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CNN Live Saturday
Tax Time 5 Days Away, Are You Ready?
Aired April 10, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
HOLLY FIRFER, CNN ANCHOR: DOLLAR SIGNS straight ahead but first the latest developments. In the Mexican town of Nuevo Progresso near the U.S. border, search crews are picking through the rubble of two buildings destroyed in a massive explosion. Investigators say at least one person was killed. It's unclear how many others are injured.
President Bush says the U.S. will stay the course in Iraq. Speaking today during his weekly radio address, the president said the actions of Iraqi insurgents will not derail democracy for that country or it won't delay the June 30 date set for the end of U.S. occupation.
Meantime, on ground in Iraq, coalition troops trying to observe a ceasefire in Fallujah continue taking hits from Iraqi insurgents. Iraqi Governing Council members, Fallujah leaders and the leadership of anti-coalition forces continue discussions trying to bring calm to the besieged city.
And welcome to DOLLAR SIGNS, where we help you make the most of your money. Today hopefully we'll help you save some of it by explaining your options if you have not filed your taxes yet, and we'll outlook some taxes in the future.
Our Valerie Morris has some tips and the forms you'll need, so grab a pencil and a piece of paper.
(BEGIN VIDEOTAPE)
VALERIE MORRIS, CNN CORRESPONDENT (voice-over): If you haven't yet filed your tax return and don't want to be penalized, have you two choices, file now or request an extension. You can buy yourself four months. But if you owe money, you must pay something to Uncle Sam by April 15, even with an extension.
EVAN SNAPPER, YOHALEM GILLMAN & CO.: It's a requirement to pay, not to file. You can get an automatic extension until August 15 by just filing a 4868 extension request. But that's extending the filing. You still have to pay any taxes due by April 15.
MORRIS: If you don't have the money, the worst thing you could do is to neglect filing your return.
SNAPPER: If you're going to owe money, still file the return so you're not filing late or file the extension with the right numbers on it so you're not hitting the late-filing penalty. And that's the big one. MORRIS: The penalty for not filing on time is a monthly interest charge of 5 percent of the amount due. The penalty for not paying on time is only one-half of 1 percent of the amount due. Both penalties are capped at 25 percent of what you owe.
(on camera): But remember, filing taxes is a two-way street. If the IRS fails to get a taxpayer their refund within 45 days from the due date, Uncle Sam owes you and the deal is fair. You'll get 5 percent interest on the amount.
Valerie Morris, CNN Financial News, New York.
(END VIDEOTAPE)
FIRFER: To make sure you avoid the common pitfalls many last- minute filers face, we're going to tap into the expertise of our guests in New York, Donna Levalley is a tax attorney and the editor of J.K. Lasser's "Your Income Tax 2004"; and Marion Asnes is the senior editor of "Money" magazine. This month's issue offers no-nonsense tips for saving money and cutting your taxes.
Welcome to both of you. We appreciate your time today. First question, last minute tax filers, those procrastinators, what advice can you give to them, should they file an extension? Should they just be careful on their math if they're rushing? Marion, what do you say?
MARION ASNES, "MONEY" MAGAZINE: Well, you know, if you really think you have all your paperwork in hand and it's just a matter of sitting down and doing it, by all means, do it, better to get it over with. And do be careful. Get yourself out a nice calculator and make sure the numbers are correct, because you know, the number one reason that the IRS sends correspondence to us taxpayers questioning things on our return is because of math errors. So you know, check yourself.
FIRFER: OK. Donna, quickly to you, does filing an extension raise a red flag to the IRS? Are you more likely to be audited?
DONNA LEVALLEY, TAX ATTORNEY: No, there's no reason that an extension should raise any red flags. Large deductions, disproportionate with your income or sudden changes in your tax return from previous years is what raises those flags. Filing an extension, if you don't think you have all your paperwork, if you don't think that you're going to have enough time to do a good and complete job. But as the previous piece that you had aired said, filing an extension to file your return is not an extension to pay. And you have to make a good faith estimate of what you do owe and pay anything that you do owe.
FIRFER: Terrific. We've Michael from Maryland on the phone with a question about long-term care assurance. Hi, Michael.
CALLER: Hi.
FIRFER: Go ahead with your question.
CALLER: Is long-term care insurance deductible as a medical expense?
FIRFER: Marion, do you want to take that?
ASNES: You know, your health insurance is deductible as a medical expense only if you're self-employed. But that means health insurance, major medical and the like, it does not include long-term care insurance, I'm sorry to say.
