Tax Tips
Readers ask financial questions
Gina L. Gwozdz

Question:

We are in the 15 percent bracket and own a co-op for which we pay $1,400 a month maintenance or $16,000 a year, of which 45 percent is tax deductible.

My wife does our taxes and she informed me that last year we could not use it because we did not have enough deductions to fill in the long form. Is there any way we could use it?

-- Chris

Answer:

Taxpayers who own their homes, and itemize their deductions, are generally allowed to deduct their mortgage interest and real estate taxes that they pay for themselves.

Most taxpayers are not allowed to deduct expenditures that others pay for them.

However, Internal Revenue Code section 216, allows shareholders to deduct a portion of their maintenance charges from their taxable income.

The shareholders in a co-op are usually tenants in the co-op; thus, their maintenance charges is esentially rent paid to the co-op.

Maintenance charges usually include all costs associated with running the building, such as real estate taxes, mortgage interest, utilities, insurance, etc.

Some of these expenses are not tax deductible.

You are informed of the percentage of the maintenance charges that are tax deductible each year.

In order for you to claim this deduction you would have to itemize your deductions on your tax return.

If you were unable to "use the long form," then you did not report more itemized deductions than your standard deduction.

The first thing you should do is see if you (or your wife) overlooked other expenditures that are tax deductible such as state income (or sales tax) and personal property taxes, the interest on the debt you incurred to purchase your co-op shares, equity loan interest taken out on your co-op shares and charitable contributions.

Harder to qualify for, but also includible, are allowable medical expenses, casualty losses, and various miscellaneous deductions. If you think something may be deductible, but you are not sure you should ask a qualified tax professional.

The important thing to keep in mind is that your tax deduction is only a portion of every dollar that you spend.

Because of this it is never wise to based your spending, business or investment decisions sole on tax consequences.

The value of every tax deduction depends largely your income -- the more income you have, the more valuable the tax deduction.

Question:

I have a Roth IRA and was considering to use it instead of my regular account for purposes of trading stocks, mind you I am not a day trader, when I refer to trading stocks, it may be after holding it a couple months to possibly a year to two. I will do that with seasonal stocks or cyclical.

I have been for the most part long-term buy and hold in my Roth IRA, but figure i would be able to get a tax benefit if I traded within the Roth, is my reasoning sound? Thanks in advance for any comments.

-- Sharon

Answer:

Without suggesting what is or is not an appropriate investment or way for you to invest (since I do not know what your total portfolio or personal financial statement looks like), I can say, that from a tax standpoint you are correct.

It is generally true that keeping investments that yield, or may yield, gains taxed as ordinary income in an IRA makes good sense.

The most obvious exception that I can think of is foreign stocks, as the foreign tax that is withheld will be permanently lost.

You should also keep in mind that there are no tax benefits to losses incurred by trading in an IRA account.

And most important, it is rarely wise to change your basic investment strategy due to taxes.

Question:

My daughter's was just informed that her firm is moving to another state. She she will not be moving with them and she has worked for them for over ten years, they are going to give her severance pay. I would greatly appreciate your help with the following questions:

1. Does her employer have to deduct Federal/State withholding tax and social security and Medicare from her severance paycheck?

2. If her payment were called a "bonus" instead of severance pay, would there be any difference in the deductions taken from it or in the amount of taxes she would have to pay?

3. Will her receipt of severance pay (or a bonus) affect her eligibility to apply for and receive unemployment benefits as soon as her employment ends?

-- Jacob

Answer:

Severance pay is treated as a continuation of her wages; therefore, as with wages, it is mandatory that her employer withhold Federal, State, Social Security and Medicare taxes, as applicable. A bonus, is also part of a worker's wage and her employer would be required to withhold accordingly for that as well.

The potential difference between a bonus payment and severance pay is that severance pay is usually paid out on the same "schedule" that her wages were previously paid out. A bonus is usually a one time payment. If all the payments are paid out in the same calendar year, then the final tax due will be the same no matter if it is classified as severance pay or bonus pay. However a bonus payment may be subject to a flat 25 percent withholding rate, instead of the rate your daughter indicated on her W-4. The difference between these two rates may make your daughter either owe or receive a refund come tax time.

Unemployment benefits are determined on a state level. Some states allow immediate unemployment insurance benefits; others do not. It is best to discuss this with her state's unemployment office.

!

Gina L. Gwozdz is a Bullard resident and certified public accountant. You may reach her via her web site at http://glgcpa.blogspot.com/