Your Top Tax Questions Answered

Q: Are any of my losses from the stock market drop a tax deductible?
A: Absolutely -- especially if you lost more than you earned. For example, say your capital gains were $5K last year. If your capital losses were also $5K, the two wash each other out. Now suppose you only lost money on your investments. You can then claim as much as $3K of net capital losses each year from your wages and ordinary income. (If you're married and filing separately, you can only claim $1.5K.) If you lost more than the $3K maximum, you can carry any additional losses over to future years to help offset any future capital gains.

Next: Question No. 2

Q: Does the stimulus package affect our taxes? Does any of that money need to be included in our income totals?
A. Thankfully, no. The economic stimulus check you received last year does NOT count as taxable income. So it will neither reduce your refund nor increase the amount you owe this year.That's because your stimulus check, which you received in calendar year 2008, is actually a special ADVANCED tax credit based on your -- stay with us here -- 2008 return. By the way, hopefully, you kept the letter from the IRS which outlined the amount of your payment. If you didn't qualify for the full amount last year, you may now, based on your 2008 return.
Next: Question No. 3

Q: What are the most important changes from 2008 I should be aware of in preparing my taxes? (Part 1)
A. While we wouldn't exactly call anything the IRS offers "exciting," there are several changes that could significantly impact how much (or how little) you owe in taxes.First, if you bought your first home between April 8, 2008 and July 1, 2009, you may qualify for a first-time homebuyer credit. The credit is for 10% of the purchase price of the home, with a maximum of $7,500. And, keep in mind that the credit is essentially a 15-year interest-free loan at $500 a year -- it must be paid back to the IRS. Also (as always!), income and other restrictions apply.
Next: Question No. 4

Q: What are the most important changes from 2008? (Part 2)
A. First-time homebuyers who have less than 20% to put down on their homes can STILL deduct private mortgage insurance, which is required for lower down payment loans. This provision was set to expire in 2007, but it's been extended until at least 2010. And, if you're in the 10-15% tax bracket, you won't have to pay ANY taxes on long-term capital gains from 2008 through 2010. That's right, your tax obligation went from 5% to 0% starting last year.Here's another goody: The maximum IRA contribution increased $1K in '08, making the maximum $5K for those under 50 and $6K for 50+.
Next: Question No. 5

Q: What if I can't pay my taxes?
A. Whatever you do, you MUST at least file your tax return (with or without an extension), even if you can't pay a dime towards what you owe. Communication is the biggest step toward preventing trouble with the IRS. If you don't contact them to say that you're having problems coming up with the money, things could get ugly, fast. The IRS can put a lien on your house, garnish your wages ... you could even go to jail. This is serious stuff! So, at the very least, FILE that return. Then work out an installment payment plan by using Form 9465. Also, you may qualify for an extension to pay by calling the IRS at 1-800-829-3676 and requesting Form 1127.
Next: Question No. 6

Q: Are there deductions that can be claimed if I lost my job?
A. You can deduct job hunting expenses as long as you are staying in the same field (but not if you are looking to switch careers). Only expenses that exceed 2% of your income quality. So, if you earned $60K last year, you can only deduct expenses OVER AND ABOVE $1,200. After that, there's no cap. Expenses include airfare, rental cars, and hotels when you're interviewing in other cities. If you drive to an interview, you can also deduct 50.5 cents per mile for the first six months of '08, and 58.5 cents per mile for the last six months of '08.
Next: Question No. 7

Q: Can I claim a deduction on a bad debt from a family member?
A. Yes, but it's a bit trickier than deducting a bad business debt because you need to demonstrate that a loan did indeed take place. Otherwise, the money "lost" will, likely, be considered a gift. You also need to show that the debt is now worthless. A simple promissory loan note signed by both parties is critical. As far as your taxes go, file a bad debt as a short-term capital loss and attach a detailed description of the entire transaction -- including how much was owed, its due date, and why you deem the debt to be worthless and a copy of the signed note (even better if notarized).
Next: Question No. 8

Q: How do taxes on dividends work?
A. If you earned more than $10 in a year from dividend investments, you need to report all distributions on your tax returns. And if you earned more than $1,500, you need to file Schedule B, Interest and Dividend Income. If you're in the 25% tax bracket or higher, your tax rate on dividend earnings is 15%. If you're in the 15% or lower bracket, your rate is 5%. These rates were set to expire at the end of 2008, but they've been extended through 2010. Keep in mind a corporation's earnings are taxed, and the distributed dividends from those same earnings are also taxed. Yes, you can cry "Double taxation!" Unfortunately, there's nothing you can do about it.
Next: Question No. 9

Q: What is the best tax shelter for me to pay fewer taxes?
A. It might be to start a business! A business can save you a bundle in taxes every year -- especially during those first few years when no one, including the IRS, expects you to make a profit. For it to be a legitimate business, you DO need to establish a profit motive, though. So, if you're a full-time teacher and sell your handspun pottery at weekend craft fairs, you're clearly looking to make a profit on the sale of your works of art. Many expenses, losses, etc. can be deducted, and even if you work full-time, you can drastically reduce the amount of taxes you owe.
Next: Question No. 10

Q: If I claim my college-aged son as a deduction, can he also claim himself as a deduction on his return?
A. No. If you claim your son as a dependent on your return, he can't claim himself on his own return. (That would fall under the category of "double dipping.") When your son fills out his return, he needs to check off that he's a dependent on someone else's return. And, if he's earning a healthy income at school, he may really need that deduction; so you may want to consider releasing him as a dependent and letting him claim himself ... check with your tax advisor.
Next: Question No. 11

Q: How much did my son need to earn in 2008 in order to be required to file taxes for the year?
A. It depends. If your son is single and was under 65 on December 31, 2008, he'd have to file a return if he earned $8,950 or more. If, on the other hand, he was self-employed and only earned $400 from his business, he'd also have to file a return. Of course, if he's married and filing jointly, or head of household, etc., those numbers will change. (See the IRS Web site for the specifics.) But, if he's still a dependent and working odd jobs and only earned $5,000 last year, he doesn't have to do ANYTHING by April 15th ... unlike most of the rest of us!
Next: More on the Dolans

More From the Dolans

April 15th has turned into a game of "gotcha" -- and most taxpayers lose. Ken and Daria Dolan bring you proven, simple strategies that put you on a level playing field when it comes to your taxes and all things money.

At Dolans.com, they reveal common money mistakes that will cost you dearly, debt management strategies that work and the smartest money moves for 2009.

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