FIRFER: And what about another phone call here, Patrick from Utica is on the phone with a question about a death in the family. Hi there, Patrick, what's your question?
CALLER: Hi, my mother passed away in June, and all total, I think her bank accounts and IRAs totaled about $55,000, the house is worth about $30,000. So I'm wondering, do I have to pay taxes on that? And what about -- she had worked for the first five months of that year, that is 2003, so I'm wondering, do I have to pay taxes on her income from that -- how does that work?
FIRFER: Donna, let's throw that one to you, go ahead.
LEVALLEY: Yes, you will have to file a tax return for her because she was working for that first part of the year. And she may be due a return, you don't know, based on what her income was and comparing that to her standard deduction, her personal exemption. So you're definitely going to want to file because like I said, you may have a refund coming. As far as having to pay anything on the estate, it doesn't sound like it rises to the level of a taxable estate. So fortunately for you, filling out the estate tax return is just going to be perfunctory in tying up those loose ends. But I don't believe you're going to be sending in a check if those figures check out.
FIRFER: OK. Moving topics over to depreciation on rental property, we have Lloyd from Racine on the phone. Good afternoon, Lloyd.
CALLER: Good afternoon, thank you. Yes, my question is on depreciation. We bought the duplex we live in in May of 2002. We claim the income of the other unit on Schedule E but we don't understand depreciation in order to reduce that income.
FIRFER: Marion, could you sort of spell that out for Lloyd?
ASNES: I think I'm going to throw this one over to Donna. . FIRFER: OK. Donna, go ahead. you take that one then.
LEVALLEY: Well, I think one of the places he may want to go, besides my tax guide, would be the IRS publication. It spells out exactly how many years he has to depreciate the property, the various conventions about when it was "put into service," and how that will reduce the deduction or the amount of depreciation deduction for the year. And so that's -- it's a little more complicated to say, I can't give you a figure without having that type of information. So I recommend you go to the IRS Web site, punch up that publication. But you will have some type of depreciation for the portion of the property that you're renting out to sort of offset the income that you've received.
FIRFER: I have a question for you, Donna, about what you can write off. What about clothing, makeup, things like that, that -- say you're in sales and you go to a meeting and you have to dress a certain way and look a certain way, can you write off most of your clothing or your hair dressing? You know, anything like that, or is that sort of one of those gray areas where you're better to be safe and sorry and don't write it off?
LEVALLEY: Unfortunately, the deduction for uniforms, so to speak, or what you're wearing while you work, is generally limited to uniforms or a type of clothing that can't be used in, say, your regular life. So I know plenty of my friends say, hey, I have lots of suits and I dry clean them, and I don't like to wear them on the weekend or after work, why can't I deduct them or depreciate them? But basically, I like to say, go back to the rule where you would not wear it in your regular life. There has been some exceptions. Las Vegas show girls with very gaudy evening gowns showed up at the audit saying, hey, would you wear this in your regular life?
(LAUGHTER)
FIRFER: I guess that's effective.
LEVALLEY: That is. And it...
FIRFER: Go ahead, Marion.
ASNES: I want to add one point to that, and that is that if you are an on-air personality, and I think that's kind of what you're asking about...
(LAUGHTER)
FIRFER: How sharp of you to notice.
ASNES: Yes. Well, if you are doing something specifically for an on-air appearance, such as getting your hair blown out before you go on air, then check with your tax accountant. That is something that very well may be deductible.
FIRFER: OK. We'll pick this conversation up in a minute and your calls and e-mails are next on DOLLAR $IGNS. And of course you can still send your questions to DollarSigns@CNN.com or call in, the number is 1-800-807-2620.
We'll be right back.
(COMMERCIAL BREAK)
FIRFER: Welcome back to DOLLAR $IGNS. We're talking about filing your taxes. Yes, April 15 is just a few days away. Tax attorney Donna Levalley and financial expert Marion Asnes are answering your questions.
I want to start out with an e-mail we have from George in Nashville, Tennessee. And George asks, he says: "My girlfriend and I have been living together for the past six months. What's the best way for us to file our taxes?" Donna, do you want to make a suggestion to him?
LEVALLEY: Well, I guess if the question is about filing status, they're not married under the rules of the federal government, so they're going to have to file separately as single people. There are some sticky situations about whether common law marriage counts, and it does. However, if he's talking about head of household issue, if one of them is the other one's dependent, there's this weird sort of stipulation in the federal rules of taxes whereas if your relationship violates local law, whereas certain times - certain places people are not allowed to cohabitate, you know, but not really enforced, the IRS doesn't have to recognize that and you won't be able to get head of household. But just living together doesn't give you the ability to file a joint return, so they will be filing as single people.
