TurboTax Support Blog

I’m in the military. Do I need to file a state return?

This question is popping up in Live Community from our military TurboTax customers. For 20 years I was a Navy wife, so I volunteered to try to answer the question.

To figure out which state return an active duty military person files depends (in military terms) on their “home of record” or “state of legal residence.”

First let’s define those two terms.   

Your “home of record” is the state recorded by the military that was your home when you were enlisted, appointed, commissioned, inducted or ordered in a tour of active duty.

Your “state of legal residence (SLR)” is your “home of record” unless you changed it to another state.  Military members often mistakenly think that by changing the state on their paycheck records changes their SLR.  Nope. In order to change the SLR, a DD Form 2058 must be submitted to the finance officer and accepted.

For more information on requirements for valid changes when filing Form 2058, check out a Fact Sheet on Legal Residence that I discovered on Hill Air Force Base’s website. 

From a tax standpoint, your SLR is considered your “domicile” or “resident” state as long as you are on active duty.  Even if you are stationed in another state, you’re still considered a resident of your SLR. 

Now that we’ve defined these terms, let’s look at an example..

Joe lived in San Diego, CA back in 2000 and decided to join the military.  It’s now 2007 and he is stationed in Maryland.  He and his wife Jennifer are living in Virginia.
Does Joe file a state tax return for 2007?  If so, which state?  California, Maryland and/or Virginia?

We know that Joe is considered a California resident (That’s “his home of record” and SLR.)   It depends on each state’s laws if they want their resident military to file a return when they are stationed outside the state.   Let’s see what California law says.   

It says that if Joe is active duty military, home of record is California, and stationed in California, then he files a typical California resident tax return.  If he’s stationed outside of California, he is considered a “nonresident” CA for tax purposes. In most cases, he doesn’t need to file a CA return unless he has CA source income such as rental property income. In these circumstances,  CA source income doesn’t include his military W-2 or intangible income like interest, dividends, stock sales etc. So it looks like Joe doesn’t have to file a California return. 

Remember that each state is different. If Joe’s “home of record” was in a certain state, he may be required to file a return and then deduct all of his income and pay no tax.  That way the state knows he still exists!  And some “home of record” states will tax Joe on his income even if he is stationed outside of the “home of record.”  To check out your “state of legal residence” laws for filing when stationed outside the state, click on IRS’ State Links website to find your SLR’s state website.

Does Virginia or Maryland expect a tax return from him? 

The Servicemember Civil Relief Act states that an active duty member is not considered a resident of a state unless it is his SLR. Joe would only file a Virginia or a Maryland return if he had a nonmilitary 2nd job in that state. If he’s working at Home Depot in Virginia on the weekends, he would file as a Virginia nonresident and only report that W-2.  He would not report any other type of income. 

Answer for Joe: He doesn’t have a rental property back in California and doesn’t work a second job so there is no state return to file for Joe.   

What state return does his wife file?

Joe’s home of record has nothing to do with his wife’s residency.  Like the rest of the nonmilitary world, her residency will depend on which state she lives in and its law.

Let’s say that Joe’s wife is employed in Virginia and lived there all year.  She is considered a Virginia resident who has to file a resident Virginia tax return.

What type of return does she file?  Again each state is different.  The state of Virginia says she files a married filing separate resident state return and includes only her income. 

If they were living in a different state, she might be required to file a nonresident return with Joe. On the return all of Joe’s income would be deducted and only Jennifer’s income taxed. Again, here’s the IRS’ State Links website to check your state on what type of return needs to be filed by a nonmilitary spouse.

For tax year 2007, Joe and Jennifer will file a married filing joint federal return and Jennifer will file a resident Virginia return.

For more information on the military and taxes, read:

Can I Efile with a Foreign Address?

Tax Information for Members of the U.S. Armed Forces

IRS – Armed Forces Tax Guide

New IRA options for military

Reservists and Retirement Withdrawals

Tax Rebates –What’s the Catch?

