NEW YORK (CNN/Money) - Independent contractors must pay estimated taxes during the year; students can deduct up to $2,500 in interest on education loans, and your filing status is determined by your marital status on Dec. 31.
Those are among the answers to reader's questions this week in our latest Q&A. Check back with our Tax Center page every Wednesday from now until the filing deadline, April 15, for more.
This week's answers come from tax professionals Mildred Carter, John W. Roth, and Mark Luscombe of CCH Inc. in Riverwoods, Ill., a tax and business law firm.
Hi. I'm from Chicago. Last year I started working as an independent contractor for a Web development company. They did not deduct taxes from my paycheck. Was I supposed to make estimated tax payments ? What is the limit on that, and am I required to make these payments, or only if the IRS informs me of this requirement. Thanks! -- Arun M.
Dear Arun,
Yes, you are required to make estimated payments if you expect to owe at least $1,000 in tax for 2002 after subtracting out any withholding and credits. Estimated taxes include not only your income tax liability but also your self-employment tax liability. Self-employment tax represents your contribution to Social Security and Medicare and, since you are self-employed, you must pay both the employer's share as well as the employee's share. You are allowed to take an adjustment to gross income equal to one-half of the self-employment tax liability you incur. Self-employment tax is in two parts, Social Security and Medicare. Your Social Security liability is equal to 12.4 percent of your first $80,900 of income. Your Medicare liability is equal to 2.9 percent on all your income. In addition to the self-employment tax, you will need to make a payment to cover your income tax liability. This is calculated by taking your earnings at four points during the year and determining your tax liability as if this represents an equivalent portion of your yearly income. You indicate that you made no estimated tax payment for 2001 which means you also are likely to have to pay an underpayment penalty.
Our tax system is a "pay tax as you earn the income" system and you are penalized if you fail to make minimum payments throughout the tax year. I would strongly suggest you obtain a copy of IRS Publication 505, Tax Withholding and Estimated Tax, which is available on the IRS Web site, under "Publication and Notices." Also, please seek out the advice of an accountant or other financial professional to assist you in preparing you 2001 return to hopefully minimize your underpayment penalty and to help you prepare your estimated tax payment for 2002. The first 2002 estimated tax payment is due on April 15, along with your income tax payment for 2001. Other estimated tax payments are due on June 15, September 15, and January 15 of the following year -- John W. Roth, CCH Inc.
Hello. I operate a small consulting business from home; I have a room that's an office and I work from there. If I itemize this year, can I deduct a portion of utilities as a business expense, and how do I calculate the amount? Thanks! -- Moses A.
Dear Moses,
If you wish to deduct these expenses, you will need to deduct them from your business income. You should be filling out Schedule C, Profit and Loss From Business (Sole Proprietorship). You should not claim these expenses as an itemized deduction on Schedule A. To claim your home office expenses, assuming your home office qualifies, you complete Form 8829, Expenses for Business Use of Your Home. Here you calculate what portions of your utility expenses are related to your generation of business income. The amount of expenses you are allowed to deduct is limited to the profits you earned from your business. Please note that there are other ramifications from the use of a home office. Specifically, you are not allowed to exclude from the gain on the sale of your home that portion which is attributed to the use of a home office. For more details, obtain a copy of IRS Publication 334, Tax Guide for Small Business, from the IRS Web site, under Publications and Forms. I would also advise you to seek out the advice of an accountant, tax attorney, or other financial professional to help you prepare your 2001 income tax return and to discuss the advantages and disadvantages of the home office deduction. -- John W. Roth, CCH INC.
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I am paying two student PLUS loans for my children. The loans are only two years old. I did not receive any form of certificate of interest paid for the bank. Is this interest tax deductible or not? -- unnamed
You can deduct up to $2,500 in interest paid during the tax year on any qualified education loan. The debt must be incurred by the taxpayer solely to pay qualified higher education expenses for yourself, your spouse or your dependent. For 2001, the deduction is limited to interest paid during the first 60 months in which such payments are required. From your facts, it appears that you would be entitled to deduct the interest, if your modified adjusted gross income is within the limits. The amount of your student loan interest deduction is phased out (gradually reduced) if your modified adjusted gross income is between $40,000 and $55,000 ($60,000 and $75,000 if you file a joint return). You cannot take a student loan interest deduction if your modified adjusted gross income is $55,000 or more ($75,000 or more if you file a joint return). -- Mildred Carter, CCH Inc.
I was divorced Dec. 17, 2001, and I never worked. Will I have to file a tax return? -- unnamed
From the information provided it could not be determined if you are required to file an income tax return. Whether you work or not has no effect on the determination of whether you have to file a return. What determines whether you have to file an income tax return depends on your gross income, your filing status, your age, and whether you are a dependent. You have indicated that you were divorced on December 17, 2001. Your filing status is determined by your marital status on December 31, and, unless you remarried before the end of the year, your filing status should be single. If you have at least $7,450 of gross income in 2001, you are required to file an income tax return regardless of whether you owe any taxes or not. Gross income is more than just wages and salary. The definition of gross income is all inclusive and would include interest, dividends, gain from the sale of assets, profit from self-employment, rental income, unemployment compensation, legal or illegal gambling income, and annuity or pension payments. Please be aware that there are income-splitting rules for residents of community property states, which may require you to refer to your divorce property settlement agreement. For more information, obtain IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, from the IRS Web site, under Publications and Forms. I would suggest that you stop by your local store front income tax preparation firm to help you determine if you are required to file an income tax return. -- John W. Roth, JD, LLM, CCH Inc.
My wife passed away July 4, 2001. Can I file separate and hers be filed separate? -- unnamed
A couple always has the right to file separate returns, even while both are alive and married, but it is usually possible to lower your tax liability by filing a joint return. A joint return may be filed when one or both spouses died during the year, with the closing date of the return being the last day of the surviving spouse's tax year, assuming that the surviving spouse did not remarry during the year. If you desire to file separate returns, your return would cover the period through the end of the year and your wife's return would cover the period up to her date of death. If your wife has an executor or administrator for her estate, the executor or administrator would be responsible for filing her separate return or for joining you in signing a joint return. You may wish to consult with a tax professional to make sure which options would be best for you in your particular situation. -- Mark Luscombe, CCH Inc.
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Hello, I have recently been transferred by a global investment bank from New York to Switzerland. Conveniently, I completed my tax year of 2001 in NY and my new tax domicile started January 1, 2002, in Switzerland. As far as completing my taxes for the past year, will the processing and the refund, if any, be the same as if I had never relocated or changed my tax status? Additionally, I am a U.S. citizen if this helps. I realized this will be entirely different when paying taxes in 2002. Kind regards. -- A concerned U.S. taxpayer
Dear Concerned Taxpayer:
A change in your residence in 2002 would not affect your 2001 return. You may wish to make sure that the IRS has an address that will be effective for getting any refund or questions concerning your 2001 return to you. -- Mark Luscombe, CCH Inc.
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