FIRFER: As if things aren't as confusing. Go ahead, Marion.
ASNES: Yes. What I was going to say is another thing that they have to watch out for is if they own their house, what kind of title is on the house. If only one has title and the mortgage, only that one person, considering that they'll be filing separately, will be able to enjoy the advantages of the mortgage deduction. So that's something for them to consider.
FIRFER: OK. We have Henry from Michigan on the phone about income averaging. What's your question then, Henry?
CALLER: OK. I'm going to be retiring this year and I'm -- well, I'm going to be drawing a sizable account from what I've put aside for retirement. And I was wondering how to best protect this next year. I was thinking of income averaging and how does that work?
LEVALLEY: Well, income averaging, unless you receive a lump sum distribution and you were born before 1939, which is, I'm not sure, really how this law came into effect and the stipulations. There is no income averaging anymore. There used to be. And income averaging still exists for fishermen and farmers. But for regular folks, unless it's some type of lump sum retirement distribution, there will be no income averaging available to you as an option.
ASNES: This is one of those situations where you really need to think about how you're going to manage that sum of money that you're going to be taking out of the pension. And one of the things -- if you don't already have some kind of rollover account that you can move that money into, this is something for you to talk to an expert, a financial planner about, because you don't want to be forced to pay taxes on all that money at one time. There are a lot of ways that you can forestall that. So you should look into it.
FIRFER: And Monique from Brooklyn is on phone with us. Hi, Monique. You have a question about child care.
CALLER: Yes, I do. My husband and I are considering filing jointly this year to take advantage of some of the child tax credits, but he has tax liability and I don't. I usually get a refund. And we're wondering if we should in fact file jointly or just go separately.
LEVALLEY: Well, unfortunately...
ASNES: Well...
LEVALLEY: Oh, go ahead.
FIRFER: Donna, you start.
ASNES: OK. Well, one of the things -- I'm sorry, go ahead, Donna.
LEVALLEY: Oh, no, it's OK -- the only way you'll be able to take advantage of these child tax credits and dependent care credits is if you file jointly. So you may want to consider that. You may actually do better. Some of the joint filing or marriage penalty provisions have been washed away, standard deduction is double that of a single person. The 15 percent bracket has no marriage penalty, but the child care credit, dependent care credit is only available to married people who file jointly.
ASNES: I also wanted to say that if you're married, that money is sort of coming in and out of the same pot. So it all is going to come out in the wash anyhow, so it doesn't really make that much of a difference. The big question is how you're going to be able to maximize the amount of money you get back or minimize the amount of money you pay. So you may want -- I know this is going to sound really horrible, but you might want to try filling out your returns both ways and see which one comes better. With the child care tax credit, that washes out when your income reaches a certain level. I don't remember, Donna, do you know exactly what the level is when that starts to fade away?
LEVALLEY: I think -- I believe it fades away at -- or end at about $110,000, just a gross income. So -- but I agree with you, unfortunately, it's a paperwork sort of problem or addition. But figuring it out both ways is sometimes the only way you can tell which is going to maximize your tax savings.
ASNES: Right, if you have a computer program like TurboTax or Quicken to figure out your taxes, that way you can try doing it both ways and see which is best, and then you know what to file.
FIRFER: Great advice. We have an e-mail from Monica from Westminster, Colorado, which asks: "My parents emigrated last year from Europe and live with us now. Basically they depend on us for everything. Can we count on them for taxes as our dependents?" Before you answer that, we have to take a quick break and we'll get to that right after the break. Stay right here.
(COMMERCIAL BREAK)
FIRFER: Welcome back to DOLLAR $IGNS. We're answering your last-minute tax questions. Donna Levalley and Marion Asnes are taking some of the guesswork out of it for you. And before the break, we left you with an e-mail from Monica in Westminster, Colorado. Let me read that to you again quickly: "My parents emigrated last year from Europe and now they live with us and basically they depend on us for everything. Can we count on them for taxes as our dependents?" If you have a parent that lives with you, can they be a dependent, Donna?
LEVALLEY: Yes, they can. They live with you, they're your parents and their income is less than the personal exemption amount, and for 2003, that's $3050, you can claim them. And Social Security, welfare benefits, doesn't count in adjusted gross income. So if you're basically supporting them, yes.
FIRFER: All right. Ron from Florida is on the phone, he has a question about sales over the Internet. Good afternoon, Ron. . CALLER: Good afternoon. I'm considering making a line or a series of videos that are just how-to videos and selling them on a Web site. And I was wondering, are the tax rules any different for selling things over the Internet?
