4th Annual Tax Thread - 2006

[Doboji]

HELP!!!!

Should I be in shovel money away panic mode?

Here's the deal:

1) I got married in October

2) My wife owns our condo, interest only mortgage ~1600/month

3) I cashed out ~15K stock options

4) My income = ~115K

5) Her Income = ~45K

I'm terrified that I'm going to find myself holding a nasty bill... how worried should I really be?

 

[DaveSimmons]

Child's Play question:

We donated by making purchases of goods (toys, games, etc.) at Amazon.com using wish lists for the children's hospitals.

Does this count as a cash donation, or a donation of goods? The goods were never in our possession, but the cash was paid to Amazon not to the hospitals.

 

[EagleKeeper]

Originally posted by: Doboji
HELP!!!!

Should I be in shovel money away panic mode?

Here's the deal:

1) I got married in October

2) My wife owns our condo, interest only mortgage ~1600/month

3) I cashed out ~15K stock options

4) My income = ~115K

5) Her Income = ~45K

I'm terrified that I'm going to find myself holding a nasty bill... how worried should I really be?

There is no way of knowing what the damage will be until you start crunching the numbers. Much will depend on your withholdings and the stock option profit.

Run the numbers and then decide if you need to lose sleep for the next 3 months.

The benefit is that you have a new wife to help ease the tension.

 

[EagleKeeper]

Originally posted by: DaveSimmons
Child's Play question:

We donated by making purchases of goods (toys, games, etc.) at Amazon.com using wish lists for the children's hospitals.

Does this count as a cash donation, or a donation of goods? The goods were never in our possession, but the cash was paid to Amazon not to the hospitals.

Those were goods that arrived from/by you to the destination.

 

[kevbot]

I've heard a few people speak of credits for contributions to IRA's. Can I get credit for contributions to my simple IRA or my Roth IRA?

 

[EagleKeeper]

Originally posted by: kevbot
I've heard a few people speak of credits for contributions to IRA's. Can I get credit for contributions to my simple IRA or my Roth IRA?

Simple IRA - reduces your taxable income at time of funding - taxable on withdrawal
Roth IRA holds investment money until withdrawn at retirement - then it is tax free.

 

[galperi1]

Hi,

In 2006, I have earned close to $7,100 in income from those "freebie" sites. The ones where you get x amount of referrals for a certain prize.

My question is how do I report this income? I am not sure if these companies will send me a 1099-MISC or if they just assume I will report the correct amount to the IRS.

Do I report all the income as income from box 3 of a 1099-MISC? Or do I need to just report all of the income under Line 21 - Other income on the 1040 not from a 1099? Also, are there any other tax considerations that I may be missing with these prizes?

Thanks for any help!

 

[kevbot]

quote:
Originally posted by: kevbot
I've heard a few people speak of credits for contributions to IRA's. Can I get credit for contributions to my simple IRA or my Roth IRA?


Simple IRA - reduces your taxable income at time of funding - taxable on withdrawal
Roth IRA holds investment money until withdrawn at retirement - then it is tax free.



Thanks. I'm sure I heard of a write-off or credit for contributions made in '06 to encourage people to participate in retirement plans. This is on the federal tax return, I beleive, and not related to what happens when I get old enough to withdraw from those accounts. Maybe I misunderstood, or I'm talking out of my butt.

 

[EagleKeeper]

Originally posted by: galperi1
Hi,

In 2006, I have earned close to $7,100 in income from those "freebie" sites. The ones where you get x amount of referrals for a certain prize.

My question is how do I report this income? I am not sure if these companies will send me a 1099-MISC or if they just assume I will report the correct amount to the IRS.

Do I report all the income as income from box 3 of a 1099-MISC? Or do I need to just report all of the income under Line 21 - Other income on the 1040 not from a 1099? Also, are there any other tax considerations that I may be missing with these prizes?

Thanks for any help!

You should use the Schedule C to report income of that amount.
You will be responsible for the SS taxes on that income as well.

