Tax return questions answered by WalletPop experts
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Mar 18th 2010 1:30PM
Updated Mar 18th 2010 3:49PM
There's less than one month to go before April 15. In your rush to get in your tax returns, beware of phishing, hiding income, and going all crazy on your charitable deductions. If you're relying on a professional, check his credentials, as shady preparers can ring up huge tax bills for you. These are just some of the top 12 mistakes the Internal Revenue Service is warning about in its list of "Dirty Dozen" Tax Scams. To help, WalletPop experts are on hand to answer your questions, from taxes on annual leave to what to do you if you suspect IRA fraud.
Question: I have a 21-year-old daughter in prison. I am sending her $100 a month and other supplies, like bras, panties, shoes, deodorant and thermal underwear. Can I claim her on my taxes as a dependent?
--Anthony
Answer from Barbara Weltman of The J.K. Lasser Institute
Probably not. While there's no specific law barring a dependency exemption for someone who is incarcerated, you probably don't meet all of the conditions for claiming a dependency exemption for your daughter as being a "qualifying relative." More specifically, to claim a dependency exemption, you must provide more than half of your daughter's support. This doesn't seem likely in view of the small monthly contributions you make. She is probably receiving more than half of her support from the prison system.
Question:
What taxes are due on annual leave paid after retirement?
--Marcy
Answer from John A. Tracy, CPA and author of "Accounting for Dummies"
Generally speaking, all types of wages paid for labor performed by an individual are includable in his or her 1040 individual income tax return in the year received. From your brief description (annual leave), I think the amount you receive must be included as wages in your 1040. (In some cases, earned wages could fall under the constructive receipt definition in the Internal Revenue Code, but I doubt this in your case.) Sorry, but this is taxable income. Whether it ends up pushing you into having taxable income, or into a higher tax bracket, depends on many factors in the income tax law.
Question:
My former stockbroker & former IRA custodian committed fraud through misrepresentation and stole the funds in my IRA via Auction Rate Securities sales they placed in my account. Since this a theft and not really a long-term capital loss, can I deduct it as a theft for IRS filing purposes? Can money stolen from one's IRA be treated like any other theft?
--Raccoon
Answer from Mark Britton, lawyer and founder of Avvo.com, a free online legal directory
Question:
My former stockbroker & former IRA custodian committed fraud through misrepresentation and stole the funds in my IRA via Auction Rate Securities sales they placed in my account. Since this a theft and not really a long-term capital loss, can I deduct it as a theft for IRS filing purposes? Can money stolen from one's IRA be treated like any other theft?
--Raccoon
Answer from Mark Britton, lawyer and founder of Avvo.com, a free online legal directory
While losses from theft can be deducted from your taxes, was this actually embezzlement, or a difference of opinion on investment strategy? Even in cases of investment fraud, there is a complicated analysis that only a tax professional or lawyer familiar with your situation can undertake to determine whether an IRS theft loss applies. And unfortunately, even if your advisor determines that a theft loss applies, it is unlikely that you will be able to take the deduction for losses in a tax-exempt vehicle like an IRA. There have been some recent changes in IRS policy on this front stemming from the Madoff Ponzi scheme, and there may be an opportunity to take a theft loss if your IRA was funded with after-tax dollars. However, I'll emphasize again -- you need to sit down with an experienced tax professional or tax attorney and walk through the specifics of your case to determine how these complex rules apply to you.
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