ASNES: Right now, sales tax are in abeyance, you don't really have to pay state sales tax. But the government is asking people voluntarily to estimate that and send it in, so you'll have to really check in with the tax advisor.
FIRFER: OK. We have now John from Alabama on the phone. And John is behind several years on his taxes because of a serious illness. John, what is your question for our experts?
CALLER: My question is whether or not the online filing system is flexible enough where I can file these back taxes online?
LEVALLEY: Well, as far as I know, what the IRS offers through the free file is just for the current year. Whether or not software programs are available to accept online filing for previous years I'm not sure. You may want to check into that with the TurboTax or the Intuit companies.
ASNES: As far as I know, they're not. You can find -- you know, you can find programs for past years if you go say to eBay. But if you're several years behind, you should probably find a tax accountant -- an accountant, and have that accountant contact the IRS for you before the IRS comes after you, you'll do better that way.
FIRFER: OK, I have a question, if each of you could give us a brief answer. For those of us that have already paid our taxes this year, what tip can you give us for filing 2004's taxes next year that might help us out or save us some money? Donna, why don't you start.
LEVALLEY: I think you should start with this year's return, look at it, look where you've had your expenses, look where your deductions were generated, and mind those areas further. And I always recommend, if you're in the position, increase your contributions to your IRA, to your 401(k). They'll create more excludable income so it will lower your taxes. And if you have a flexible spending account, dependent care account care available, once again, you're going to lower your tax burden and also maybe make otherwise nondeductible expenses deductible through those tax planning vehicles.
FIRFER: And Marion, do you have a tip for us?
ASNES: I have two. One is keep the best records you can. Most of us underestimate, if we count on our memories to figure out what our deductions should be, we will underestimate. So make sure that you set up a good filing system for yourself. The second one, to follow up on Donna, put all the money into tax shelters that you legally can. And if you have self-employment income, remember that with that, you can also contribute to an SEP, a simplified employee plan or to a Keogh account which has a much more generous provision than an IRA.
FIRFER: And I think we have time for one more phone call from Sharon in Washington. Hi, Sharon, thanks for calling.
CALLER: Hi. I'm 65 years of age and disabled. And I am tax exempt. But last November, I got a line of credit on my paid-for home in order to get some necessary home improvements and to purchase a used vehicle. I've made some improvements to date but not in the amount of the line of credit. Will I have to pay taxes on money that I have used?
LEVALLEY: Well, because it's a loan and it's secured by your home, there shouldn't be any tax consequences to it. And if you're not paying any tax -- any income taxes, a deduction for any interest you may pay, I don't know what the terms of your line of credit, whether repayment begins when you use it. The deduction may not mean too much to you if you're not having any current income taxes.
ASNES: With that in mind, pay it off as soon as it's feasible for you because most people count on that deduction to make the home equity line more affordable.
FIRFER: We have an e-mail from Jacques in Blacklick, Ohio, who asks: "Can you claim closing escrow costs on your first year?" Good question. Marion?
ASNES: You can do that if you're buying this house for the first time. But you can't do it if you're refinancing. If you're refinancing, you have to take -- you have to deduct your closing -- your closing points over the life of the loan. So if you took a 30- year mortgage, you'd have to pay them out -- you'd have to deduct them over the 30 years.
FIRFER: And one quick question, Donna, what is the most common tax mistake that people make so we know what to avoid?
LEVALLEY: I think in addition to what was mentioned before, the math errors, incorrect or duplicate Social Security numbers. You have to make sure that they match-up and also use the name that's on record with the Social Security Administration. So if you've married or divorced, use the name that's on record with them, not the one that you may use in business. And also, overlooking more favorable filing status, widowers -- widow and widowers can basically claimed what's called "qualified widow status" and use the joint rates for the next two years. And also single filers may qualify for head of household status, which is a much more generous rate.
FIRFER: Great. Well, we're out of time, but we appreciate all of your advice, Donna, Marion, thanks for your time today.
LEVALLEY: Thanks for having me.
ASNES: Glad to be here.
FIRFER: Up next on "PEOPLE IN THE NEWS," it's Easter weekend and we have profiles of Billy Graham and Mel Gibson.
Then at 6 p.m. Eastern, we're going to go live to the car show in New York From the latest trends in gadgets to the newest hybrids.
And at 7 Eastern, "THE CAPITAL GANG." Tonight the gang talks about Condoleezza Rice's testimony and John Kerry's economic plan.
And Nic Robertson joins in live with an update on the hunt for Osama bin Laden. Headlines after this quick break.
