Taxes For Dummies, 2002 Edition is full of helpful tips and strategies for getting through the process of filing income tax returns accurately and on time completely revised for 2002! This friendly guide is targeted for individual taxpayers and those with special tax situations (self-employed, small business owners, etc.). Understand tax law changes for 2002 with complete line-by-line analyses. Plus, this book also contains answers to the most frequently asked tax questions.
About the Author
Eric Tyson, MBA, is the author of many popular For Dummies guides to personal finance and investing, including the million-copy bestseller Personal Finance For Dummies. David J. Silverman, EA, is a tax advisor and author of Battling the IRS.
Table of Contents
PART I: Getting Ready to File.
Chapter 1: The U.S. Tax System and Rates.
Chapter 2: Tax Return Preparation Options and Tools.
Chapter 3: Getting and Staying Organized.
Chapter 4: No Form Fits All (Or, What Kind of Taxpayer Are You?).
PART II: Tackling the Various Forms 1040.
Chapter 5: Easy Filing: 1040EZ and 1040A.
Chapter 6: Form 1040: Income Stuff.
Chapter 7: Form 1040, Part Deux: Adjustments to Income Stuff.
Chapter 8: The Rest of the 1040 and Other Yucky Forms.
PART III: Filling Out Schedules and Other Forms.
Chapter 9: Itemized Deductions: Schedule A.
Chapter 10: Interest and Dividend Income: Schedule B.
Chapter 11: Profit or Loss from Business: Schedule C.
Chapter 12: Capital Gains and Losses: Schedule D.
Chapter 13: Supplemental Income and Loss: Schedule E.
Chapter 14: Profit or Loss from Farming: Schedule F.
Chapter 15: Other Schedules and Forms to File.
PART IV: Audits and Errors: Dealing with the IRS.
Chapter 16: The Dreaded Envelope I: IRS Notices.
Chapter 17: The Dreaded Envelope II: Audits.
Chapter 18: Fixing Mistakes the IRS Makes.
Chapter 19: Fixing Your Own Mistakes.
PART V: Year-Round Tax Planning.
Chapter 20: Tax-Wise Personal Finance Decisions.
Chapter 21: Retirement (Tax-Reduction) Accounts.
Chapter 22: Small Businesses and Tax Planning.
Chapter 23: Your Investments and Taxes.
Chapter 24: Real Estate and Taxes.
Chapter 25: Kids and Taxes.
Chapter 26: Estate Planning.
PART VI: The Part of Tens.
Chapter 27: Ten Important Tax Law Changes.
Chapter 28: Ten Important Tax Questions.
Chapter 29: Ten Proven Ways to Avoid Audits.
Chapter 30: Ten Often-Overlooked Tax-Reduction Opportunities.
Chapter 31: Ten Interview Questions for Tax Advisors.
Appendix A: Reaching Out to the IRS.
Appendix B: Glossary.
Appendix C: Tax Forms.
On Monday, April 6th, barnesandnoble.com welcomed David J. Silverman to discuss TAXE$ FOR DUMMIE$.
Moderator: Welcome to the auditorium, Mr. David J. Silverman. Thank you for spending your lunch hour with us. How are things today?
Eric Tyson: Marvelous. Counting the hours until April 15th.
Megan from New York City: This year I chose to use the federal 1040EZ form (done over the phone) and the NY State IT-100 EZ (yes -- I took the shortcut!). As you might know, these save the citizen the time of figuring out the computations -- the government does that for you! The federal form was painless -- just a phone call and you know immediately what you are getting back. The state was equally easy -- you just put the figures down and your direct deposit number and vwalaa!!! -- but for the state I did find it kind of troubling that I didn't instantly know exactly what amount rebate I would get. My question is this In your opinion, are the EZ forms smart to use? Do you think you get more money back if you do your own computations? Is it safe to put your direct deposit number down on these forms?
