Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 5, 1990 TAG: 9003041960
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
A: The capital gain on sales of personal residences is computed by subtracting the adjusted basis of the house sold from its selling price (net of selling expenses). The selling price is the total amount you receive which includes cash and any mortgage or note you receive from the purchaser. Selling expenses include commissions, advertising, legal fees and loan charges paid by the seller.
The adjusted basis of your house is the original purchase price which is then increased or decreased by certain items. Items that increase the basis would be improvements and additions to the house. Items that decrease the basis would be gain from the sale of an old home that was postponed and any depreciation if your home was used for business or rental purposes.
How to wear out a carpet
Q: I have rental property purchased new in January 1984 that is being depreciated under 15-year ACRS plan. To rent the property this year, it was necessary to recarpet the complete unit. How is this expense reported: one-time repair, five-year depreciation or other depreciation method?
A: The year that an asset is placed into service dictates the method of depreciation used in its cost recovery (otherwise known as depreciation). In virtually every year since 1981, Congress has changed the rules governing depreciation in both the life and method used. Assets placed into service in 1987 and forward are depreciated under the lives and methods of MACRS (Modified Accelerated Cost Recovery System). IRS Publication 534 titled Depreciation contains the tables of the MACRS depreciation percentages for each year of an asset's life.
Assuming you recarpeted your rental unit in 1989, it would be considered MACRS 7-year life property. Table 1 on page 28 of the aforementioned publication would be used, yielding 1989 depreciation of 14.29 percent. This depreciation, along with other depreciation for that rental, would be reported on Form 4562, Depreciation and Amortization.
The new carpet would be subject to cost recovery rather than expensed because the outlay is an improvement rather than a repair. Identifying depreciable assets and computing depreciation is a tedious and complex process. You should consult a tax adviser if you are still unclear after reading the publication.
Home gain covered
Q: For nearly 30 years we owned a home and an adjoining lot. Although they were on separate deeds, we used the adjoining lot as part of our home. When we sold the home, we sold the lot separately to a different buyer. Before selling these, we purchased another home for more than the total sale value of the old home plus lot.
We are over 62 years of age. The question is, may we take the value of the old home plus lot as one entity in deferring capital gains, or could we take the one-time exemption on the old home plus lot?
A: As you seem well aware, the Internal Revenue Code includes a provision that defers from current taxation gain on the sale of your primary residence that is timely reinvested in another home. Gain may be deferred if, within two years before or two years after the sale, you buy and live in another home that costs at least as much as the adjusted sales price of the old home. Adjusted sales price is defined as the original contract price less certain costs of selling the property.
As you occupied your old home for nearly 30 years, it qualified as your principal residence. And since the purchase price of your new residence appears to be greater than the adjusted sales price of your previous residence, the gain has been reinvested. The fact that the sale of your residence was in two parcels to different purchasers is not an issue; non-recognition applies to gains realized on the separate sale of a home situated on a parcel of land and the sale of a contiguous parcel. The replacement period in a separate sale situation is determined in reference to the first sale. Assuming you purchased your new home within the two years before the sale of your old, you have met the replacement period requirements.
Because you appear able to defer the gain on both parcels currently, it is not advisable to avail yourself of the one-time exemption available to over-55 taxpayers.
To prepare your tax return, you will need to complete Form 2119, which alerts the IRS to the facts pertinent to your deferral. It may also be helpful to read Chapter 17, Selling Your Home, in IRS publication 17, which is titled Your Federal Income Tax. This publication should be available at the IRS office in the Poff building in downtown Roanoke.
You can't underpay
Q: During 1990, I will receive a one-time interest payment of approximately $20,000 that will add to my 1990 tax burden. What options are available to me that will not bring about a penalty-interest charge next year when I file my 1040? I have heard that no charges will be levied provided my taxes withheld in 1990 (deducted from payroll) are within 90 percent of 1989 taxes paid and provided that total taxes are paid no later than April 15, 1991.
A: Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, is used by individuals to substantiate that no penalties or interest are due on an underpayment of taxes for the year.
The instructions to the form outline the different exceptions to the penalties for underpayment, in the section entitled Who Must Pay the Underpayment Penalty. Your letter outlines but one of the available exceptions. No penalty is assessed when you timely pay at least 90 percent of your tax liability through withholdings or quarterly estimated tax filings. Of course any remaining tax liability - the underpayment - must be remitted with your return or extension on April 15 of the following year.
The decision of whether to use the enumerated exception over other available options should be made with consideration to available cash flow for the year. Your tax adviser will be able to assist you in choosing an exception that will shield you from any penalty.