Note: You can also attempt to expenses off some of that income by looking for items/cost/expeditures that are related/relevant to obtaining that income.

 

[EagleKeeper]

Originally posted by: kevbot

I've heard a few people speak of credits for contributions to IRA's. Can I get credit for contributions to my simple IRA or my Roth IRA?

Simple IRA - reduces your taxable income at time of funding - taxable on withdrawal
Roth IRA holds investment money until withdrawn at retirement - then it is tax free.

Thanks. I'm sure I heard of a write-off or credit for contributions made in '06 to encourage people to participate in retirement plans. This is on the federal tax return, I beleive, and not related to what happens when I get old enough to withdraw from those accounts. Maybe I misunderstood, or I'm talking out of my butt.

Based on age, the Federal government allows you to toss a little more that normal into the pot.

 

[Engineer]

I have a quarterly tax payment question. Because I was deemed to be an HCE (Highly compensated employee) for 2005, I received a large chunk of 401k money back in late 2006 for 2005. The withholdings on this money was only 10% (not a penalty as per IRS, I do not have to pay a penalty). To complicate things, my company warned me that the 2006 HCE overpayment will be returned by March of 2007, requiring me to file it on 2006 taxes. Because of the large amounts of money added to my income, my tax liability is now above $1,000, which generally is the penalty limit for the IRS.

However, if my company does not distribute the 2006 overpayment to me until after April 15th, 2007, my tax liability will drop as the 2006 overpayment can then be included in 2007 taxes.

Since it looks like I can make a payment until January 15th, 2007 for 2006's taxes, would that be advisable to make a $1,000 payment that would guarantee me to be under the $1,000 tax liability for 2006. If the 2006 401k money does not make it back early enough, this tax payment would then place me into the refund category.

I understand that the IRS allows exceptions to the penalty and I would assume that a late year (even into the next year) refund of overpayments to 401k plans for HCE reasons would quality for exemption from the penalty, but I hate to be grilled for the process.

Thoughts? Suggestions?

Thanks

 

[ShotgunSteven]

Is it true that the deadline for filing your taxes is only if you owe money, and you can file after the deadline if the government owes you money back?

 

[EagleKeeper]

Originally posted by: Engineer
I have a quarterly tax payment question. Because I was deemed to be an HCE (Highly compensated employee) for 2005, I received a large chunk of 401k money back in late 2006 for 2005. The withholdings on this money was only 10% (not a penalty as per IRS, I do not have to pay a penalty). To complicate things, my company warned me that the 2006 HCE overpayment will be returned by March of 2007, requiring me to file it on 2006 taxes. Because of the large amounts of money added to my income, my tax liability is now above $1,000, which generally is the penalty limit for the IRS.

However, if my company does not distribute the 2006 overpayment to me until after April 15th, 2007, my tax liability will drop as the 2006 overpayment can then be included in 2007 taxes.

Since it looks like I can make a payment until January 15th, 2007 for 2006's taxes, would that be advisable to make a $1,000 payment that would guarantee me to be under the $1,000 tax liability for 2006. If the 2006 401k money does not make it back early enough, this tax payment would then place me into the refund category.

I understand that the IRS allows exceptions to the penalty and I would assume that a late year (even into the next year) refund of overpayments to 401k plans for HCE reasons would quality for exemption from the penalty, but I hate to be grilled for the process.

Thoughts? Suggestions?

Thanks

A pre-emptive strike to protect yourself would be a lot better than the time and paperwork required to get forgiveness.

Another option would be to file your taxes as soon as possible and then do an ammeneded return when you get the 401K overpayment paperwork. This way would show that the 401K was an additional item that you were not "aware" of.

However, given the better of your 3 options, the prepayment would be the safest.

 

[EagleKeeper]

Originally posted by: ShotgunSteven
Is it true that the deadline for filing your taxes is only if you owe money, and you can file after the deadline if the government owes you money back?

You actually do not have to file if the government owes you money.

However, after 3 years have past, you will not be able to file for a past due refund.