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Aired April 10, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
HOLLY FIRFER, CNN ANCHOR: DOLLAR SIGNS straight ahead but first the latest developments. In the Mexican town of Nuevo Progresso near the U.S. border, search crews are picking through the rubble of two buildings destroyed in a massive explosion. Investigators say at least one person was killed. It's unclear how many others are injured.
President Bush says the U.S. will stay the course in Iraq. Speaking today during his weekly radio address, the president said the actions of Iraqi insurgents will not derail democracy for that country or it won't delay the June 30 date set for the end of U.S. occupation.
Meantime, on ground in Iraq, coalition troops trying to observe a ceasefire in Fallujah continue taking hits from Iraqi insurgents. Iraqi Governing Council members, Fallujah leaders and the leadership of anti-coalition forces continue discussions trying to bring calm to the besieged city.
And welcome to DOLLAR SIGNS, where we help you make the most of your money. Today hopefully we'll help you save some of it by explaining your options if you have not filed your taxes yet, and we'll outlook some taxes in the future.
Our Valerie Morris has some tips and the forms you'll need, so grab a pencil and a piece of paper.
(BEGIN VIDEOTAPE)
VALERIE MORRIS, CNN CORRESPONDENT (voice-over): If you haven't yet filed your tax return and don't want to be penalized, have you two choices, file now or request an extension. You can buy yourself four months. But if you owe money, you must pay something to Uncle Sam by April 15, even with an extension.
EVAN SNAPPER, YOHALEM GILLMAN & CO.: It's a requirement to pay, not to file. You can get an automatic extension until August 15 by just filing a 4868 extension request. But that's extending the filing. You still have to pay any taxes due by April 15.
MORRIS: If you don't have the money, the worst thing you could do is to neglect filing your return.
SNAPPER: If you're going to owe money, still file the return so you're not filing late or file the extension with the right numbers on it so you're not hitting the late-filing penalty. And that's the big one. MORRIS: The penalty for not filing on time is a monthly interest charge of 5 percent of the amount due. The penalty for not paying on time is only one-half of 1 percent of the amount due. Both penalties are capped at 25 percent of what you owe.
(on camera): But remember, filing taxes is a two-way street. If the IRS fails to get a taxpayer their refund within 45 days from the due date, Uncle Sam owes you and the deal is fair. You'll get 5 percent interest on the amount.
Valerie Morris, CNN Financial News, New York.
(END VIDEOTAPE)
FIRFER: To make sure you avoid the common pitfalls many last- minute filers face, we're going to tap into the expertise of our guests in New York, Donna Levalley is a tax attorney and the editor of J.K. Lasser's "Your Income Tax 2004"; and Marion Asnes is the senior editor of "Money" magazine. This month's issue offers no-nonsense tips for saving money and cutting your taxes.
Welcome to both of you. We appreciate your time today. First question, last minute tax filers, those procrastinators, what advice can you give to them, should they file an extension? Should they just be careful on their math if they're rushing? Marion, what do you say?
MARION ASNES, "MONEY" MAGAZINE: Well, you know, if you really think you have all your paperwork in hand and it's just a matter of sitting down and doing it, by all means, do it, better to get it over with. And do be careful. Get yourself out a nice calculator and make sure the numbers are correct, because you know, the number one reason that the IRS sends correspondence to us taxpayers questioning things on our return is because of math errors. So you know, check yourself.
FIRFER: OK. Donna, quickly to you, does filing an extension raise a red flag to the IRS? Are you more likely to be audited?
DONNA LEVALLEY, TAX ATTORNEY: No, there's no reason that an extension should raise any red flags. Large deductions, disproportionate with your income or sudden changes in your tax return from previous years is what raises those flags. Filing an extension, if you don't think you have all your paperwork, if you don't think that you're going to have enough time to do a good and complete job. But as the previous piece that you had aired said, filing an extension to file your return is not an extension to pay. And you have to make a good faith estimate of what you do owe and pay anything that you do owe.
FIRFER: Terrific. We've Michael from Maryland on the phone with a question about long-term care assurance. Hi, Michael.
CALLER: Hi.
FIRFER: Go ahead with your question.
CALLER: Is long-term care insurance deductible as a medical expense?
FIRFER: Marion, do you want to take that?
ASNES: You know, your health insurance is deductible as a medical expense only if you're self-employed. But that means health insurance, major medical and the like, it does not include long-term care insurance, I'm sorry to say.
FIRFER: And what about another phone call here, Patrick from Utica is on the phone with a question about a death in the family. Hi there, Patrick, what's your question?
