Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 7, 1994 TAG: 9403040253
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
When I figure his estimated taxes at the beginning of each year, I use filing status "married filing separately" for him for ease of doing the figures and since I am not self-employed. On the estimated tax worksheet, line 14b states "enter 100 percent of tax shown on your 1993 tax return." Generally I file our annual tax returns under the status "married filing jointly." So how do I determine the value for line 14b from our 1993 annual return considering the inclusion of my income on the 1993 return?
A: Line 14b of the 1994 estimated tax worksheet requires you to enter your total actual tax from your income tax return for the prior year. You avoid any underpayment penalties if you pay in, through withholding or estimated tax payments, 90 percent of your actual tax for the current year, 100 percent of your actual tax from the prior year or 110 percent of your actual tax from the prior year if your adjusted gross income is over $150,000.
Although your husband's actual tax from 1993 could be determined, you should complete the 1994 estimated tax worksheet according to your actual filing status, married filing jointly.
You should consider the total income and deductions of both you and your husband. From the expected tax on your joint taxable income, you should subtract your withholding. The remaining amount is your joint 1994 expected tax subject to estimated tax payments. However, if your joint actual tax liability for 1993 is less than your 1994 expected liability, you can pay that amount instead. Line 14b is your joint actual tax liability for 1993.
Answered by Fulton Galer of McLeod & Company.
Entering distribution
Q: When a tax-deferred annuity, originally issued by an insurance company, matures and is rolled over into another tax-deferred annuity with another insurance company, the original insurance company issues a form 1099-R showing the gross distribution. The block for taxable amount indicates "O," and the distribution code is 6, "Section 1035 exchange (a tax-free exchange of insurance contracts)."
This is not an IRA, SEP, Keogh or 401(k); there are no requirements that any amounts be withdrawn by a certain age of the insured; it is not a taxable transaction. Why is the form 1099-R sent to the IRS?
If the tax-free distribution must be entered on the individual's tax return, where?
A: You do not have a recognized gain or loss on the exchange of an annuity policy if the annuitant stays the same as under the original contract. If the exchange takes place within one insurance company, it is not required to issue a 1099-R if it keeps adequate records relating to the exchange. However, when the exchange is with another insurance company and the original issuing company distributes the contract amount to the new company, it will report this "distribution" to the Internal Revenue Service on form 1099-R.
Assuming that your transaction qualifies as a tax-free exchange, you should enter the gross distribution on form 1040, line 17a, and no amount on line 17b. Since you had no income tax withheld on the transaction, you do not have to attach the form 1099-R to your income tax return.
Answered by Patrick Budd of Budd, Ammen & Co.
Itemized deductions
Q: In regard to state taxes paid as an itemized deduction on the federal return, here are three questions:
1. On the federal return, are state tax estimates deducted in the year they are paid or for the year they are paid? For example, when the Virginia fourth-quarter 1993 declaration is paid in January 1994, is that amount included in the state taxes deducted on the 1993 federal return?
2. If one switches from itemized deductions to the standard deduction for tax year 1994 and there is a refund from the state of part of the 1993 state taxes paid, is the refund taxed on the federal return as 1993 income even though the overpayment may have been made in calendar 1994?
3. Are there any traps to watch for when switching from itemized deductions to standard, or vice versa?
A: To question 1, if you are a cash-basis taxpayer, you can deduct only those taxes paid during the calendar year for which you file a return. A fourth-quarter 1993 Virginia income tax estimate paid during January 1994 is deductible as a 1994 itemized deduction. You can deduct the tax only in the year you actually pay it.
2. State tax refunds are taxed under the tax benefit rule. If you did not derive a tax benefit from your prior year deduction, you do not have to include the amount you received this year in income. This happens when the standard deduction was used by the taxpayer in the previous year, the taxpayer was subject to the alternative minimum tax, or had credits that reduced the tax liability to zero.
3. Generally, you may choose the method that saves you the most taxes. However, you are not eligible for the standard deduction if you are married and filing a separate return and your spouse itemizes deductions, you are filing a tax return with a short tax year, or a nonresident or dual-status alien during the year. Dependents may have a limited standard deduction. There are higher standard deductions for taxpayers who are over age 65 or blind.
Cash-basis taxpayers can obtain a deduction for itemized deductions in one year and make use of the standard deduction in the next year by the proper timing of payments. "Bunching" of the deductible expenses in one year will result in a larger tax benefit over the two-year period than otherwise would have been available.
Answered by Gary Duerk of Brown, Edwards & Co.
Credit where due
Got question Feb. 14 pertaining to taxation of welfare benefits was answered by Robert Flynn of Foti, Flynn, Lowen & Co. The credit line was omitted.
by CNB