 

[ShotgunSteven]

Originally posted by: EagleKeeper

Originally posted by: ShotgunSteven
Is it true that the deadline for filing your taxes is only if you owe money, and you can file after the deadline if the government owes you money back?

You actually do not have to file if the government owes you money.

However, after 3 years have past, you will not be able to file for a past due refund.

That's what I thought, though I wasn't sure of the cut-off point. Can you still file online for a past year, or do you have to do it via the mail?

 

[EagleKeeper]

Originally posted by: ShotgunSteven

Originally posted by: EagleKeeper

Originally posted by: ShotgunSteven
Is it true that the deadline for filing your taxes is only if you owe money, and you can file after the deadline if the government owes you money back?

You actually do not have to file if the government owes you money.

However, after 3 years have past, you will not be able to file for a past due refund.

That's what I thought, though I wasn't sure of the cut-off point. Can you still file online for a past year, or do you have to do it via the mail?

Most online access points (3rd party) shut down after the August deadline.

You then have to use snail mail.

 

[Nuriko]

Originally posted by: kevbot
I've heard a few people speak of credits for contributions to IRA's. Can I get credit for contributions to my simple IRA or my Roth IRA?

Yeap, there is a credit for qualified retirement savings contributions (reported on form 8880). You can check out IRS publication 590 or the form itself for the full details, but there are some limitations. If your AGI is over 25k (and you are claiming single filing status; the limits for head of household and married filing jointly are 37.5k and 50k, respectively), you can't take the credit. You also can't take the credit if you were born after 1/1/89, are claimed as a dependent on another's return for 2006 or were a full time student for 5 months during 2006.

 

[Engineer]

Originally posted by: EagleKeeper

Originally posted by: Engineer
I have a quarterly tax payment question. Because I was deemed to be an HCE (Highly compensated employee) for 2005, I received a large chunk of 401k money back in late 2006 for 2005. The withholdings on this money was only 10% (not a penalty as per IRS, I do not have to pay a penalty). To complicate things, my company warned me that the 2006 HCE overpayment will be returned by March of 2007, requiring me to file it on 2006 taxes. Because of the large amounts of money added to my income, my tax liability is now above $1,000, which generally is the penalty limit for the IRS.

However, if my company does not distribute the 2006 overpayment to me until after April 15th, 2007, my tax liability will drop as the 2006 overpayment can then be included in 2007 taxes.

Since it looks like I can make a payment until January 15th, 2007 for 2006's taxes, would that be advisable to make a $1,000 payment that would guarantee me to be under the $1,000 tax liability for 2006. If the 2006 401k money does not make it back early enough, this tax payment would then place me into the refund category.

I understand that the IRS allows exceptions to the penalty and I would assume that a late year (even into the next year) refund of overpayments to 401k plans for HCE reasons would quality for exemption from the penalty, but I hate to be grilled for the process.

Thoughts? Suggestions?

Thanks

A pre-emptive strike to protect yourself would be a lot better than the time and paperwork required to get forgiveness.

Another option would be to file your taxes as soon as possible and then do an ammeneded return when you get the 401K overpayment paperwork. This way would show that the 401K was an additional item that you were not "aware" of.

However, given the better of your 3 options, the prepayment would be the safest.

Thanks EagleKeeper!

Now the question of prepayment. I did not pay quarterly estimated payments this year as I did not expect to pay at all until the things changed in the last quarter of the year (because of the changes in my income from the overpayment of the 401k). Other than sending in the payment with the last quarterly voucher, is there anything special I need to consider? Trying to wade through the mountain of documents on the IRS site seems to suggest that not paying equal quarterly payments might cause issues or need special documentation. Any knowledge or advise on this?

Thanks again!


Edit: Well, I might have found my own answer in IRS Publication 505...

When To Start
You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods.

No income subject to estimated tax during first period. If you do not have income subject to estimated tax until a later payment period, you can make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. Table 2-2 shows the dates for making installment payments.