That’s been a common question from our customers at TurboTax ever since the Economic Stimulus Act became law Feb. 13. It’s not surprising. We’ve all doubtless been warned: “If it’s too good to be true, then it probably is.”  In fact, Google lists 50 million variations of this adage.

Then how could it be true that the government wants to give most of us what is essentially free money? The simple answer is, because the federal government wants to put money in our pockets so we’ll spend it and help stimulate our slowing economy.

Under the act, starting in May some 130 million Americans will receive what’s known to most as a tax rebate. You might hear the IRS call it a stimulus payment. It will be worth at least $300 and as much as $1,200 or more per household this year. Furthermore, it won’t reduce your 2007 tax refund, need to be repaid later, or be taxed in another year. It won’t lower any government benefits you normally get. And if you’re likely to get a stimulus payment, the IRS will send you a letter telling you how you can (you may have already received this). Hint: You have to file a 2007 tax return, even if you don’t normally need to.

So go ahead and get your share. Learn here if you qualify.

Unfortunately, you might not get a rebate if your 2007 income is too high or too low. But, wait, you won’t necessarily miss out. If you didn’t get a payment or got a partial payment because your income was too high or too low, you’ll get a do-over next year. You can use your 2008 income to qualify, when you file a 2008 return in 2009.

Conversely, what if your 2008 return shows you would get you a lower payment than you did with your 2007 return? No worries. Just keep the difference -- really. Also, if you have a baby or adopt a child in 2008, more good news. You could still get a stimulus payment for that child on your 2008 return.

What if you owe federal income tax from a previous year, student-loan debt or back child support? This is where your “luck runs out” (only 372,000 Google listings) because as it does with regular tax refunds, the IRS will turn your free money into a payment of those debts. 

Deducting Mortgage Points

In the Live Community,  lots of people have questions about deducting mortgage points. And I’m not surprised. Like many things in the tax code, there is a lot of confusion around mortgage points because there are a lot variables involved. This blog is written to answer those questions.

What are points?

In short, points refers to interest you pay up front in a mortgage rather than over the life of the loan. They usually allow you to have lower monthly payments. You might see them referred to in your mortgage paperwork as “loan origination fees” or “loan discounts.”

Can I deduct all the points in one year?

As a general rule of thumb, if this is your first mortgage, and you used it to buy or build the home you live in, then yes, you can deduct all the points in the first year. In addition, if you refinance your mortgage, or take out a home equity loan or home improvement loan for the purpose of improving your home, then you can often take the points of those loans off the first year as well.

Of course there are some other rules. For instance, in your paperwork, the points have to be calculated as a percent of your principal, rather than a flat fee. For a full list of requirements, see the IRS Chart on Fully Deductible Points

What if the seller paid the points on my loan?

Sometimes the seller offers to pay the points on a loan. The good news for buyers is that it’s the buyer who gets to take the deduction on the points. The same rules apply about whether you can deduct all the points in the year you paid them as if you paid the points yourself.

Note: the seller cannot deduct the points paid for the buyer; these points are considered selling expenses for the seller.

What if there weren’t enough funds provided to cover the points?

In the convoluted world of mortgage financing, there might be a case, for instance a zero-down payment loan, where points are deducted but then paid for by adding them to the principal of the loan.

The bottom line is that you can only deduct, up front, the points that were actually paid for by you or the seller. Here’s an example:  You were charged $2,000 in points on a new home loan in 2006. The seller paid for $1,000 towards your points and you provided a down payment of $750.  You can deduct fully $1,750 ($1,000 + $750) in points but you must deduct the remaining $250 in points over the length of the loan.

What about a home improvement loan or home equity loan?

In general, you can also fully deduct, in the year paid, points paid on a loan to improve your main home. If the loan is meant for other purposes, like paying for tuition or a car, you can only deduct the points over the life of the loan.

What about the points paid on my second home?

You cannot fully deduct in the year paid points you pay on loans secured by your second home. You still get to deduct these points only over the life of the loan.