Eric Tyson: Yes, if you meet the qualifications -- in other words, you have less than $400 in interest and $50,000 in total income. But the point I am trying to make is, if something changes in your life, such as you change jobs, you receive stock options...in other words, things get complicated rather quickly, and using this form, you could be shortchanging yourself. To the second question, no, but I would always check the IRS's computations. Yes, it is safe to put your direct deposit number down. It protects your refund from being stolen or lost. Every year the IRS receives about 100,000 refund checks back from the post office as undeliverable, and so the answer is yes.
Katherine Kallmeyer from Portsmouth, OH: I moved my job and home in 1997 -- it's about 120 miles from my previous address. I sold my condo and bought a house that cost about $22,000 less than my condo. Since they changed the rules, I think I don't have to claim the money as a capital gain. Is that correct? My second question is about moving expenses. The company paid most of them directly to a third party. I do have W-2's for the money paid out. Can I deduct the moving expenses even though I did not pay them myself? Thanks.
Eric Tyson: Well, the first thing is, you will have to file the form 2119 for exchange of residence, and you claim the exclusion under the new law, which is $250,000 if you are single, or $500,000 if you are married. If they were added to your income and included on your W-2, then you can claim the moving expenses as a deduction. And that is done on form 3903.
Doris from PA: Do I have to declare dividends I get from my IRA even if they are reinvested into the account?
Eric Tyson: No, you don't. You only have to report income from an IRA when you start taking the money out when you retire.
Jennifer from Bronx, NY: When your tax forms ask you to contribute money to a specific organization, where does that money come from? Does it come from your return? (My father-in-law just told me it doesn't.)
Eric Tyson: Yes, it says so right on the form that you can elect to have a dollar or two of your tax go directly to the presidential election fund.
Sandy from Massachusetts: What type of maintenance expenses can be listed in the maintenance field on form 1040C? As a carpenter/contractor, can I list maintenance of property I am working on (i.e., flood control, brush cleanup, snow removal)?
Eric Tyson: Yes, but things get rather complex here. There's something called the Uniform Capitalization Rules. I know what you're thinking Who the heck ever thought of that?! That means that you can't deduct these kinds of expenses until you sell a piece of property. The answer is normal maintenance is deductible garbage removal, snow removal. Things that add to the life of the property aren't. Patching a hole in the roof is a maintenance item, putting a new roof on is a capital expenditure.
Dale from Williamsburg, VA: Is a home office deduction allowable for college professors?
Eric Tyson: Currently no, but if you hang on until January 1, 1999, home office deduction might be, if it's a requirement of your job that you have to use your home office for administrative purposes.
Montey from Hollywood, FL: I have recently owed the IRS money, and I sent them a note saying that I couldn't afford the amount of money they requested. I included about half of the money they wanted with the note. They then sent me a bill for the remainder of the bill and a payment plan in two payments. I wanted as little interaction with the IRS as possible, so I sent them the entirety of what I owed them. However, they then sent me another bill for the second part of their payment plan. I figured they just made a mistake and we would clear this up. However, they kept sending me a bill for the second portion of the bill, which I already payed them. I tried calling them, but was on the phone for two and a half hours before I finally hung up the phone in frustration. I heard too many stories about the IRS so I just sent the rest of the money and they say we are now all settled, but they actually owe me money. What should I do? Part of me wants to get my money back, but part of me wants to just stay clear of this imcompetent organization. What do you recommend?
Eric Tyson: You can file a claim for refund 1040X, and you can get the overpayment back that way. Persistence counts. If you're going to throw up your hands in despair, that's the fastest way I know to get separated from your money.
Paul from Hoboken, NJ: Hello David. I recently graduated from college and am working in NYC. I have an entry-level job that pays only 20 grand in NYC (for which I bust my butt), which I can barely survive on (I eat plenty of mac & cheese). One hungry evening I decided to do my taxes and was horrifed at the fact that I actually owe the government a couple hundred dollars, after they have been sucking money from my paycheck for the past year. Am I insane or is this utter bull? What can I do to reduce this amount? Please help a hardworking, starving worker.
