Monday, March 27, 2000
Prize taxable at 'resale' value
BY AMY HIGGINS
The Cincinnati Enquirer
More tax questions from our readers, with answers courtesy of Crystal Faulkner, certified public accountant and partner in Cooney Faulkner & Stevens, downtown:
• I won a cruise that the contest people valued at $3,000. Other travel agents I've talked to have priced the trip much lower. Can I use one of the lower valuations as the amount I have to claim as income?
Prizes and awards made in goods or services must be included in your income at their fair market value. However, the Tax Court has taken special factors into account in determining fair market value of prizes and awards. It is the “resale” value at the time of receipt that is the determining factor as to how much of the
prize is taxable. The organization that provided the cruise will most likely provide you with a 1099, which includes the value that you will have to report on line 21 of your form 1040. If you think the information is incorrect, you should contact the organization issuing the 1099 so it can send a revised 1099 with the proper value of the award. If it is unwilling to reissue the 1099, you should attach a schedule showing the full amount reported on the 1099 reduced by the discount to bring the taxable amount to the resale value. You should have documentation supporting your claim that the value of the prize is overstated.
• If I didn't itemize last year, do I have to claim a state tax refund this year as income?
State tax refunds are not included in taxable income if you did not receive a tax deduction for the original payment.
• How do I report annuity distributions from my deceased out-of-state sister's estate?
If you are receiving taxable annuity distributions (from an annuity product), you should consult with a tax adviser to determine the amount of the distribution, which is taxable in your specific circumstance. These distributions should be reported to you on form 1099-R.
• I bought a new condo last year. Where do I deduct interest paid on it?
Interest that you paid on your home mortgage is reported on Form 1040, Schedule A, as an itemized deduction. Be sure to include any points that you may have paid to acquire your condo, as well. The points will show up on your closing statement. These are also deducted on Schedule A.
• I see you can deduct investment advisory fees. Does that apply to fees within an IRA? Does it matter whether the fee was paid with a check or deducted from the balance? Does it make a difference whether the fee included brokerage fees?
You can deduct an IRA trustee's administrative fees that are billed separately and that you paid in connection with your individual retirement arrangement. These fees are deductible as a miscellaneous deduction on Schedule A (Form 1040). The payment must be paid separately in order to be deductible.
• I settled a Bureau of Workers' Compensation case in February 1999. BWC settled for $15,000, and my employer settled for $13,000. I recently received from my employer a Form 1099. I thought the awards were not taxable.
Typically, workers' compensation is like an insurance payout and is indeed not taxable. The payment here, however, might have been for lost wages, which are taxable.
If the 1099 had the payment listed incorrectly, ask your em ployer to correct it. Because the IRS matches what your employer tells it with what you tell them, it's important to account for the payment on your 1040 if you don't get it corrected by April 17.
Without more information on this payment and the rest of your tax picture, the best advice is to check with a tax pro.
• Trees on my property were destroyed by last April's tornado. We paid $4,000 on tree replacement, but the appraisal of our home still went down $33,000. Can I claim that loss?
Yes. It's considered an uninsured loss. You'll need the appraisal to prove the loss. Then you'll need to subtract $100 and 10 percent of your income. The remaining amount is what you might be able to deduct. See a tax adviser or Publication 547, “Casualties, Disasters, and Thefts” for more details.
• Which of the Hope Credit or the Lifetime Learning Credit should I claim?
Typically, you claim one or the other, but not both. The Hope Credit is only claimable in the first two years of under graduate education. The Lifetime Learning can be taken through graduate school.
Which you should take depends on several factors, including your overall income. Get a Form 8863 and the instructions that go with it. Do the calculations for both and figure which would be more applicable and beneficial to you. And as always, a tax professional who can look at your overall tax picture is advised.
• The Department of Veterans Affairs sent me a letter Jan. 4 saying that it made an error in establishing my disability and awarded me 10 percent more from June 1990. How far back can I go to amend prior taxes?
You shouldn't have to amend anything. Payments like this are only taxable in the year you actually receive them. Therefore, if the VA is sending you a lump sum to make up for a previous shortfall, you would record it all next year on 2000 taxes. I'd also check with a tax adviser to make sure this doesn't affect some other part of your overall tax picture (i.e., put you in a new bracket or affect your eligibility for certain deductions).
• I filed a 1040EZ last year, and the only thing that changed is that I received a 1099-DIV for $50. Which should I file this year?
You'll likely want to file a 1040A. You can't file the 1040EZ if you have ordinary dividends, and the 1040A is easier than the 1040. Check out the eligibility requirements in the 1040 instructions or with a tax adviser in case there is some other reason you'd want to file a 1040.
• What should I do if I forgot to file state taxes for 1998?
File them right away. It's illegal to skip filing income taxes, whether they are federal or state. The sooner you get them in, the more you'll save on penalties and interest, and the possibility of being prosecuted.
You can get past years' forms for any state either from the state directly, or at www.1040.com.
• How do I know if the interest from my U.S. savings bonds is excludable from tax?
Typically, only savings-bond interest used to pay educational expenses is tax-exempt. Use a Form 8815 to figure your exclusion. Otherwise, interest on savings bonds is taxable in the year the bond is redeemed or the year it matures. You should receive a 1099-INT if you need to report anything. Also be aware that savings-bond interest may be excludable from state or local income.
• How do I report a loss on the sale of stock?
The same way you do on a gain. Put it on the appropriate place on a Schedule D. You then add your gains and subtract your losses to arrive at a net gain (or loss). This gets recorded on the 1040 line 13. Follow the directions carefully to determine the taxes owed. If this is the first time dealing with stock sales and a Schedule D, you may want to get guidance from a tax pro.
• I transferred money from one annuity to another, never actually taking the money. But I got a notice that the rollover was reported to the IRS. Do I have to pay tax?
Annuity rollovers typically are tax-free, but it really all depends on what kind of annuity you held and how the rollover was handled. Also, double-check that notice you received. It should specify how much was taxable. Take the form and your annuity paperwork to an accountant or other tax professional. They'll be able to tell you better.
• Should I change the basis of my stock based on cash dividends I've received?
No. Cash dividends generally don't affect your basis, but a stock dividend might. Only reinvested cash dividends, as through a dividend reinvestment plan (DRIP), add to your basis.
• What form do I need to fill out if I took money out of my 401(k) last year?
Retirement fund distributions get reported on the 1040, either lines 15 or 16. Check out Form 5329. Typically, you'll have to file one if you took early distributions and need to pay a penalty. The instructions accompanying the form (or a tax adviser) can help you figure out the details in your situation.
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