Complicated tax code often leaves taxpayers at a loss when preparing their returns

Frequently asked tax questions

April 03, 2011|By Eileen Ambrose, The Baltimore Sun

Nearly half of taxpayers have yet to file their federal tax returns, although the deadline is just about two weeks away.

Many of them are holding off to the last minute because they owe taxes, of course. But some likely are waiting for answers.

The U.S. tax code grows more complicated each year, often leaving taxpayers uncertain about whether they qualify for deductions or not. And a bumpy economy has left many taxpayers yearning for bigger refunds. So this year tax professionals say they are fielding more questions than ever about debt, the homebuyer credit, Roth IRA conversions and any obscure deductions filers could be overlooking.

Here are some frequently asked tax questions this season:

Can I deduct that? Money is so tight that taxpayers are trying to take advantage of every imaginable deduction, says Robin McKinney, director of the Maryland CASH Campaign, which provides free tax preparation for low- to moderate-income filers.

"They're starting to ask for some things that are squirrelly," she says.

Can you deduct a dog's medical bills? Is the mileage driving from home to work deductible? Can street clothes worn to the office be written off?

"No. No. No," McKinney says.

(You can deduct the cost of work uniforms and mileage if you use the car on the job, provided your employer doesn't reimburse you. But Fido is not a deduction.)

"Most of the time, if they ask if they can deduct something, the answer is no," McKinney says.

Why is my refund less this year? Many financially struggling workers adjusted their tax withholdings last year so they could receive more money in their paychecks, McKinney says.

Now, she says, they wonder why their refund is lower this season — or worse, why they owe taxes to Uncle Sam.

Generally, if you're getting fat refunds year after year, you should reduce your tax withholdings using Form W-4. Otherwise, you're giving the government an interest-free loan. But lower withholdings too much, and you could end up owing money when you file.

To figure out the correct amount of withholdings, use the W-4 calculator at IRS.gov. You can adjust withholdings at any time by submitting a new W-4 to your employer.

Do I have to repay the homebuyer credit? With more than one version of the first-time homebuyer credit written into the federal tax code, there is a lot of confusion. "It's the most Frankenstein, quilt-patched piece of legislation ever," says Mark Steber, chief tax officer of Jackson Hewitt Tax Service.

Homeowners who got the $7,500 credit in 2008 must repay it — at a rate of $500 a year — starting with this tax season. The IRS has been slow at handling returns with repayments, and the taxpayers due refunds complain they have been waiting months to get their money, Steber says.

If you received the $8,000 credit in 2009 and 2010, you don't have to repay it unless you sell the house within three years.

But many couples who claimed the $8,000 credit in the past two years have since split. In fact, the most frequent tax question on our Consuming Interests blog is whether the credit must be repaid after a divorce.

"That homebuyer credit has been difficult for the IRS because of all the life changes," says Kathy Pickering, executive director of The Tax Institute at H&R Block.

Block has been advising clients on what happens to the credit after a divorce, Pickering says. The answer isn't always simple and may depend on the divorce settlement, she says.

"Those are the kind of things you should work with your tax adviser on," she says.

Will I pay tax on forgiven credit card debt? Debt collectors report forgiven debt to the IRS.

"Even if [consumers] didn't have to repay the debt, they have to pay taxes on it," Pickering says.

My elderly mom lives with me. Tax break? H&R Block says 16 percent of U.S. families have at least two adult generations under the same roof.

If you have an elderly parent or adult child living with you at home, you may be able to claim a $3,650 "qualifying relative exemption." The parent or adult child, however, must have less than $3,650 in taxable income, and you must provide more than half their support, Pickering says.

Where's my refund? The average refund is $2,985, so it's understandable that taxpayers are eager to get their hands on it.

File a paper return, and you'll usually get a refund in six to eight weeks, says Jim Dupree, the IRS spokesman in Baltimore. File electronically and have the refund directly deposited in the bank, and you'll get the money in as little as 10 days.

You can check the status of your refund at "Where's My Refund?" at IRS.gov. Or call 800-829-1954. You must provide your Social Security number, the amount of the refund and your filing status.

(More than 25,000 Marylanders have $27.7 million in refunds that weren't claimed in 2007. If they don't file for the refund by the April 18 deadline, the Treasury Department keeps the money.)

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