What about the points on a refinanced loan?

In general, the points you pay to refinance a mortgage are not deductible in full in the year you pay them. The only exception to this is if you use the proceeds of your refinanced loan to improve your main home.

The good news is, if you’ve been deducting points over the length of your loan, in most circumstances, you can deduct the remainder of the points in the year that the related mortgage is paid off early due to prepayment, refinancing, or foreclosure.

What happens if the mortgage changes hands and I’m deducting the related points over the life of the loan? 

If the mortgage is sold to another lender, there is no change to your tax situation. You need to continue deducting your points over the length of your loan just as before.  Also, you can leave the original mortgage lender’s name to identify those points in TurboTax.

How do I enter my mortgage points in TurboTax?

Select the Federal Taxes tab (at the top of your screen), then select Deductions & Credits. Click on Find Deductions Myself. Under the Home section, click on the Start or Revisit button next to Mortgage Interest and follow the screens.

Can you explain the Home Loan Summary screen in the TurboTax Interview?

The Summary screen shows the information that you entered for each loan. It displays the mortgage interest paid for 2007 and the total points paid with that related loan, regardless if the points are amortized over several years. In the example below, mortgage interest paid for 2007 was $12,000 and the total points paid on that loan was $4,000.

For additional information on mortgage points, see IRS Publication 936

Print a copy of your 2006 tax return. Check Schedule A, line 12 for the amount of amortized points deducted for your 2006 tax return. In the example below, line 10 shows the $12,000 of mortgage interest and line 12 shows $400 as the 2006 amortized deduction of the $4,000 points.

   

Is my child an animal?

Last week, I explained that you cannot claim your pet as a dependent on your tax return. If you’d rather not read the whole article, this quote summarizes it nicely:

Although the IRS doesn't specifically spell it out, it is tacitly implied that dependents — at least for taxation purposes — must be human.

Now, I’ve been in this business so long, I already know what your next question is. You’re living with some kind of creature (possibly a teenager) that’s eating you out of house and home, and you’re wondering how to determine if this entity is human so that you can recoup some of your losses.

Well. That’s what I’m here for.

The more we learn about animals, the scarier it gets. They are more like us — and we are more like them — than we care to admit.

For many years, we believed that the ability to make tools is what separated us from the rest of the animal kingdom. Then I saw this program on TV the other night where chimpanzees made — and used — sharpened sticks to spear their prey.

Well, that pretty much threw a monkey wrench into that hypothesis. Ha ha, get it? Monkey wrench.

OK, what about the ability to feel happiness or sorrow? Or to wage war? Exclusively human, right?

Wrong. Chimps have aped us in those departments too. Hoohoo, I kill myself. (Not uniquely human either — lemmings have been known to do that. Kill themselves, that is.)

Other than DNA analysis, which is expensive and non-tax-deductible to boot, there is no way to tell with absolute 100% certainty that the hungry inhabitant you’re living with is indeed Homo sapiens. But there are ways to tell with 99.99% certainty, and if that’s good enough for the IRS, it’s good enough for you.

Test #1 – The Opposable Thumb Rule

Examine the ends of your creature’s forelimbs. What do you see?

• What forelimbs? You have a snake or a pet rock. Not a dependent. STOP.
• Paws, dewclaws, hooves, wings, flippers, tentacles, fins, or talons. You have some sort of animal. Not a dependent. STOP.
• A hand with an opposable thumb. You have a primate, which is a step in the right direction. Proceed to Test #2.

Test #2 – The Tail Rule

Now examine your creature’s hindquarters. Do you see a tail?

• Yes. You have a monkey, which you cannot claim as your dependent, at least not until a few more million years of evolution have passed. STOP.
• No. You have a human, an ape, or a monkey that lost its tail. You’re getting warmer. Proceed to Test #3.

Test #3 – The Hair Distribution Rule

Is the hair more or less evenly distributed along the body of your creature?

