Tax Questions

TaxCutters is here to answer all of your tax questions. If you have a question that isn’t listed, please call us at (773) 728-1500.

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

You much make estimated tax payments for the current tax year if both of the following apply:

  1. You expect to owe at least $ 1,000 in tax for the current tax year, after subtracting your withholding and credits.
  2. You expect your withholding and credits to be less than the smaller of:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax show on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

What should I do if I made a mistake on a federal return which I’ve already filed?

It depends on the type of mistake you made. Many mathematical errors are caught in the processing of the tax return itself.

  • If you did not attach a required schedule, the IRS will contact you and ask for the missing information.
  • If you did not report all your income or did not claim a credit, you should file an amended or corrected return using Form 1040X, Amended U.S. Individual Income Tax Return. When filing an amended or corrected return:
    • Include copies of any schedules that have been changed or any Form W-2 you did not include. File 1040 only after you have filed your original return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later.

Please allow the IRS 8-12 weeks to process an amended return.

Can I receive a tax refund if I am currently in a payment plan for prior year’s federal taxes?

As a condition of your agreement, any refund due you in a future year will be applied against the amount you owe. Continue making your installment payments as scheduled because your refund is not considered a substitute for your regularly scheduled payment.

You may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, student loans, or child support.

The IRS will automatically apply the refund to the taxes owed.

If I claim my daughter as a dependent because she is a full-time college student, can she claim herself as a dependent when she files her return?

If you claim your daughter as a dependent on your income tax return, she cannot claim herself on her income tax return. If an individual is filing his or her own tax return, and the individual can be claimed as a dependent on someone else’s return, the individual cannot claim his or her own personal exemption. In this case, your daughter should check the box on her return indicating that someone else can claim her as a dependent.

Do self-employment taxes need to be paid quarterly or yearly?

If you are required to make estimated tax payments, self-employment tax is paid by making quarterly estimated tax payments which include both income tax and social security tax.

When are the quarterly estimated tax returns due?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

If a payment is mailed, the date of the U.S. postmark is considered the date of payment. The payment periods and due dates for estimated tax payments are as follows:

Jan. 1– March 31 = April 15
April 1 – May 31 = June 15
June 1 – August 31 = September 15
Sept. 1 – Dec. 31 = January 15 of the following month

What is the difference between a Form W-2 and a Form 1099-MISC?

Both of these forms are called information returns.

The Form W-2 is used by employers to:

  • Report wages, tips and other compensation paid to an employee.
  • To report the employee’s income tax and Social Security taxes withheld and any advanced earned income credit payments.
  • To report wage information to the employee, and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

A Form 1099-MISC is:

  • Generally used to report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.
  • Required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or compensation are paid.
  • Provided by the payer to the IRS and the person or business that received the payment.

I sold a rental property last year. What closing costs can I deduct?

The only deductible closing costs are those for interest and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including:

  • Abstract fees
  • Charges for installing utility services
  • Legal fees
  • Recording fees
  • Surveys
  • Transfer taxes
  • Title insurance
  • Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions).

I sold my principal residence this year. What form do I need to file?

Generally, you need only report the sale of your principal residence if you realized a gain on the sale. To determine if you may exclude up to $250,000 of gain on the sale of your principal residence (up to $500,000 for a joint return or a return by a surviving spouse).
You may be entitled to exclude from income all or a portion of the gain realized on the sale of your principal residence if during the 5-year period ending on the date of the sale:

  • You owned the property for at least 2 years; the 2- year period need not be continuous (the ownership test).
  • You must have lived in the property as your principal residence for at least 2 years; the 2- year period need not be continuous (the use test).
  • During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another principal residence.

My wife and I have two children and we are going to file separate returns this year. Can we each claim one child for the earned income credit?

No. In order to qualify for the earned income credit, your filing status cannot be married filing separately. If you are married, you usually must file a joint return to claim the earned income credit.

What expenses qualify for the education credits?

Expenses that qualify for an education credit are qualified tuition and related expenses required for enrollment or attendance at an eligible educational institution. An eligible educational institution includes most accredited colleges, universities, vocational schools, or other postsecondary educational institutions eligible to participate in the student aid programs administered by the Department of Education.