How much to pay to avoid penalty. To determine how much you should pay by each payment due date, see How To Figure Each Payment, later.

Since my spike in income was distributed after August 31st of 2006 (a date shown later in pub 505), and the rest is expected before April 15th of 2007, it looks like there isn't an issue with paying the estimated tax as one lump sum by Jan. 15th, 2007 (last quarterly payment). Does this seem right?

Also, should I make the estimated payment enough to cover the entire amount of tax that I think that I'll owe or just enough to get it under the $1,000 threshold? Since there is no penalty for $1,000 or less (IIRC), it would seem that if I expect to pay $1,800, a 4th quarter payment of $850 would take care of it? Thoughts?

 

[EagleKeeper]

I would recommended paying what is needed to avoid the penalty at a minimum. ($850)

Also determine what the additional funds will cause in terms of taxes owed.

If those 401K additional funds actually show up on time; they can be used to cover the extra tax bill on the 17th of April.

If the funds do not show up; then those funds will eventually get charged/used against the 2007 and you will just pay the rest of the tax bill on the 17th.

 

[Engineer]

Originally posted by: EagleKeeper
I would recommended paying what is needed to avoid the penalty at a minimum. ($850)

Also determine what the additional funds will cause in terms of taxes owed.

If those 401K additional funds actually show up on time; they can be used to cover the extra tax bill on the 17th of April.

If the funds do not show up; then those funds will eventually get charged/used against the 2007 and you will just pay the rest of the tax bill on the 17th.

Actually, I'm figuring the additional 401k funds in on the estimate that is about $1,800 owed. If they do not show up, I will most likely fall under the $1,000 taxes owed limit (About $400 owed instead of the $1,800) and not need to pay an estimated payment. If I pay the 4th quarter payment and the 2006 401k overpayment funds do not show up by April 17th, then I will get a refund of overpayment of about $400. Damn, now I see why people want a simplified tax system. I've read for several hours on this crap and it's still a headache.

The 4th quarter estimated payment would be a pre-emptive strike against the possible returned money from the 2006 overpayment of the 401k. If that money does show up, I'm somewhat covered with the estimated payment of taxes. If it doesn't, I get a refund. If I don't pay the estimated payment, it's a 50/50 shot that I could get hit depending on whether my company sends me the money by April 17th or not. *sigh*

I'm just trying my best to avoid paying a penalty or going through the grind with the IRS.

 

[EagleKeeper]

Pre-emptive strike for the win or to at least avoid the loss

 

[Sukhoi]

Got a couple questions here...probably won't know the answer to most of them but we'll see.

I was in college from January to May. This is the first year I haven't filed as a dependant of my parents. Can I use my tuition and/or rent payments to reduce my income for the year, or any other benefit? Also does it matter if any of the money came from one of those 529 college savings plans?

Since starting work in July I have put a whole lot of money into paying off student loans ahead of time. I'd have to add it up, but I think close to $16K during 2006. Can this be used to my advantage on my taxes?

My official residence is in Ohio, but I have worked and been paid in two separate counties in Kentucky. I have not worked at all in Ohio. How do I even begin to approach my state taxes? Also I'm pretty sure my Ohio county has lower taxes than either Kentucky county. And at my Ohio residence I do not have a city tax, while both Kentucky counties took city tax out of my pay check. Can I get any of that money back? Or am I stuck with that since I have to pay taxes for the county I worked in?

Thanks!

 

[EagleKeeper]

Tuition payments can be used as a percentage to reduce your taxable income.

Rent - No

Student loans are benifical in only of the interest paid.

Working in mulitple States will prevent uyour from using Tax S/W for your state taxes.

If you read the disclaimer in the OP, you will find that we can not assist you with State taxes.

 

[Sukhoi]

Cool, thank you.

 

[duragezic]

Amazing EagleKeeper that you have took your own free time and answered all of these people's questions for nothing in return.

Very nice of you!

And it's been like this for years! I know CPA did this a couple of years ago too... not sure where he is lately, but very good deed by both of you.