married.

All of that said, Pennsylvania no longer recognizes common law marriages. After some back and forth in the courts, the Pennsylvania Legislature passed a law which abolishes new common law marriages on or after January 1, 2005. Common law marriages prior to that date may be grandfathered (assuming you can prove it).

As of this year, only Alabama, Colorado, Kansas, Rhode Island, South Carolina, Iowa, Montana, Oklahoma, and Texas plus the District of Columbia recognize common-law marriage. Pennsylvania is one of five states which recognizes common law marriages established before a date certain; the others are Georgia, Idaho, Ohio and Oklahoma. Utah recognizes common law marriage if verified by a court (though I’m not quite sure why you just wouldn’t get married in that case).

So, sorry to be the bearer of bad news here, but it looks like you have to either each file as single or consider getting legally married.

Good luck!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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Taxpayer asks:

My father wants to sell me his house (approx. value of $300,000) for what he owes on it ($54,000). I know, a pretty sweet deal. Some friends advised him that the best way to do this is simply to “give” me the house, and I will send him a Christmas card with $54,000 in it. What is the best way to complete this transaction when it comes to taxes. The house is located in Florida.

Taxgirl says:

This question has lots of layers… So, I’ll start off my re-emphasizing that you should consult with your tax professional - there is a lot of information outside of this transaction (such as your father’s estate planning situation) that will affect the outcome.

But here is the basic result: Your father is making a gift to you in the amount of $246,000. A below market sale is generally considered a gift to the extent of the difference between fair market value and the “selling price” - in your case, $300,000 (FMV) - $54,000 (purchase price) = $246,000 (gift). Since your father is entitled to give you $12,000 per year without any consequences, the taxable value of the gift for federal gift tax purposes is $12,000 less, or $234,000.

With that, I differ with your friends as to the best way to complete the transaction. If your father and you are both in agreement that this is a sale for $54,000, then treat it like a sale - none of this cash in the envelope nonsense. If you attempt to hide the sale price, it may be difficult for you to later prove that the entire $300,000 was not a gift. The amount of the gift is important for estate and gift tax purposes. Additionally, if you treat the whole thing as a gift and you “gift back” $54,000, you’re just complicating the situation. You can read more about what gift tax is at my prior post.

As far as income tax goes, assuming that there’s nothing strange about the mortgage, etc., the sale should not result in federal income tax consequences. There should be no capital loss or gain.

And here’s where I’m a lawyer and tell you some “buts”…

Your father’s estate could be affected by the gift, depending on his health and financial situation. Even if he’s not subject to federal estate tax, making gifts may affect Florida Inheritance Tax, so be sure and check that out.

Any claims for Medicaid or other government assistance made by your father could also be affected by such a gift.

There are also basis issues for you to consider. The FMV of the property, the donor’s basis and the value of the gift will all affect your basis for purposes of future sale. You’ll want to run that information by your tax professional.

See what you get for asking a lawyer?

Seriously, while the transaction feels simple, it may not be, taking into consideration the bigger picture. Since the amount of the gift is significant, I’d check your tax professional before moving forward, just to make sure there are no surprises. There may even be a better way to structure the transaction, depending on your circumstances.

Good luck - and enjoy your “new” home!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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Taxpayer asks:

Hello Taxgirl,

I appreciate you taking my question.

Is there any ruling, statute, or law of any kind in the state of Pennsylvania that states that retailers must charge tax (apply rate) on total purchases versus applying the tax rate line item by line item?

Example:

Total purchases: $40.45 Rate: 0.0675% Total Tax: $2.73

Difference of .02

Thank you very much,

Taxgirl says:

That’s a really interesting question! I’ve never really given it much thought but it does make a difference, as you pointed out.

It appears that the answer is the “total transaction” and not the individual items. Here’s the statute:

If anyone has a different read, let us know.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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It’s Fix the Tax Code Friday!

On many of the taxgirl.com threads about the possibility of a second economic stimulus package, there have been discussions about age - and whether a second package should benefit the young or old more. The undercurrent of age has also rippled through online discussions about child care credits, retirement plan benefits - and even who should pay most as a result of budget cuts in cities like Philadelphia.

This made me wonder: should taxes be age neutral? Or does it make sense to sway towards the young or old when it comes to exemptions and deductions? Some folks cried foul that the child credit for purposes of the rebate only applied to those under the age of 17 - even if those who were older would otherwise qualify as dependents. Others feel that retirees shouldn’t get a break based on age, that income should control your tax burden.

So today’s Fix the Tax Code Friday question is:

Should age matter when it comes to paying - or not paying - taxes?

If you think it shouldn’t, why not? If you think it should, who should get a break: younger taxpayers or older taxpayers? Should there be an age limit on dependents? Sound off!

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