Listeners' Tax Questions Answered
MELISSA BLOCK, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
ROBERT SIEGEL, host:
And I'm Robert Siegel.
April 15th is less than a month away. And in honor of tax season, we asked you to sift through your 2009 paperwork and send us your own tax questions.
And to help answer them, we are joined now in our New York bureau by Lauren Young, who's a personal finance expert and who consults for Turbo Tax.
Welcome to the program, Lauren.
Ms. LAUREN YOUNG (Turbo Tax Consultant): Hi, Robert.
SIEGEL: And last week, we asked our listeners to submit questions. We received plenty of them. And first, this is what we heard from Don Carver(ph) in Ogden, Utah.
Mr. DON CARVER: I was unemployed for about nine months and I needed to pay off my school loans because I couldn't make monthly payments. So I took the money from my 401(k) plan and used it to pay off those student loans. Now I have a large tax debt and I don't know what I need to do to set up something so that I can pay off that debt a little at a time.
Ms. YOUNG: You know, this is one of the things that I've heard from a lot of people. They're using their retirement accounts, they're tapping them to pay other bills not realizing, not reading the fine print that you have to pay taxes on that money, those distributions when you take them. So note to self: Be really careful about that.
SIEGEL: Mm-hmm. Mm-hmm.
Ms. YOUNG: If you don't think can pay for it, the most important thing to do is to actually file your taxes no matter what, because the IRS at least, it's good faith thing that you got your act together.
The next thing you do is actually call the IRS and talk to them about it because they want to work out a deal with you, Robert. They really want to help you to not get in trouble. But keep in mind that you do pay penalties. It's about a 5 percent penalty on the tax you owe each month, and it's up to 25 percent of the tax you owe, so it can get really expensive.
SIEGEL: Really. And Mr. Carver also told us that he received unemployment insurance last year. Is that also taxable?
Ms. YOUNG: Yes, it's taxable to a point. So you get the first $2,400 tax-free and after that you do have to pay taxes on your unemployment. So that's also something really important to keep in mind.
SIEGEL: Okay, next. A listener who requested anonymity wrote in from Ann Arbor, Michigan, to ask, which is better for one's credit rating: paying off taxes or paying off a credit card bill?
They can't pay this year's taxes and they're worried about it affecting their credit rating.
Ms. YOUNG: So if you don't pay your credit card bill, it does really hurt your credit score, right? Your credit card payment history makes about 35 percent of your overall credit score. However, if you don't pay your taxes, the IRS can garnish your wages. They can take your property. So what's the point of having a good credit score if you don't have any money to spend? So I would say the first thing to do is to pay your taxes.
SIEGEL: So the IRS trumps the credit card company.
Ms. YOUNG: Correct.
SIEGEL: Okay. Now, we're joined by phone by Emily Wilson(ph), who's a schoolteacher in Shelbyville, Tennessee, and has a question for us.
Ms. EMILY WILSON (Teacher): Yes. My husband started a home business about nine months ago. He did not have a job in 2009. And I'm wondering, should I go ahead and file my taxes separately while he figures out all the tax information for his business, so I don't miss the deadline?
Ms. YOUNG: Emily, definitely file your taxes. This is a great question. The thing about paying your taxes, filing separately is that you typically pay higher taxes when you do it separately. It actually pays to be married. You get a lot of breaks for being a married couple.
Ms. WILSON: Right.
Ms. YOUNG: I think what you should do is actually calculate the return separately just to see if - what the tax bill is going to be. But the bottom line is that it usually works in your favor to file jointly. So I think, in the end, that's probably going to work best for you. But work it out and good luck.
Ms. WILSON: Thank you.
SIEGEL: Okay. Several people wrote in asking questions about supporting someone else who's struggling financially in this recession. And let's hear another listener question.
Mr. CHRIS EWING(ph): This is Chris Ewing from Laramie, Wyoming. I have an adult unmarried child who lives in an adjoining state, and except for occasional odd jobs, has been out of work for most of 2009. My wife and I have been very supporting of this child. And we paid her bills: her medical insurance, rent, groceries, et cetera.
Is it possible to somehow claim this child on our taxes, even though they have not lived with us, are not a student, and are over 25?
SIEGEL: Lauren, what about Chris Ewing's 25-year-old adult child?