CALLER: Hi, my mother passed away in June, and all total, I think her bank accounts and IRAs totaled about $55,000, the house is worth about $30,000. So I'm wondering, do I have to pay taxes on that? And what about -- she had worked for the first five months of that year, that is 2003, so I'm wondering, do I have to pay taxes on her income from that -- how does that work?
FIRFER: Donna, let's throw that one to you, go ahead.
LEVALLEY: Yes, you will have to file a tax return for her because she was working for that first part of the year. And she may be due a return, you don't know, based on what her income was and comparing that to her standard deduction, her personal exemption. So you're definitely going to want to file because like I said, you may have a refund coming. As far as having to pay anything on the estate, it doesn't sound like it rises to the level of a taxable estate. So fortunately for you, filling out the estate tax return is just going to be perfunctory in tying up those loose ends. But I don't believe you're going to be sending in a check if those figures check out.
FIRFER: OK. Moving topics over to depreciation on rental property, we have Lloyd from Racine on the phone. Good afternoon, Lloyd.
CALLER: Good afternoon, thank you. Yes, my question is on depreciation. We bought the duplex we live in in May of 2002. We claim the income of the other unit on Schedule E but we don't understand depreciation in order to reduce that income.
FIRFER: Marion, could you sort of spell that out for Lloyd?
ASNES: I think I'm going to throw this one over to Donna. . FIRFER: OK. Donna, go ahead. you take that one then.
LEVALLEY: Well, I think one of the places he may want to go, besides my tax guide, would be the IRS publication. It spells out exactly how many years he has to depreciate the property, the various conventions about when it was "put into service," and how that will reduce the deduction or the amount of depreciation deduction for the year. And so that's -- it's a little more complicated to say, I can't give you a figure without having that type of information. So I recommend you go to the IRS Web site, punch up that publication. But you will have some type of depreciation for the portion of the property that you're renting out to sort of offset the income that you've received.
FIRFER: I have a question for you, Donna, about what you can write off. What about clothing, makeup, things like that, that -- say you're in sales and you go to a meeting and you have to dress a certain way and look a certain way, can you write off most of your clothing or your hair dressing? You know, anything like that, or is that sort of one of those gray areas where you're better to be safe and sorry and don't write it off?
LEVALLEY: Unfortunately, the deduction for uniforms, so to speak, or what you're wearing while you work, is generally limited to uniforms or a type of clothing that can't be used in, say, your regular life. So I know plenty of my friends say, hey, I have lots of suits and I dry clean them, and I don't like to wear them on the weekend or after work, why can't I deduct them or depreciate them? But basically, I like to say, go back to the rule where you would not wear it in your regular life. There has been some exceptions. Las Vegas show girls with very gaudy evening gowns showed up at the audit saying, hey, would you wear this in your regular life?
(LAUGHTER)
FIRFER: I guess that's effective.
LEVALLEY: That is. And it...
FIRFER: Go ahead, Marion.
ASNES: I want to add one point to that, and that is that if you are an on-air personality, and I think that's kind of what you're asking about...
(LAUGHTER)
FIRFER: How sharp of you to notice.
ASNES: Yes. Well, if you are doing something specifically for an on-air appearance, such as getting your hair blown out before you go on air, then check with your tax accountant. That is something that very well may be deductible.
FIRFER: OK. We'll pick this conversation up in a minute and your calls and e-mails are next on DOLLAR $IGNS. And of course you can still send your questions to DollarSigns@CNN.com or call in, the number is 1-800-807-2620.
We'll be right back.
(COMMERCIAL BREAK)
FIRFER: Welcome back to DOLLAR $IGNS. We're talking about filing your taxes. Yes, April 15 is just a few days away. Tax attorney Donna Levalley and financial expert Marion Asnes are answering your questions.
I want to start out with an e-mail we have from George in Nashville, Tennessee. And George asks, he says: "My girlfriend and I have been living together for the past six months. What's the best way for us to file our taxes?" Donna, do you want to make a suggestion to him?
LEVALLEY: Well, I guess if the question is about filing status, they're not married under the rules of the federal government, so they're going to have to file separately as single people. There are some sticky situations about whether common law marriage counts, and it does. However, if he's talking about head of household issue, if one of them is the other one's dependent, there's this weird sort of stipulation in the federal rules of taxes whereas if your relationship violates local law, whereas certain times - certain places people are not allowed to cohabitate, you know, but not really enforced, the IRS doesn't have to recognize that and you won't be able to get head of household. But just living together doesn't give you the ability to file a joint return, so they will be filing as single people.
