Question: My wife and I withdrew $3,500 from my daughter's mutual fund for her high school tuition. We deposited the check into our account and then wrote a check to the school. My wife is the custodian on the account, and we claim my daughter as a dependent. The mutual fund company sent a 1099-B. Do we have to report this as a capital gain on our return?

        Answer: Generally, income from investments such as mutual funds in the form of dividends, capital gains, etc. are reported on your daughter's income tax return. Since she is 14, she is not subject to the “kiddie tax” and is only required to file a return if her gross income exceeds $700. If the funds from a custodial account are used for a child's support, then the income may be taxable to the parent rather than the child.

Claiming dependents

        Q: I have a blended family and was told if I supply more than 50 percent of the support to a dependent I can then claim that dependent on my income tax return. In my divorce decree, it outlines who can claim each dependent in each year. If I am providing more than half the support, can I claim the dependency exemption even if the divorce decree states otherwise?

        A: The divorce decree overrides the 50 percent test; therefore, you are not able to claim the exemption for those years in which you are not entitled under the agreement.

More on dependents

        Q: My fiancee and I bought our first house last year. She doesn't pay taxes, for she is disabled. She has a son who lives with us. Her ex-husband pays child support and claims him on his taxes. Is there any way I could get some kind of credit for him since I raise him and pay for his needs?

        A: In order to claim an exemption for a dependent, her son must have lived with you the entire year as a member of your household since you are not married. In addition, you must provide more than half of the support during the calendar year to claim the exemption. If the divorce decree allows her ex-husband to claim the exemption, you will not be eligible to benefit. If her son qualifies as a dependent, you may wish to consider filing Head of Household status. See Internal Revenue Service Publication 501 for more information on exemptions, standard deductions and filing information available at www.irs.gov.

Opening an SEP

        Q: I was self-employed for the first half of 2000 and was employed by a corporation in the second half, but not allowed to participate in their 401(k) plan. Can I open an SEP-IRA based on my income for the entire year?

        A; Only the amount of earned income for the first half of the year may be considered for SEP purposes.

Reporting property sale

        Q: I received a 1099-S on vacant residential land I sold. Do I claim this in capital gains? I also sold an apartment in a different county that was not part of the land. I did not receive a 1099-S on this transaction. Should I have?

        A: Regardless of whether a 1099-S was received or not, you must report any gains or losses from the sale of both properties on your individual income tax return in the year sold. If the land was held as investment property, the gain or loss should be reported on Schedule D and be classified as short-term or long-term depending on the holding period. The sale of the rental property should be reported on Form 4797. For more information, you may wish to consult IRS Publication 544, Sales and Other Dispositions of Assets, available online at www.irs.gov.

        — Compiled by Amy Higgins

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