Ms. YOUNG: Well, this is, you know, tough times and a lot of people are supporting family members who live far away and nearby. And the good news is that you can claim those people, lots of different kinds of family members -stepchildren, kids, grandparents, your parents - as dependents.
But there's an IRS checklist, of course. That person cannot have received more than $3,500 in gross income. So that would probably whack a lot of people out of being a dependent. And you have had to support them for more than half of the year. And they can't file a joint income tax return with somebody else. They have to be residents of the U.S.
So there's a lot of different hurdles that you have to get over, but if that child didn't make any money, Chris, I'd say yes.
SIEGEL: And the fact that the daughter lives in another state, not with Mr. Ewing and his wife in Laramie, that's not an obstacle if...
Ms. YOUNG: As long as you can prove it, Robert. As long as you can prove that you have been supporting them. If they have kept accurate records, then yes.
SIEGEL: But once again, even unemployment insurance would count toward the income that might disqualify somebody from that.
Ms. YOUNG: Right, so if his daughter had made more than the hurdle of $2,400 in unemployment insurance and will have gotten up to that $3,500 level, then -again, you know, there's so many variables. That's the fun part about taxes but...
(Soundbite of laughter)
Ms. YOUNG: ...but good, too, because it keeps us busy.
SIEGEL: We all have our own idea of fun. And we should mention here that Mr. Ewing told us that his daughter, this year, now has two part-time jobs working for the census and teaching bassoon. So she's having a better year so far.
Here's a question from Chambersburg, Pennsylvania, from Andrea Finch(ph). She writes: My son just started college this fall. Which deduction is best to take and what are the differences: tuition and fees deduction, American Opportunity deduction or Lifetime Learning Credit? And if we choose one this year, can we switch to a different one next year? What order should they be taken in?
And she notes that her son is still a dependent, and she and her husband make over $100,000 per year.
Ms. YOUNG: So the good news about all the different choices you have with tuition is it does help you minimize your tax bill. But ultimately, there are some credits available to you. And she mentioned the American Opportunity -which is new for this year - and the Lifetime Learning Credit.
Those are better because credits actually help you reduce your overall tax bill as compared to deductions in the overall formula of things because they reduce your income dollar for dollar. So you want a credit, basically.
I like the American Opportunity Credit because the overall deduction is bigger. But the problem is her income is going to probably put her - that $100,000 -there's all different kind of thresholds and it's a sliding scale. This is another area where I would say run the numbers and figure out what's going to be the best scenario for you.
But I have a feeling in the end that the American Opportunity Credit's going to make the most sense for her.
SIEGEL: And what if you take one kind of credit this year, could she go and switch to the other credit next year or the year after?
Ms. YOUNG: You can switch it up. You can. And every year, the situation might be different, so different things could help you in different tax years.
SIEGEL: Okay. Here is a question about green incentives.
Ms. ANDREA POLLENGER((ph): This is Andrea Pollenger. I'm calling from Andover, Massachusetts. And I bought energy-efficient windows last year and would like to know if the cost of installing them is also part of what I can deduct.
SIEGEL: And Ms. Pollenger also told us that she said that you need a certain certification for the windows to qualify for the deduction. Is that right?
Ms. YOUNG: She's right. You do need certification from the manufacturer or you get, you know, it's literally like getting a little note from the doctor. But I'm sorry, Andrea, you do not get any deduction for the labor and installation costs, unfortunately.
SIEGEL: What about mileage for driving to the windows company or what you had to eat on the way there?
Ms. YOUNG: Well, you get to open up your windows...
(Soundbite of laughter)
Ms. YOUNG: ...your brand-new beautiful windows and scream out to the world, I have a deduction. I did my taxes.
(Soundbite of laughter)
Ms. YOUNG: And then there are a ton of other energy-saving items available to you: doors, insulation, roofing, solar stuff. So just keep in mind though that the maximum you can spend on energy-saving credits at home improvements is $5,000.
SIEGEL: All right. Lauren Young, thank you very much for talking with us. Lauren Young, personal finance expert who blogs for Turbo Tax.
We do recommend, Lauren, not to, in any way, walk away from your advice, that if people have some problem with the IRS, find a tax preparer or a financial consultant of your own.
But thanks so much for answering our listeners' questions.
Ms. YOUNG: My pleasure, Robert. And, you know, that's why they call me the deductionista.
(Soundbite of laughter)
Ms. YOUNG: I like to talk about the deductions.
SIEGEL: Okay, take care.