Eric Tyson: I wish I could offer advice other than to say, "Welcome to the world of the grown-ups!" The average person works from January 1 to May 10 to pay their total tax bill. That's just a fact of life.
Haggs from 'cross the way: Mr. Silverman, what is a fair price to pay to get your taxes done by an accountant? I feel like I paid too much.
Eric Tyson: I'll give you a very clear answer That depends on how complicated your return is. Or, if it's a simple return, and you merely need someone who is familiar with a tax form. A number of studies seem to suggest that what you pay bears no relation to the quality of service. While I can't give you a definitive answer, you raise a valid point.
Steve from Boston: I work two jobsone during the day, and at night I'm a college professor. Two questionsAre commuting expenses from job 1 to job 2 deductible, and are books I need to buy for my classes deductible business expenses?
Eric Tyson: Yes, the law couldn't be clearer on this. They are both valid business expenses.
Leigh from Portland, OR: The majority of the income I received this year was untaxed by the federal government because it came in the form of royalties and a graduate assistantship. I now find myself owing over $700 in taxes, although I only made about $11,000. I am unclear about whether I will have to pay a penalty because I did not pay estimated tax last year. How do I figure that out?
Eric Tyson: There is a form 2210 where you compute the penalty for underestimating your tax. If you don't compute it, when you send in your return the dear folks at the IRS will do it for you.
Susan Kramer from Lancaster, PA: Just for the record: what are some of the biggest mistakes people make in filing their taxes? Could you maybe list three that might apply to most people in the audience to consider and double-check? Thank you for taking the time to answer my question.
Eric Tyson: Number one: not keeping very good records. On April 6, it's really tough to remember what your deductible expenses are without very good records. This paper trail could save you a bundle. Number two: a lot of single parents don't realize they might qualify for the lower head of household rates, the child care credit, and possibly the earned income credit. And three; don't confuse filing and paying. Some folks who owe the IRS money but can't pay mistakenly believe that they should file when they have the dough to pay what they owe. This is a mistake. The penalties are staggering for not filing on April 15 or requesting an extension of time to file. If you can't pay what you owe, attach form 9465, request to pay in installments to your return. You will be surprised what pussycats the IRS are when citizens voluntarily make this request.
Gary from Framingham, MA: I worked part of the year for myself, and part for an employer. I'm in the 15 percent tax bracket but find myself owing a couple of thousand dollars in taxes. I'd like to open a SEP-IRA, but would like your advice on whether this is a good idea.
Eric Tyson: Yes, it will save a bundle in tax. But being self-employed, the largest portion of what you owe is the social security tax as a self-employed person. The SEP won't reduce this portion of the tax.
Eloise H. from Lighthouse Point, FL: My elderly father just gifted the bulk of his savings to his children to spare us losses from inheritance tax when he dies. Do you think this is a wise decision? What are the benefits of doing this during your lifetime? Drawbacks?
Eric Tyson: Well, everyone can give up to $10,000 a year without triggering a gift tax. In addition, there is a $625,000 lifetime exclusion that's ultimately going to work its way up to a million dollars. People make these gifts so that any appreciation of the asset is no longer in their estate. For example, if your father gave you stock in GE worth $600,000, there would be no gift tax because it's under the exclusion, and any appreciation in the value of the stock is no longer considered part of his estate.
Mark from NYC: Hello Mr. Silverman, I am a young, relatively new member of the workforce, and I wanted to do my taxes myself for the first time this year. I ended up sending them to an accountant, though, and not because the forms were too difficult -- I actually have a feeling I did them correctly, at least insofar as the directions directed me. But I got cold feet -- I thought, "What if I made a mistake? Does it screw up my credit rating? Do I get penalized? What would happen if I was wrong?" So, I ask you -- what WOULD happen if I sent them in with inadvertent mistakes? Thanks.
