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Answers to the Top
Ten Tax Questions
by Ginita Wall
 Should I file jointly with my spouse?
In almost all cases, you should file jointly. Married couples who file separately are barred from many special tax benefits. Filing separately generally is reserved for when you suspect that your spouse is evading taxes and do not want to sign a joint return, or if you are legally separated or divorcing and don't want to file jointly with your soon-to-be ex. There are a few specific tax situations in which your taxes might be lower if you file separately rather than jointly, but you will have to run the numbers both ways to be sure.
- How can I maximize the tax benefits of purchasing my own home?
When you buy a home, review your settlement statement carefully for deductible items. Prepaid interest, property taxes, and other deductible items will be listed on your closing statement. Other costs you paid can be added to the tax basis of the home, and will lower your gain when you sell the house.
Remember to deduct points paid on your home loan. Points paid when you acquire the house are deductible in that year. Points paid to refinance a loan must be written off over the length of the loan (1/30 each year on a 30 year loan). If you refinance again with a different lender, don't forget to write off the remaining unamortized points in the year you refinance. If you refinance with the same lender, you must amortize the unamortized portion of the old points over the term of the new loan.
- How can I take advantage of the opportunities for tax savings offered by my employer?
Start investing in 401(k)s, stock purchase plans, tax-sheltered annuities, and other tax-advantaged accounts as soon as possible. Small contributions made at an early age are much more valuable than large contributions made a few years before retirement.
Also, learn about your company's fringe benefits. Large employers often have tuition assistance plans, free employee counseling, mass transit commuting assistance, and other tax-free perks that might not be common knowledge around the water cooler. Visit human resources for a chat about what your company offers, or check out your company's website.
Ask your employer for health insurance, life insurance, or other fringe benefits instead of a raise. Since health insurance premiums are deductible to your employer but not taxable to you, you can save taxes by getting health insurance instead of a raise that is subject to Social Security and income taxes.
If you are considering going back to school, ask your employer to pay for your education. If the classes are job-related, all tuition is excludable from your income. Even if the classes aren't related to your job, the first $5,250 of tuition, books, fees, supplies, and equipment paid under an employer's educational assistance program is excludable from your income.
- How can I get more take-home pay in each paycheck?
Tax refunds are not a gift from Uncle Sam-they are an interest-free loan you make to your spendthrift Uncle. Structure your withholding so that you break even with the IRS at the end of the year by filing a new W-4 form with your employer. If you need help saving on a regular basis, start an automatic savings plan with a bank, credit union, or mutual fund. The interest you earn may not be much, but at least it will be yours and not the government's.
- Should I contribute to a Roth IRA?
Roth IRAs are a good idea for almost everyone. For 2002, you can contribute up to $3,000 to a Roth IRA, if your income is less than $110,000 ($160,000 on a joint return). Your contribution won't be tax deductible, but your money will grow tax-deferred over the years, and you won't have to pay tax on the distributions at retirement. If you need money before retirement, you can withdraw your contributions tax- and penalty-free if the Roth has been open at least five years.
- Can I withdraw from my regular IRA in an emergency?
If necessary, you can withdraw from your IRA without penalty to meet medical emergencies, for education, or to buy a home. You can withdraw money from your IRA penalty-free (but not tax-free) before age 59-1/2 to pay for medical expenses that exceed 7-1/2 percent of your income, to pay for health insurance premiums if you are unemployed, to pay for higher education expenses, or to pay the first $10,000 of first-time home-buying expenses. If you desperately need money for one of these qualified expenses, your IRA is a place to start.
- Can I deduct my expenses to find a new job?
You can deduct the cost of travel, meals, telephone calls, resume preparation, career counseling, and employment agencies, to the extent that they exceed 2 percent of adjusted gross income, regardless of whether you actually change jobs. However, you can't deduct the cost of finding your first job.
- What's the best way to save for my child's college education?
Section 529 plans allow taxpayers to set aside money for a child's education and take out those funds can be tax-free to pay educational expenses. Many investment firms will be offering these plans in the future, as they can now be sponsored by any educational institution, public or private, with no contribution limits.
Education IRAs can also fill the bill if you have less than $2,000 a year to contribute. You can set aside up to $2,000 a year per beneficiary, and invest the funds with any bank, insurance company or mutual fund.
- What's the best way to get tax relief for current education expenses?
Take advantage of the Hope and Lifetime Learning Credits to help pay for college expenses. The Hope Credit covers the first $1,000 of tuition and fees and 50 percent of the next $1,000, for a total of $1,500 per year. Any amounts a student or her parents pay for the first two years of college will qualify, if the payer's income is under $50,000 ($100,000 on a joint return). The student must be enrolled in a degree or certificate program on at least a half-time basis.
If you do not qualify for the Hope credit, use the Lifetime Learning Credit. This credit is 20 percent of up to $5,000 ($10,000, beginning in 2003) of tuition and fees each year, for a maximum credit of $1,000 per tax return. Qualified expenses include tuition at any accredited institution, whether or not you are pursuing a degree, if the payer's income is under $50,000 ($100,000 on a joint return). And guess what? This credit applies to you as well, to encourage you to take courses that will enhance your knowledge and earning ability.
- What should I do with my retirement plan accounts after I retire?
When you leave your last job, roll your retirement funds directly into an IRA. By having your company transfer the funds directly to your IRA, you will avoid paying a 20 percent withholding tax on the entire balance. Of course, you can begin taking withdrawals from the IRA at any time after age 59-1/2, but they are taxable. You will have to make estimated tax payments or have the payer withhold taxes from your withdrawals to avoid penalties.
If you have more than one retirement plan, avoid commingling retirement funds. Each 401(k) or pension rollover should have its own separate IRA. Although the accounts can be with the same trustee, they should be in separate accounts to avoid problems if you later decide to rollover your IRA into a new employer's plan.
Once you are retired, remember to take the required minimum distributions from your retirement plans by April 1 of the year after you turn 70-1/2. If you don't, you'll face stiff penalties of 50 percent of the difference between the amount you withdrew and the required minimum distribution.
You’ll find these and many other helpful tax tips in the
booklet 150 Ways to Save Taxes Through Life’s
Transitions.
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