Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 30, 1995 TAG: 9502010010
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
A: Any prize from the Virginia State Lottery is taxable as gambling winnings under the Internal Revenue Code. The amount of federal and Virginia taxes you paid at the time of collecting the winnings was income tax withholding similar to tax withholding from an employee's paycheck. The withholding may or may not cover your total tax liability. This will depend upon any other sources of income, deductions and tax withholding you may have.
The Virginia State Lottery should provide you with Form W-2G that reports the taxable amount of your winnings and the amount of the federal and Virginia income tax withheld.
The amount of your winnings should be reported on line 21 of Form 1040. (You will not be eligible to use Form 1040A or Form 1040EZ for 1994.) On this line you will need to describe the income as ``Lottery Winnings.'' This amount will then become part of your total income for 1994.
The federal withholding is reported as income tax withheld on Form 1040, along with any withholding shown on your W-2, and it becomes a credit against your actual federal tax liability.
The Virginia tax withholding is also added to the Virginia withholding on your W-2 and is used as a credit against your 1994 Virginia income tax liability as computed on Form 760.
Also, if you itemize your deductions, the Virginia withholding reported on Form W-2G should be added to any other state income taxes reported on line 5 of Schedule A and any gambling losses that can be substantiated may be shown on line 28, as long as they do not exceed the gambling winnings reported on line 21 of Form 1040.
- Answered by Allen Spell of Brown, Edwards & Co..
Q: I built a specialized house designed for the handicapped, which I am. I had the building contractor build some things, and I purchased some products separately for the handicapped. Can I get some kind of credit or deduction for the expenses? For example, my contractor gave the specially designed bathroom a price of $20,000, which was built into the price of the house. I also spent $15,000 for an elevator which I bought separately. Is there some way I can get some credit or deduction for these kinds of expenses?
A: Costs incurred for elevators and other permanent improvements to a residence to accommodate a physically handicapped individual may be deductible medical expenses if the primary purpose is for the medical care or convenience of the handicapped taxpayer, his spouse or dependents.
However, the medical deduction is limited to that portion of the expense that exceeds the amount by which the improvement increases the value of the taxpayer's property. For example, if you can establish that the elevator and specially designed bathroom, which cost a total of $35,000, only increased your property value by $20,000, then your medical deduction would be $15,000.
Some expenses incurred by or for a physically handicapped individual to remove structural barriers in a residence (for example, constructing access ramps, widening doorways and installing special support bars) are presumed not to increase the value of a residence and may be deductible in full.
In addition, costs of equipment that are related only to the handicapped person and are detachable from the residence are not permanent improvements, so their full cost may also be a medical deduction. Examples are detachable inclines and air conditioners.
No tax credit is allowed for the above described expenditures. However, by completing Form 1040, Schedule A, you will be able to determine your allowable medical deductions, as well as your other ``itemized'' deductions, which are available to minimize taxable income.
- Answered by David Lucas of Lucas & Boatwright.
Q: Do the IRS Code and state tax authorities consider a vacation home, held over one year's duration, as being a capital asset? Consequently, will the gain or loss from the sale of a vacation home be treated as a capital gain or loss vs. ordinary income or ordinary loss?
A: You do not define the term ``vacation home'' in your question. For purposes of the tax code, a vacation home can be a second home which is considered a personal asset, or it can be a dual-use dwelling unit, which is considered both a personal and a business asset.
A dwelling used exclusively as a home, or which has been rented less than 15 days in any year, is considered a personal asset. Any gain on the sale of these types of vacation homes is capital gain and is reported on Schedule D of an individual's tax return. Any loss is nondeductible, as the tax code prohibits the deduction of losses on personal use assets.
A dwelling which experienced dual use during its holding period continues its dual nature in disposition. For tax purposes, the disposition is divided between a personal component and a business component. Any gain or loss on the personal component follows the rule discussed above: Any gain is capital in nature, and any loss is nondeductible.
Gain or loss on the business component is reportable, but the characterization as ordinary or capital is determined by complex rules that apply to dispositions of assets subject to depreciation. IRS Form 4797 is used to comply with these rules, and it determines the amount and character of gains and losses on depreciable assets.
IRS publication 527, ``Residential Rental Property (Including Rental of Vacation Homes),'' contains an excellent discussion of the sale of dual-use rental property on pages 19-23. A copy of this publication is available for use at most public libraries, or it can be obtained from an IRS office.
You also inquired into the treatment of vacation homes for Virginia tax purposes. As Virginia's tax law generally ``piggy backs'' the Internal Revenue Code, the federal treatment of the sale would also apply for Virginia reporting.
- Answered by Mary Anne M. McElmurray of Brown, Edwards & Co.
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 10. Please send your questions to Tax Questions, Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB