Tax Q&A: Can I deduct property tax without itemizing?
- You can no longer deduct your property taxes while still taking the standard deduction
- In 2008 and 2009 a special provision allowed you to do both
- April 15 is the deadline to file your 2012 tax return
With only two weeks to go to file your 2012 tax return, you probably have questions. Whether you prepare your own tax return or pay someone to do it for you, we are here to help. Every day until April 15, members of the American Institute of Certified Public Accountants have agreed to answer tax questions from USA TODAY readers. Submit your questions to taxadvice@usatoday.com.
Today's question:
Q: I am 73 and I cannot itemize my deductions (I will use the standard deduction of $7,400). My question: I heard there was a way to deduct my property tax ($4,600) while utilizing the standard deduction. Is this still allowed?
A: Unfortunately, this is not still allowed, and there is no way to deduct your property taxes on your federal income tax return without itemizing.
Five years ago, Congress passed a bill allowing a single person to deduct up to $500 of property taxes on a primary residence in addition to their standard deduction. The limit was $1,000 for a married couple filing jointly.
Unfortunately, this provision was only put in place for 2 years, so for the years 2008 and 2009, a person could deduct at least a portion of their property taxes, even if they were not itemizing.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended some tax breaks, but this tax break was allowed to expire and has never been reinstated.;
The instructions to for the 2010 Form 1040 on the IRS website lists expired tax benefits on page 6. For more information on itemized and standard deductions:
Frequently asked questions for itemized and standard deductions
Mackey McNeill, CPA
Mackey Advisors, Bellevue, Ky.
PREVIOUS QUESTIONS:
Q: I submitted an amended tax return in June 2012 for my 2011 taxes due to an error made by the financial firm that manages my money. The IRS promptly acknowledged in a letter to me that I was owed a tax refund of almost $10,000, but I never received it. I've talked to IRS representatives who agree that the refund is due to me, but they have no idea why the money is not being released. They say that it is "in limbo" and "just sitting there." My question: Can I deduct the $10,000 from my 2012 taxes as a loss and stop trying to deal with IRS? If they ever eventually do send me the 2011 refund, I'd be happy to declare it in a future tax return.
A: No. you cannot deduct this from your 2012 taxes, as the refund is not taxable when you receive it, except for the interest portion, if any will be paid. You cannot deduct a loss that has not been reported as income previously.
You may want to consider calling the taxpayer advocate line of the IRS and see if they can help. If you use a tax preparer, they can possibly help by contacting the tax practitioners line at the IRS. I have had good success with this. Good luck.
Ken Rubin, CPA
RubinBrown, St. Louis
Q. My husband and I have combined before-tax income of $260,000 per year. Our only deduction is our home mortgage. How much money is each of us allowed to put away in IRAs and 401(k)s separately or together that will help us save and lower our tax bill? How much is deductible? We are both 55 and have zero savings for retirement. Are there other deductions that we can use?
A: First, congratulations on being able to turn your financial lives to a better place. I do not know if you are asking your question for the 2012 tax year or a go-forward basis for 2013, so I will answer both.
If your question is regarding 2012, and you did not participate in your company 401(k) plans, you could still each do a deductible IRA account of $6,000 ($5,000 limit plus $1,000 catch-up provision for being 50 or older) as long as you make the payment by April 15, 2013. If you participated in your company 401(k) plans in 2012, your income is too high for you to be able to contribute to a deductible IRA for 2012.
If your question is regarding 2013, your 401(k) plans are the best way to limit your taxable income. Each of you can contribute $23,000 to your company 401(k) plans ($17,500 elective deferral plus the $5,500 catch-up provision for being 50 or older). This $46,000 would be subject to FICA and Medicare taxes but not to federal or state income taxes, so it would reduce your tax burden considerably. Again, as in 2012, your income levels would be too high to be able to contribute to a deductible IRA for 2013.
One thing to be careful of with the 401(k) contribution is that there could be a testing limit placed on your contributions. If you are in the highly paid category at your company, there could be a lower limitation on what you can contribute because of the contribution levels of the non-highly compensated people at the company. Check with your HR department to see if this applies to you.
Other deductions that would be available to you are the real estate taxes you pay on your home (you said you have mortgage interest but you would also have real estate taxes as well), state income taxes and charitable contributions. These are the major deductions, but you may have some less common deductions available. Check with a CPA. ;Usually, with higher income levels come additional benefits at work or other deductions that are too numerous to mention in this short answer.