Declare lottery winnings
Q: How much money do you have to win in the Virginia lottery and other gambling before the winnings are taxed by the IRS? Do you have to pay state taxes on gambling winnings over a certain amount? What is that amount? To offset winnings, what proof can you offer for gambling losses?
A: Winnings from the Virginia lottery or any gambling are subject to federal income tax. Winnings of $600 or less from the Virginia lottery can be excluded from your Virginia income tax, but not federal income tax.
Gambling losses are deductible. However, the deduction for gambling losses cannot exceed gambling winnings, and gambling losses are deductible only as an ONitemized deduction. If you do not itemize, you get no deduction.
Exemption stands
A: The children of divorced parents live with one parent, who uses them as dependents on the tax return. A grandparent established two CDs and a small savings account at a local bank for a child of 13 and a CD and tax-exempt bond for a child of 7. The grandparent is custodian for the investments. The parents do not and should not know of these investments for the children's education.
The taxable amounts are $685 for the older child and $475 for the younger. Do the children have to file income tax returns? Will the parent lose the exemption?
A: The 13-year-old does have to file because he has over $500 of interest income. The 7-year-old does not because he has less than $500 of interest income.
Nothing shown in this set of circumstances would indicate the parent would lose the exemption. Whether a child can be claimed as a dependent is not influenced directly by the amount of earnings a child has. To determine who may claim the child as a dependent, you should refer to the instructions accompanying your tax return.
You should reconsider your investment in the tax-exempt bond because the child is, in effect, already exempt from taxes. A taxable investment should give you a higher return.
Divorce is complicated
Q: I have been divorced since December 1987, and I pay $140 a week in support. My divorce decree states that this is a "unified award of support" for my former wife and the three children. No set amount was scheduled for the child or spousal support.
I have been advised that since there is no amount stipulated for each, and since it states unified, I am allowed to claim the entire amount on my taxes as a deduction. I have also acquired a copy of the information from the tax book at the library which states that an amount has to be stipulated as child support in order to disallow you that deduction. I was also advised that if this amount is taken as a deduction my ex-wife must claim it as income, which she has not done at any time.
A: For a payment under a divorce or separation agreement executed or modified after Dec. 31, 1984, to qualify as alimony, special requirements must be met. The following items are the most important of these requirements:
1. The payment must be made under a divorce or separation agreement.
2. The payment must be paid in cash, which includes checks and money orders.
3. The payor's obligation to make the payment must end with the payee spouse's death, and there must not be any liability to make any payment as a substitute for such payment.
4. Payments that are "fixed" as child support are not alimony.
5. Payments may be "treated as" fixed child support; for example, if they end at some time related to an event in the child's life such as attaining a certain age.
6. The parties must not designate the payment in the agreement as not being alimony for federal tax purposes.
Based on the above criteria, it would appear that the payments would be alimony. However, because the divorce decree you sent is vague, it would be advisable to consult the attorneys who wrote the document to determine the true intent of the divorce decree.
Federal retiree tax
Q: On March 29, 1989, the U.S. Supreme Court ruled a state may not tax retired federal pay unless it also taxes retired state pay. The state of Virginia was to make a decision on its military retirees during this General Assembly session. It applies to taxpayers over age 55. Is there a state income subtraction for military retirees under age 55?
A: To qualify for a subtraction of all or part of your retirement income, you (or your spouse, if married) must be (1) age 55 or over on Jan. 1, 1990; and (2) your qualified retirement income (or your spouse's, if filing separately on the Virginia return) must be less than $40,001. Qualified retirement income includes pensions from the following:
1. Qualified pension, profit sharing and stock bonus plans.
2. Public employee pension plans, including military.
3. Deferred compensation plans for state and local employees and tax-exempt organizations.
4. Lump-sum distributions from qualified retirement plans.
5. Individual Retirement Accounts (IRAs) and similar qualified plans.
6. Annuities under Sections 403(a) or 403(b) of the Internal Revenue Code.
Therefore, there is not a state income subtraction for military retirees under age 55.
Answers to these tax questions were provided by members of the Roanoke Area chapter of the Virginia Society of Public Accountants.
Volunteering their services to help taxpayers are Bob Benson of Meeks, Benson & Associates in Rocky Mount; Maryanne McElmurray of Brown, Edwards & Co.; Steve Kluttz and Noha Melki of Young & Prickitt; Bob Elliott of Foti, Flynn & Lowen; John Lauer of KPMG Peat Marwick and Cindy Caraway of Dominion Bankshares.
by CNB