FIRFER: As if things aren't as confusing. Go ahead, Marion.
ASNES: Yes. What I was going to say is another thing that they have to watch out for is if they own their house, what kind of title is on the house. If only one has title and the mortgage, only that one person, considering that they'll be filing separately, will be able to enjoy the advantages of the mortgage deduction. So that's something for them to consider.
FIRFER: OK. We have Henry from Michigan on the phone about income averaging. What's your question then, Henry?
CALLER: OK. I'm going to be retiring this year and I'm -- well, I'm going to be drawing a sizable account from what I've put aside for retirement. And I was wondering how to best protect this next year. I was thinking of income averaging and how does that work?
LEVALLEY: Well, income averaging, unless you receive a lump sum distribution and you were born before 1939, which is, I'm not sure, really how this law came into effect and the stipulations. There is no income averaging anymore. There used to be. And income averaging still exists for fishermen and farmers. But for regular folks, unless it's some type of lump sum retirement distribution, there will be no income averaging available to you as an option.
ASNES: This is one of those situations where you really need to think about how you're going to manage that sum of money that you're going to be taking out of the pension. And one of the things -- if you don't already have some kind of rollover account that you can move that money into, this is something for you to talk to an expert, a financial planner about, because you don't want to be forced to pay taxes on all that money at one time. There are a lot of ways that you can forestall that. So you should look into it.
FIRFER: And Monique from Brooklyn is on phone with us. Hi, Monique. You have a question about child care.
CALLER: Yes, I do. My husband and I are considering filing jointly this year to take advantage of some of the child tax credits, but he has tax liability and I don't. I usually get a refund. And we're wondering if we should in fact file jointly or just go separately.
LEVALLEY: Well, unfortunately...
ASNES: Well...
LEVALLEY: Oh, go ahead.
FIRFER: Donna, you start.
ASNES: OK. Well, one of the things -- I'm sorry, go ahead, Donna.
LEVALLEY: Oh, no, it's OK -- the only way you'll be able to take advantage of these child tax credits and dependent care credits is if you file jointly. So you may want to consider that. You may actually do better. Some of the joint filing or marriage penalty provisions have been washed away, standard deduction is double that of a single person. The 15 percent bracket has no marriage penalty, but the child care credit, dependent care credit is only available to married people who file jointly.
ASNES: I also wanted to say that if you're married, that money is sort of coming in and out of the same pot. So it all is going to come out in the wash anyhow, so it doesn't really make that much of a difference. The big question is how you're going to be able to maximize the amount of money you get back or minimize the amount of money you pay. So you may want -- I know this is going to sound really horrible, but you might want to try filling out your returns both ways and see which one comes better. With the child care tax credit, that washes out when your income reaches a certain level. I don't remember, Donna, do you know exactly what the level is when that starts to fade away?
LEVALLEY: I think -- I believe it fades away at -- or end at about $110,000, just a gross income. So -- but I agree with you, unfortunately, it's a paperwork sort of problem or addition. But figuring it out both ways is sometimes the only way you can tell which is going to maximize your tax savings.
ASNES: Right, if you have a computer program like TurboTax or Quicken to figure out your taxes, that way you can try doing it both ways and see which is best, and then you know what to file.
FIRFER: Great advice. We have an e-mail from Monica from Westminster, Colorado, which asks: "My parents emigrated last year from Europe and live with us now. Basically they depend on us for everything. Can we count on them for taxes as our dependents?" Before you answer that, we have to take a quick break and we'll get to that right after the break. Stay right here.
(COMMERCIAL BREAK)
FIRFER: Welcome back to DOLLAR $IGNS. We're answering your last-minute tax questions. Donna Levalley and Marion Asnes are taking some of the guesswork out of it for you. And before the break, we left you with an e-mail from Monica in Westminster, Colorado. Let me read that to you again quickly: "My parents emigrated last year from Europe and now they live with us and basically they depend on us for everything. Can we count on them for taxes as our dependents?" If you have a parent that lives with you, can they be a dependent, Donna?
LEVALLEY: Yes, they can. They live with you, they're your parents and their income is less than the personal exemption amount, and for 2003, that's $3050, you can claim them. And Social Security, welfare benefits, doesn't count in adjusted gross income. So if you're basically supporting them, yes.
FIRFER: All right. Ron from Florida is on the phone, he has a question about sales over the Internet. Good afternoon, Ron. . CALLER: Good afternoon. I'm considering making a line or a series of videos that are just how-to videos and selling them on a Web site. And I was wondering, are the tax rules any different for selling things over the Internet?
