Report winnings as `other income'

Tax Talk

Tax Talk

March 27, 2007

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax advice column featuring three experts from the Hunt Valley accounting firm SC&H Group.

Can you explain how/when you have to report winnings from gambling?

- Theresa, Baltimore

Gambling winnings include winnings from lotteries, raffles and sweepstakes and proceeds from wagers. Gambling winnings from charity-sponsored events are also includable in gross income. On line 21 (other income) of Form 1040, you report your gross winnings less the cost of placing the related winning bet or wager. You cannot net gambling losses against gambling winnings. If you have gambling losses, you may be able to claim them as a miscellaneous itemized deduction on Schedule A, but only to the extent of gambling winnings. "Professional gamblers" have a different set of rules to follow.

Under what circumstances would I be subject to a 10 percent tax penalty on a distribution from a Health Savings Account? After all, I am using the distribution proceeds for paying medical bills.

- Bernie, Brooklyn, N.Y.

If the amounts paid are not for "qualified medical expenses," the amounts become taxable and are subject to a 10 percent penalty. Some examples may include cosmetic surgery, some types of insurance premiums, Medicare supplement insurance premiums and expenses that are not medical- or health-related. However, once an individual reaches the age of 65, the 10 percent penalty no longer applies.

Recently I had my taxes prepared by a tax professional. My wife and I filed jointly; however, I noticed that our return was less than it was when we were single. My wife claims "0" exemptions and I claim "1." We both tithe a minimum of 10 percent of our income and I have rental properties that I'm not making any money on right now. My contention is that with all the things we itemize, shouldn't our refund have been more? I wanted to know if it would be wise to have someone else review our return for mistakes? Also, how much should I expect to pay for someone to review our tax return?

- Amefika, Baltimore

Your tithing, rental activity and itemized activities all have deduction limitations based on your facts and circumstances. Additionally, the alternative minimum tax may be an issue on your return. Typically, when married taxpayers both work outside the home and their income is of similar amount, they encounter what is referred to as the "marriage penalty." This phrase describes the fact that the withholding tables do not take into account the other working spouse's income, which can create smaller refunds compared with your single-filing days.

If you have questions regarding the preparation of your return, I would start by asking the preparer to explain your issues on the return. This may solve your problems before consulting elsewhere. If you still have concerns, another firm would be able to review your return. Fees for reviewing your income tax return will vary by firm and the complexity of your return.

Which state will I owe state income taxes to? I started out living in New York in 2006 but took a job offer in Maryland in February. From February until May I lived with a relative in Maryland while still owning my home in New York. From May until November, I spent three nights a week with the same relative in Maryland and four nights a week with another relative in Pennsylvania. In November, my home sold in New York, and we bought a home in Maryland, which we immediately moved into. From February until November, our mail was forwarded to Pennsylvania, but our driver's licenses and other important documents still listed New York as our address. Taxes were withheld for New York from January until February, and for Maryland for the rest of the year.

- John, Bel Air

Although you established ties in Maryland by spending most of your time in Maryland and through your employment in Maryland, you still maintained a permanent residence in New York until you sold your home in November. If you had a spouse who stayed behind in New York while you were in Maryland from February to November, that also indicates that you did not abandon your domicile in New York until November.

You would be considered a part-year resident of Maryland for the 2006 tax year and would have to file Form 502 - Maryland Tax Return for Resident Individuals for the period of time you were domiciled in Maryland (from the time you sold your home in New York to the end of the year). You would also need to file Form IT-203 Nonresident and Part-Year Resident Income Tax Return for New York for the period from the beginning of the year until you sold your home in New York.

We moved our 95-year-old mother to our home so that we can care for her because of her declining health. For determining dependent status, publication 17 says "CERTAIN Social Security benefits are tax-exempt." Since Social Security is her only income, is this tax-exempt for determining her status as our dependent?

- Gladys, Reisterstown

Your mother should have received Form SSA, which has a worksheet ("Notice 703") on the back that will help you calculate whether any portion of her Social Security benefits are taxable. Since you indicated that your mother's only income is from Social Security, you would divide the amount in box 5 of Form SSA by two. Assuming your mother's filing status is single, all of her Social Security income would be tax-exempt if one-half of her Social Security income is $25,000 or less.

NEED HELP? To submit a question to the "Tax Talk" experts, go to baltimoresun.com/taxtalk

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