Qualified expenses do not include expenses for:

  • Student activity fees (unless required for enrollment or attendance)
  • Athletics (unless the course is part of the student’s degree program)
  • Room and board
  • Insurance
  • Transportation or similar personal, living, or family expenses
  • Also, the cost of books and equipment are generally not qualified expenses because eligible educational institutions usually do not require that the cost of the books or equipment be paid to the institution as a condition of the student’s enrollment or attendance at the institution; however, for taxable years 2009 and 2010, the American Opportunity Tax Credit modifies the Hope Credit to include course material whether or not paid to the education institution.

Do tuition and related expenses paid to attend a private high school qualify for the education credits?

No. Expenses paid to attend a private high school do not qualify for the education credits because a high school is not an eligible educational institution. In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution, including an accredited, public, nonprofit, or proprietary (private-owned, profit-making) postsecondary institution. Additionally, in order to be an eligible educational institution, the school must be eligible to participate in a student aid program administered by the Department of Education.

If I pay college tuition and fees with a tax-free scholarship, can I claim an education credit on Form 8863 for those payments?

No, you cannot claim a credit for the amount of higher education expenses paid by a tax-free scholarship.

Who can claim the American Opportunity Credit?

Generally, you can claim the American Opportunity Credit if all three of the following requirements are met:

  • You pay qualified tuition and related expenses for the first 4 years of postsecondary education.
  • You pay the tuition and related expenses for an eligible student.
  • The eligible student is you, your spouse, or a dependent for whom you claim an exemptionon your tax return.

In general, the American Opportunity Credit is based on tuition and related expenses required for enrollment or attendance at an eligible educational institution. For a taxpayer to claim the Hope Credit, the student for whom you pay tuition and related expenses must be an eligible student.

To be an eligible student, generally, the student must:

  • Not have completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior and senior years of college) before this tax year.
  • Must have been enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year.
  • Must have been free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

For tax years 2009 and 2010, the American Opportunity Tax Credit modifies the Hope Credit as follows:

  • The maximum amount of the credit is increased to $2,500.00.
  • The credit can now be claimed for the first 4 years, not 2, of postsecondary education.
  • The modified adjusted gross income limitations are increased.
  • Qualified expenses include course materials.
  • Generally, 40% of the Hope Credit is now refundable (up to $1,000).

What is a Lifetime Learning Credit?

The Lifetime Learning Credit is a nonrefundable tax credit with a dollar limit per family that is available for qualified tuition and related expenses of higher education, whether the student is at the undergraduate or graduate level. It is calculated by taking a percentage of the qualified educational expenses paid.

Can I claim the child tax credit for a child who has an ITIN, rather than a social security number?

Yes, you can claim the child tax credit for a child with an ITIN (individual tax identification number) if you otherwise qualify.

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

Social security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable. The amount of social security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:

  • One-half of your benefits.
  • All of your other income, including tax-exempt interest.

The base amount for your filing status is:

  • $25,000 if you are single, head of household, qualifying widow(er) or married filing separately living apart from your spouse at any time during the tax year.
  • $32,000 if you are married filing jointly.
  • $-0- if you are married filing separately living with your spouse at any time during the tax year.

This is the first year that I received a distribution of benefits from my retirement plan. 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.

Generally, your pension or annuity is usually fully taxable if:

  • Your employer contributed all of the cost without including the cost in your taxable wages, or
  • You got back all of your previously taxed contributions tax free in previous years.

Generally, your pension or annuity will be partially taxable if you contributed after-tax dollars. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid.

If you receive pension or annuity payments before age 59-1/2, you may be subject to an additional 10% tax on early distributions.

What types of educational expenses are deductible?

Deductible educational expenses include:

  • Amounts spent for tuition, books, supplies, laboratory fees and similar items.
  • Transportation and travel expenses to attend qualified educational activities may also be deductible.

Is the mortgage interest and property tax on a second residence deductible?

The mortgage interest on a second home which you use as a residence for some portion of the taxable year is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence.

Real estate taxes paid on your primary and second residence are, generally, deductible. The limitation for mortgage interest on your primary and secondary residence is $1,000,000 for acquisition indebtedness and $100,000 for home equity indebtedness.

Deductible real estate taxes include any state, local, or foreign taxes based on the value of the real property levied for the general public welfare. They do not include taxes charged for local benefits and improvements that increase the value of the property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements.

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.

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