Taxable

Q. Last year, my landlord wanted me to vacate my apartment three months before my lease expired to make way for a long-term high-paying tenant. As an incentive to get me to leave, I was paid $3,000. Can I treat this payment as a tax-free gift or am I required to report it as taxable income?A. The $3,000 is fully taxable. Amounts received by a tenant for canceling a personal lease are taxed as capital gains -- at a maximum rate of 28 percent. In contrast, lease-cancellation payments paid from a tenant to a landlord are taxed as ordinary income at a maximum rate of 31 percent.

Last year, Jane Kuhl and her husband qualified for a state-run program that promised a 50 percent rebate to homeowners installing energy-saving insulation. The couple spent more than $6,700 plugging holes and insulating their Harford County farmhouse, which was originally built in the late 1800s. For their work, they received a 35 percent rebate from the state, along with a 15 percent rebate from their utility. Happy at first, they were later surprised and disappointed to find out that they owe income taxes on the $2,461 received from the state.

Q. I was reading Neil Downing's article ... in regard to the heading, "Some Social Security benefits are taxable," and he kind of highlighted a few things. However, I was hoping to go into more detail in this area, and I thought perhaps he has a brochure or something that could be mailed out ... in regard to income matched up with benefits and what's taxable and what isn't. - J.M., Easton, Pa. A. The Internal Revenue Service has several booklets that offer details on this tricky issue.

Market wrong model for public education Tom Neumark's column "Free Maryland teachers from unions" (Commentary, Dec. 9) should be labeled what it is - an argument for union-busting. His claims that teachers have "a right not to be represented," that they should individually negotiate contracts and that they should start companies that market education services to local districts are, in effect, a call for the privatization of schools and for an individualistic, entrepreneurial approach to education.

I received a payment from my mother's annuity life insurance policy (after she died) in August. I just wondered how much income tax I'd have to pay on this. It's a little over $500. It depends on what type of policy triggered the payment to you, said Robert J. Sclama, former head of the federal and state tax committee of the Rhode Island Society of Certified Public Accountants. For instance, if you were the beneficiary of your mother's life insurance policy, any death benefit you received would be free from federal income tax, he said.

If you're choosing investments for a taxable account, one of the easiest ways to boost your returns is to factor taxes into your selections. Today, I'll outline ways to find funds that should provide pleasing after-tax returns for many years to come. Consider a tax-managed fund. I'm always surprised when reporters ask me whether tax-managed funds are gimmicks. Taxes are very real, and so is their effect on fund investors' returns. Most stock-fund managers pay little heed to taxes, so making an effort to invest with one who does is likely to pay off. Tax-managed funds have consistently put up above-average after-tax returns.

I borrowed $4,500 from my 401(k) plan last year. Earlier this year my company cut me loose in a major downsizing. In addition to telling me I no longer have a job, my company told me I had to pay back my 401(k) loan within 60 days. Is that true? And what would happen if I decided not to pay back that $4,500? J.S., Baltimore You've accidentally discovered one major pitfall of borrowing from your 401(k) plan. Your employer, under the law, can require you to pay back the loan within 60 days if you've left the company for a new job; if your company lays you off to reduce costs; or if your company fires you for misconduct.

Retirement savers have been plowing money into foreign stocks, but experts say many are failing to consider taxes and how the investments fit within their overall plan. Foreign stock mutual funds accounted for $722 billion in workplace retirement accounts, including 401(k) plans, and in individual retirement accounts last year, says the Investment Company Institute, a mutual fund trade group, a more than 80 percent increase in just two years. As investors pile on, however, many fail to realize their foreign dividends are subject to tax, even though their money is sitting in tax-deferred retirement accounts.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.Q. My wife passed away in 1996. Can I file jointly this year? Also, I received a lump-sum payment -- the residue from her pension fund. Is that taxable?A. Normally, the determination of whether an individual is married is made as of the close of his taxable year, except when the spouse dies during the taxable year and the determination is made as of the time of death. Unless you have remarried in 1997, you cannot file a joint return because you were not married at the end of your taxable year.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions in advance of the April 17 filing deadline. I have been on full disability for the year. The only benefit I receive is from a disability insurance policy that was provided as a benefit by my employer, at no cost to me. I have applied for Social Security but have not been approved. Is the disability benefit taxable? If so, at the full rate? Compensation received under a policy of accident and health insurance paid by an employer for permanent injury or loss of bodily function is fully includable in gross income and taxable to the employee.