• Yes. You have an ape, a tail-less monkey, or JoJo the Dog-Faced Boy. Of these, only JoJo can be claimed as a dependent. STOP.
• No. You either have a human or a tail-less Chinese Crested Dog with hands instead of paws. The former can be claimed as a dependent; the latter cannot.

Because you've made it this far (congratulations!), I'll reward you with some real-life tax tidbits that concern animals:

• You can deduct the cost of shipping your household pets to your new home.
• The cost of purchasing, training, and maintaining a guide dog or other animal trained to assist a person with a physical disability is considered a medical expense.
• Damage or destruction caused by a family pet is not deductible as a casualty loss unless the event is sudden, unexpected, or unusual.
  • New puppy chews the fringe off an antique rug — tragic but not unusual, therefore not deductible.
  • Well-behaved, docile llama suddenly crashes through window and breaks Ming Dynasty vase — highly unexpected and unusual, therefore deductible.
• Cat food, if used to attract feral felines to a vermin-infested junkyard, can be written off. (Such a case actually made it to court, where IRS lawyers conceded that the hungry cats made the junkyard safer for customers by devouring rats and snakes that were on the property.)
• Adoption fees paid to nonprofit animal-rescue organizations cannot be deducted, but donations to these organizations above and beyond the adoption fee are deductible. Make sure you get a receipt.
• Boarding fees for pets while away on a business trip are not deductible.
• The upkeep for guard dogs, if used to protect business assets such as inventory, are deductible by the business as an operating expense. An animal that looks and acts the part is highly recommended. (Looks legit and keeps IRS agents from getting too close. Two birds, one stone.)

Millions of workers can take credit

With all the hoopla about the one-time rebates that most taxpayers will receive starting in May, it might be easy to overlook a valuable tax benefit for workers with modest incomes.

It’s available tax year in and tax year out, and could reduce or even eliminate any federal income taxes they owe. For some folks, it even provides a refund of hundreds of dollars. You know, just like the much-talked-about rebates will do.

This tax benefit has a name that’s hard to remember and requirements that are a challenge to understand: the Earned Income Tax Credit.

But its value to certain families is undeniable.

For example, a single working mother with young children who earned less than $37,783 in 2007 could qualify for a credit of as much as $4,716. For detailed information, check out this article on the Earned Income Credit.

To qualify, you must be between the ages of 25 and 65 and you must have income from working that is less than:

• $12,590 if single, $14,590 if married with no children
• $33,241 if single, $35,241 if married, with one child
• $37,783 if single, $39,783 if married, with two or more children

The maximum credits available:

• $428 for taxpayers with no children
• $2,853 for taxpayers with one child
• $4,716 for taxpayers with more than one child

If you take the credit, you’ll have lots of company. More than 22.4 million taxpayers shared in $43.7 billion dollars in Earned Income Credits in 2007. Those who took the credit accounted for 18 percent of the 124 million tax returns filed.

Even so, the IRS estimates that 20 to 25 percent of those eligible for the credit don’t claim it. That’s at least 5.6 million people missing out on hundreds of dollars each tax season.

For those who qualify, TurboTax offers free tax-preparation software and e-filing for federal tax returns and for certain state returns. Visit this site for more information or to get started.

In 2008, many workers who qualify for the credit should be doubly rewarded for filing a tax return. First off, they’ll get their credits. And then, if they have earned income of more than $3,000, they could also qualify for a rebate of at least $300 per person or $600 per married couples and $300 per child. Good things can come to those who file.

Can I claim my pet as a dependent?

Pets are a lot like children. Look at their similarities: they're cute, loving, playful, attention-craving, and they can't wait for you to get home. They also poop, pee, whine, ignore your commands, and break stuff. (Hey, it's not all lovey-dovey.)

Like children, pets rely upon you to support them, which can get expensive — especially if you buy your supplies at that big-box PetStore. Add to that veterinary bills, grooming, licenses, cleanup and repairs caused by pet damage, not to mention the cost of the pet itself... ouch.