For more information;
Publication 590: Individual Retirement Arrangements (IRAs)
Ted Sarenski, CPA
Syracuse, N.Y.
Q. I have four separate accounts in my TIAA-CREF retirement plan, plus a separate IRA account managed by another firm. I am 70 1/2 years old, and I understand that I am required to meet the required minimum distribution (RMD) each year going forward. Does the IRA require me to withdraw the minimum from each of my individual accounts, which means that I will have to make four withdrawals? Or, is it possible for me to be in compliance – and avoid a penalty – if I only withdraw from one (or two) account(s) – provided my total withdrawal equals my total RMD?
A: IRAs must satisfy a minimum distribution in the account by a required beginning date. For IRAs, the required minimum distribution (RMD) must begin by April 1 of the calendar year following the year in which the individual reaches age 70 1/2. This is regardless of whether or not the individual is retired.
The amount of the RMD is determined by the Uniform Lifetime Table. This amount is calculated by dividing the prior Dec. 31 balance of the IRA by the factor on the Uniform Lifetime Table. The factor on the table is based upon the owner's age.
The distribution can come from one IRA as long as it is the total amount required from the balances of all the IRAs based on the Uniform Lifetime Table. In order to do this, each account RMD should be calculated and added together. Once you determine your total RMD from all of your accounts you can then decide to make the distribution from one or two accounts.
For more information:
Answers to frequently asked questions about RMD
Douglas P. Duerr, CPA
Montville, N.J.
Q. I've canceled a couple of life insurance policies by cashing them in for their value: Do I have to pay federal taxes on the cash received?
A. You may have federal taxable income from cashing in the life insurance policies, but it most likely will not be equal to the cash you received.
Generally speaking, the taxable portion will be the difference between the amount you received and the total amount of premiums you have paid in to the policy over the years it was in force. (There is actually a more complicated formula, but it is easier to explain the taxability this way).
For example; if you paid $50 per month for the policy for 10 years you would have paid in $6,000 over the 10 years. If the cash you received was $8,000, you would have taxable income of $2,000. If the cash you received was $6,000 or less, you would have no taxable income to report. For more information:
Life insurance proceeds and surrender of policy for cash
Ted Sarenski, CPA
Syracuse, N.Y.
Q. I have been working full time and also doing photography as a hobby. This past year I exhibited my photographs in a gallery, at some expense to me, and sold several. Beginning in July, when I retire, I plan to do photography full time and market my skills. My question is, since I intend to report the income from my 2012 photograph sales, can I depreciate my camera equipment and deduct the expenses I incurred to exhibit my photographs?
A. Although you are describing your photography activity as a hobby, it sounds more like a business activity. According to the IRS:
"In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit."
Therefore, I would say you can probably start depreciating the cost of your camera equipment in 2012 and deduct all your ordinary and necessary expenses from exhibiting the photographs.
Jonathan Horn, CPA
New York City
For more information:
Publication 946: How to depreciate property
What kind of business expenses are deductible?
Q: If my wife and I are both self-employed with separate businesses, would it be more financially advantageous to file jointly or separately?
A: Married filing jointly is usually more advantageous than married filing separately.
If both businesses are profitable, married filing jointly can cause more taxable income to be taxed at lower rates, producing a lower total tax.
Joint filing can also produce a lower total tax based on the losses of the business of one spouse offsetting income of the other spouse. Separate filing could result in lesser or no tax savings from the loss. If one spouse has a significant capital loss and the other spouse a capital gain, joint filing could result in a larger deduction for the loss.
Since certain tax benefits (child and dependent care credit, deduction for college tuition, student loan interest expense, credit for elderly and disabled) are denied to taxpayers using married filing separately, joint filing could produce a lower tax if the taxpayers are eligible for these tax benefits.
Possible advantages of married filing separately include:
• Larger medical, casualty, or miscellaneous itemized deductions for expenses incurred by the spouse with lower taxable income.
• Reduced tax cost of Social Security benefits of lower-taxable-income spouse.
• Protection from legal responsibility for aggressive tax positions of spouse.
• Protection of tax refund from seizure to satisfy legal obligations of spouse.
The specific facts of each couples' situation must be considered, but it is the unusual situation that married filing separately is an advantage.
John McWilliams, CPA
Golden Gate University, San Francisco