ASNES: Right now, sales tax are in abeyance, you don't really have to pay state sales tax. But the government is asking people voluntarily to estimate that and send it in, so you'll have to really check in with the tax advisor.
FIRFER: OK. We have now John from Alabama on the phone. And John is behind several years on his taxes because of a serious illness. John, what is your question for our experts?
CALLER: My question is whether or not the online filing system is flexible enough where I can file these back taxes online?
LEVALLEY: Well, as far as I know, what the IRS offers through the free file is just for the current year. Whether or not software programs are available to accept online filing for previous years I'm not sure. You may want to check into that with the TurboTax or the Intuit companies.
ASNES: As far as I know, they're not. You can find -- you know, you can find programs for past years if you go say to eBay. But if you're several years behind, you should probably find a tax accountant -- an accountant, and have that accountant contact the IRS for you before the IRS comes after you, you'll do better that way.
FIRFER: OK, I have a question, if each of you could give us a brief answer. For those of us that have already paid our taxes this year, what tip can you give us for filing 2004's taxes next year that might help us out or save us some money? Donna, why don't you start.
LEVALLEY: I think you should start with this year's return, look at it, look where you've had your expenses, look where your deductions were generated, and mind those areas further. And I always recommend, if you're in the position, increase your contributions to your IRA, to your 401(k). They'll create more excludable income so it will lower your taxes. And if you have a flexible spending account, dependent care account care available, once again, you're going to lower your tax burden and also maybe make otherwise nondeductible expenses deductible through those tax planning vehicles.
FIRFER: And Marion, do you have a tip for us?
ASNES: I have two. One is keep the best records you can. Most of us underestimate, if we count on our memories to figure out what our deductions should be, we will underestimate. So make sure that you set up a good filing system for yourself. The second one, to follow up on Donna, put all the money into tax shelters that you legally can. And if you have self-employment income, remember that with that, you can also contribute to an SEP, a simplified employee plan or to a Keogh account which has a much more generous provision than an IRA.
FIRFER: And I think we have time for one more phone call from Sharon in Washington. Hi, Sharon, thanks for calling.
CALLER: Hi. I'm 65 years of age and disabled. And I am tax exempt. But last November, I got a line of credit on my paid-for home in order to get some necessary home improvements and to purchase a used vehicle. I've made some improvements to date but not in the amount of the line of credit. Will I have to pay taxes on money that I have used?
LEVALLEY: Well, because it's a loan and it's secured by your home, there shouldn't be any tax consequences to it. And if you're not paying any tax -- any income taxes, a deduction for any interest you may pay, I don't know what the terms of your line of credit, whether repayment begins when you use it. The deduction may not mean too much to you if you're not having any current income taxes.
ASNES: With that in mind, pay it off as soon as it's feasible for you because most people count on that deduction to make the home equity line more affordable.
FIRFER: We have an e-mail from Jacques in Blacklick, Ohio, who asks: "Can you claim closing escrow costs on your first year?" Good question. Marion?
ASNES: You can do that if you're buying this house for the first time. But you can't do it if you're refinancing. If you're refinancing, you have to take -- you have to deduct your closing -- your closing points over the life of the loan. So if you took a 30- year mortgage, you'd have to pay them out -- you'd have to deduct them over the 30 years.
FIRFER: And one quick question, Donna, what is the most common tax mistake that people make so we know what to avoid?
LEVALLEY: I think in addition to what was mentioned before, the math errors, incorrect or duplicate Social Security numbers. You have to make sure that they match-up and also use the name that's on record with the Social Security Administration. So if you've married or divorced, use the name that's on record with them, not the one that you may use in business. And also, overlooking more favorable filing status, widowers -- widow and widowers can basically claimed what's called "qualified widow status" and use the joint rates for the next two years. And also single filers may qualify for head of household status, which is a much more generous rate.
FIRFER: Great. Well, we're out of time, but we appreciate all of your advice, Donna, Marion, thanks for your time today.
LEVALLEY: Thanks for having me.
ASNES: Glad to be here.
FIRFER: Up next on "PEOPLE IN THE NEWS," it's Easter weekend and we have profiles of Billy Graham and Mel Gibson.
Then at 6 p.m. Eastern, we're going to go live to the car show in New York From the latest trends in gadgets to the newest hybrids.
And at 7 Eastern, "THE CAPITAL GANG." Tonight the gang talks about Condoleezza Rice's testimony and John Kerry's economic plan.
And Nic Robertson joins in live with an update on the hunt for Osama bin Laden. Headlines after this quick break.
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