According to the American Pet Products Manufacturers' Association, Americans are expected to spend more than $10.5 billion on their pets in 2008. (That's billion with a B, as in "B-1 Bomber").

So in light of that grim statistic (at least for those who don't own PetStore stock), it doesn't seem that silly for tax-paying pet owners to wonder: "Am I allowed to claim my pet as a dependent on my tax return? Can I get some compensation for my contribution to the $10.5 billion? Puleeeze?"

Um, no. You’re more than welcome to try — people have — but if caught you better have plans for someone else to take care of your beloved pet(s) while you are on the sort of "vacation" made famous by Al Capone.

Although the IRS doesn't specifically spell it out, it is tacitly implied that dependents — at least for taxation purposes — must be human.

Now before you argue that your dog thinks he's human or that your parakeet acts more like a human than your 2-year-old (I believe you! I believe you!), hear me out.

The rationale behind this "must-be-an-actual-human" requirement is that children of the species Homo sapiens have the potential to grow into adult taxpaying Homo sapiens, whereas dogs, cats, birds, gerbils, fish, rocks, etc., do not. It's as though the IRS is sowing the seeds — or at least providing the fertilizer — for growing the next crop of taxpayers.

Here's another way to look at it. Pets do not pay taxes, so why should the government provide tax incentives to the owners of these adorable freeloaders? Ahhhh, now do you see? Makes sense, huh?

Next week, I'll tell you how to distinguish between human dependents and animal dependents.

Your dependents, it's all so relative

Tax season is when we look at our family and friends in a different – and tax-deductible – light.

Can I count my sister-in-law as a dependent? How about my live-in girlfriend and her unemployed brother? What about my golden retriever?

Believe it or not, the IRS code tells us that any of the above, except the retriever, could qualify as a dependent under the right circumstances.

Why are dependents good to have at tax time?

For each dependent you can legally claim, you get a $3,400 deduction on your 2007 taxes. So if you are in the 25 percent tax bracket and have three dependents, worth $10,200 in deductions, you’ll save $2,550 on your taxes. (However, for some higher-income earners, deductions are reduced or eliminated.)

In our society, where growing numbers of people live together who aren’t married or aren’t related, it’s good to know the rules.

The following guidelines only apply to adult dependents. (The IRS has all sorts of rules for dependent children, particularly those whose parents are divorced. For information, see IRS Publication 504: Divorced or Separated Individuals.)

If you claim an adult as a dependent, that person must meet several IRS qualifications:

·        Had less than $3,400 of gross income during the year.

·        Received more than half of his or her support from you.

·        Did not file a joint income tax return with anyone else.

·        Is a citizen or resident of the United States or a resident of Canada or Mexico.

·        Is a relative or a member of your household for the full year.

As you can see, this last requirement opens your door - and your tax return - to many potential dependents, as long as you’re willing to support them.

So, to use our initial example, your live-in girlfriend and her brother who also lives with you could qualify as your dependents.

But what if you support someone who doesn’t live with you, such as your elderly mother?

The IRS allows you to count as a dependent a whole list of relatives who don’t also have to occupy your home, provided you provide more than half their annual support:

• Children, stepchildren, eligible foster child, grandchildren or great grandchildren
• Siblings, including half or step siblings
• Parents, grandparents, or any other direct ancestors
• Stepparents
• Aunts or uncles
• Nieces or nephews
• Fathers-in-law, mothers-in-law, sons-in-law, daughters-in-law, brothers-in-law, or sisters-in-law

Unfortunately, your golden retriever is not among these. Nor is your gardener or your nanny, even though it might seem you support them. They’re your employees, not your dependents.

For Faster Refunds

If you’re in a hurry to get your refund, the fastest way to move it from IRS coffers to you is to have it deposited directly into your bank account.

Lots of taxpayers have already embraced this method, for the benefits of convenience (no running to the bank) and security (no chance for lost checks). More than 61 million people chose to have their refunds deposited directly to their accounts in 2007.