Retirement savers have been plowing money into foreign stocks, but experts say many are failing to consider taxes and how the investments fit within their overall plan. Foreign stock mutual funds accounted for $722 billion in workplace retirement accounts, including 401(k) plans, and in individual retirement accounts last year, says the Investment Company Institute, a mutual fund trade group, a more than 80 percent increase in just two years. As investors pile on, however, many fail to realize their foreign dividends are subject to tax, even though their money is sitting in tax-deferred retirement accounts.

Local property tax rates range considerably in Maryland, as anyone who's moved to and from Baltimore knows. You might not want to make homebuying decisions based on taxes alone, but it doesn't hurt to understand the differences beforehand. Check out the accompanying chart to see some comparisons: what you'd be paying in county and state property taxes this fiscal year if you bought the median-priced home in various jurisdictions in 2007, and what you'd be paying for a $300,000 house. (This assumes that your taxable assessed value is the same as your purchase price, which isn't always the case.

Editor's note: Every Sunday through the end of tax season, The Sun has run an edited transcript of Baltimoresun.com's weekly tax advice column featuring experts from the Sparks accounting firm SC&H Group who answered reader questions. This marks the final installment for this season. I worked as a paid high school basketball coach for the 2007-08 school year. Our season started Nov. 15, 2007, and ended in February. I received my lump sum coaching payment in March. I purchased basketball books from the beginning of the season until the end. Since I purchased the bulk of these books before Dec. 31 but received the check in March, can I write these off on my taxes?

Bills are piling up to the point where you dread opening your mailbox. If only your creditors would forgive your debt. Sometimes, they will -- but even then your money troubles might not disappear. Canceled debt in many cases is considered income -- taxable income. And if a creditor forgives thousands of dollars of debt, you can find yourself whacked by a big tax bill. And that is not the only consequence. Forgiven debt can raise your income to the point where you're ineligible for certain credits and tax deductions, or part of your Social Security benefits is taxed, says Bob Scharin, a senior tax analyst with Thomson Tax & Accounting.

Many fund investors will get an unpleasant surprise from their tax preparer this year, a bill for the distributions they got from their funds, even though those funds may have had a disappointing year. Year-end numbers for 2007 are not available yet, but it is clear that distributions will amount to a record of more than $500 billion. You read that right: a half-trillion dollars, nearly $100 billion more than in 2006, and that was the previous record. That means that $1 out of every $23 invested in funds today was recycled, passed back to the shareholder and, in most cases, back to the fund again, creating a tax liability along the way. By the time final numbers are available, investors with taxable fund accounts will have paid Uncle Sam more than $25 billion for the privilege of playing buy-and-hold in 2007.

Let's start with a confectionary confession: I like snacks. Friends have accused me of single-handedly - sometimes double-handedly - supporting the Little Debbie snack cakes empire. My family knows I hold a special place in my belly and heart for those creme-centered, round Goetze's caramels that my grandfather stowed in the little compartment between the car seats. I also have a weakness for Doritos. So imagine my visceral unease, figuratively and literally, to news that Maryland legislators are yet again considering a tax on snack foods.

For retirement savers looking to convert a traditional individual retirement account to a Roth IRA, patience will pay off. In 2010, the rules change for conversions, and until then there are a few things savers can do to prepare. The big winners in 2010 will be taxpayers with incomes above $100,000. Currently, they can't even convert to a Roth. If a taxpayer's annual adjusted gross income is also too high for contributing either to a traditional or Roth IRA (more than $166,000), he or she can make nondeductible contributions to a traditional IRA up to the annual limit ($4,000, or $5,000 if 50 or older)