Eric Tyson: The IRS would bill you for any tax or penalty that you owe. This bill wouldn't affect your credit rating if you paid it. It's only unpaid bills from the IRS that get reported to the credit agencies. However -- there's always a however when it comes to taxes -- if you made a mistake in the IRS's favor by reporting income that's not taxable, for example, guess what? The IRS won't be sending you a refund!
Wilhelm from Reno: OK, I'll ask the stupid question that everyone else wonders but is too embarrassed to askWhat exactly defines a write-off, and how much can you get away with?
Eric Tyson: A write-off is an allowable tax-deductible expense. I had a professor of taxation who was fond of saying, "If you get audited, and don't end up owing the IRS a lot of money, you probably had a lousy accountant."
Lara from NYC: If I deposited $2K in my IRA for 1997, but didn't take the tax deduction (I'm in a 401K, also, and didn't qualify for the deduction), can I leave the funds in the IRA, or should I go through the "pain" of removing it?
Eric Tyson: You can leave it in there, and this year you could possibly roll it over to a Roth IRA. All this advice is dependent on the amount of your income. The general rule Having money working for you that's exempt from tax makes sense.
Doug Trafelet from Chicago: Would you mind explaining the details of the new Roth IRA and how it fits in with tax deductions?
Eric Tyson: You don't get a deduction for a Roth IRA. If your income is under $150,000 and you're married, and $95,000 if single, you can put away $2,000. If you leave the money in for five years, when you're 59 and a half, the amount you have accumulated can be withdrawn tax free. And, unlike a regular IRA, you can take what you've contributed out at any time without a penalty.
Frank from Albany, NY: I have some business expenses, but I can't find all of the receipts for these. Should I take deduct them anyway?
Eric Tyson: Yes. There's something called the Cohan Rule, named after George M. Cohan, and it applies to expenses other than travel and entertainment. If you have a valid reason for not having these records, such as impracticability, the courts allow a reasonable estimate.
Jennifer from Nashville: My husband performed a small amount of contract maintenance work (approx. $1K) to "help out" in his father's rental property company. We did not receive a 1099-MISC from him and cannot seem to get him to fill one out for us. We declared the income and filled out the necessary self-employment forms (Schedule C, etc.). Are we required to submit a 1099-MISC form for this income?
Eric Tyson: No, the payer is. You have fulfilled your civic duty by reporting it on your return and paying the tax.
Debbie Gale from Georgia: My fiancé lived in Atlanta from January through May, Maine from June through August, and then back in Atlanta from September through December. Can he claim he was a part-year resident of both states? He fares better this way than as a Georgia resident with out-of-state income.
Eric Tyson: Being in the Big Apple, I'm not familiar with Georgia taxes. But as a general rule, you are a resident of the state you're domiciled in. Domiciled is fancy legal jargon for the place where, after short or long absences, you plan to return. It sounds like he has you and Georgia on his mind.
Susan from Boston, MA: Should married couples file joint returns? Are there benefits or drawbacks we should know about for separate and joint filings? Also, if we filed separate returns last year, can we file a joint return this year without suffering penalties?
Eric Tyson: Each year stands on its own, so what you did last year has no bearing on how you choose to file for 1997. As a general rule, couples will make out better filing jointly. Depending on your deductions and income, there are some oddball situations where married filing separately could save you money. The drawback to filing jointly is that each party is responsible for any unpaid tax. When couples split, this could be a real problem. For example, if one spouse has their return loaded up with all kinds of off-the-wall deductions, the other spouse could end up being responsible for any tax due if these deductions are disallowed.
Moderator: Thank you once again for joining us today, Mr. Silverman. We truly enjoyed having you, and getting some much-needed tax tips and advice. Any final remarks before we close?
Eric Tyson: Yes, if you can't file by April 15, apply for an extension of time to file. This will give you a four-month breathing spell until August 15.