You also have the option of choosing what the IRS calls a “split refund,” that is, dividing your refund among as many as three accounts at three different U.S. financial institutions. These accounts can be of several sorts: checking, savings, brokerage, and IRAs. Just so you know, TurboTax will guide you in getting a direct deposit and a split refund.

Why does the IRS offer the option of divvying up your refund? To encourage taxpayers to save and invest a portion of the money they get back at tax time.

If you sense a mixed message from our government here (save your refund, but spend that proposed tax rebate), you’re not alone. But then we taxpayers are usually conflicted on this subject as well.

Should you opt for a split refund, the IRS offers some pointers: Verify that your financial institution accepts direct deposits, be sure to enter account and routing numbers accurately, and confirm with the institution that a refund received by a couple who filed jointly can be deposited into the account of only one spouse.

If you’re directing your refund into an IRA, it’s up to you to ensure you meet the April 15 deadline for a 2007 contribution and that your IRA trustee knows whether you intend the funds for the year 2007 or 2008.

For more information on split refunds, take a look at this IRS article, "Divide and Prosper." To track your refund, visit the IRS site, "Where's My Refund?"

Do I need to file a return?

It’s not surprising that most of us feel that we must file an annual tax return. After all, even the rich and famous can get in scalding hot water for not paying. (The late hotel magnate Leona Helmsley actually did time in prison for tax evasion. Actor Wesley Snipes has become the latest celebrity to go on trial for failing to pay taxes.)

But the truth is, not everyone needs to file. Even the IRS says so. The agency said that many people will file a 2007 federal income tax return, even though their income fell below the requirements. Based on questions we at TurboTax are seeing from customers in our Live Community, such as students and part-time workers, these requirements aren’t well known.

For Tax Year 2007, single folks don’t need to file unless their annual income tops $8,750 and they’re under age 65, or $10,050, if they’re age 65 or older on Jan. 1, 2008. For married couples filing a joint return and living together at the end of 2007, the income threshold is $17,500 if both are under age 65 and $19,600 if both are age 65 or older.

Go here for a more complete listing.

There are, however, exceptions. If you’re self-employed, you’ll need to file a tax return if your net earnings, basically your profit after expenses, exceed $400 a year. The idea here is not just to get you to pay income taxes, but self-employment, or Social Security taxes as well.

You should also file if you are eligible for the Earned Income Tax Credit, intended to help workers with low incomes. Depending on your income and the number of children you have, the credit can reduce or even eliminate your income tax bill and possibly still generate a refund. See this article.

And even if you’re not required to file, the IRS advises you to do so if you worked and federal income tax was withheld. That’s so you can recover the withholding tax. It’s yours, so take it.

Also, the filing rules for children and students up to age 24 are different. To learn them, see this article on the “kiddie tax.”

However, if you are supposed to file a return, and you don’t, it could cost you. If you can’t make the full payment, you’re still better off filing a return. The penalty for “failure to file” is 5 percent per month up to 25 percent of the tax your return indicates you owe. By contrast, the penalty for “failure to pay” your taxes is considerably less, ½ percent per month up to a maximum of 25 percent of the amount owing.

Your responsibility for filing a return will, at some point, cease. The IRS says that upon your demise, it’s up to your survivors to decide if you should file one last time. And that, of course, is determined by whether you’d already met the annual filing requirements.

Phishers Now Want You To Believe The IRS Is A Charity!

And I guess the way Congress spends the money we give the IRS, it sure seems like it sometimes.  But this isn’t the case. 

The IRS gave warning yesterday of a new email phishing scam.  The scam wants you to believe that the IRS and the US Government are partnering to solicit donations for victims of the Southern California Wildfires.

The link in the email goes to a website that looks like the IRS website, but is not.  It’s shameful the way scammers take advantage of tragedy.  Beware of this email and give to a legitimate charity like the Red Cross.

To see the IRS news release, click here.