Last-Minute Tax Tips

This year’s tax twists and turns

Marketplace Staff Mar 12, 2010
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Last-Minute Tax Tips

This year’s tax twists and turns

Marketplace Staff Mar 12, 2010
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TEXT OF INTERVIEW

Tess Vigeland: So, what’s your secret? James Brown playing in the background? Microwave popcorn and lots of chocolate? The promise of a massage once it’s all over? What’s the secret you use to get yourself to just sit down and do your taxes?

Well, this year there are all kinds of twists and turns to watch out for, especially if your wallet’s been hit hard by the downturn. Kevin McCormally is the tax man for Kiplinger’s Personal Finance magazine. And we invited him in to sort out some of your questions. Welcome to the show.

Kevin McCormally: Thanks, Tess.

Vigeland: So how’s your tax season going? Are you done yet?

McCormally: My tax season, I’m actually going to get a refund this year. Unusual, and of course, I preach the gospel against refunds, but actually, it’ll be nice to get a check.

Vigeland: Oh, so you preach this gospel, because, as we have said on this show before, if you get a refund, you’re basically giving the government free money, right?

McCormally: Yeah. I don’t care about giving the government an interest-free loan, because God knows that they need the help. But I find that it just puts people in the wrong frame of mind when they do their return, because if you owe the IRS $1,000, you’re going to really bust it looking for more deductions or making sure you don’t make any mistakes that cost you money. Whereas if you got $1,000 back, you’re going to say, “Let me get this in the mail as soon as I can and get my money.” So I think psychologically, it’s a real problem. And I know that we all love our refunds, and I confess this year I’m going to get one. Yay!

Vigeland: Yay! All right. Well let’s get to some listener questions, and we’ve received a lot about this first-time home buyer tax credit. It became a little confusing, didn’t it, stopped and then started again at the end of last year?

McCormally: Well, it almost stopped on Nov. 1. And the real thing is they changed it, effective Nov. 7, 2009. It’s a critical date. And we have been flooded with questions from people saying, “I bought it on Nov. 4. Do I get the credit?” And we say, “No, Nov. 7.” And it drives them crazy, and they think it’s unfair. Remember what Congress was trying to do was create an incentive for people to buy houses, to help bail us out of this recession. And if you bought a house on Oct. 31, before they created the credit, as much as you hate to hear it, you didn’t need that $6,500 incentive to buy that house. You did it anyway, so the tax payers aren’t going to help you out.

Vigeland: Well, given all the confusion, I suppose it wasn’t surprising for us to hear from Teera. She wrote in from Boulder, Colo. And here’s her situation…

Teera: I bought a condo with my grandmother in 2005. I refinanced in Oct. of 2009, paid back the principal that my grandmother put down, signed the mortgage by myself for the first time. I don’t know whether or not I would qualify for the first-time home buyer tax credit.

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Vigeland: So, what do you think? Does she get the tax credit? Is she eligible?

McCormally: Teera doesn’t want to hear the answer, because the answer is “no.” And she’s got two things that work against her here. First of all, the law forbids the credit, if you buy the home from a related person. And a related person, in this definition, is a parent, or a grandparent or a lineal descendant, a child or a grandchild. Uncles and aunts are fine, brothers and sisters are fine, but not grandma.

And a re-fi never counts anyway. The whole point of the credits are to get you to go out and buy a new house, a different house. Two strikes against her, I’m afraid she doesn’t get the money.

Vigeland: All right. Sorry about that Teera, but thanks for writing in.

Now Kevin, we’ve also received a lot of questions about the Making Work Pay credit, and this was part of last year’s stimulus package, gave people a little more money in their pay checks each month. But, as we’ve been hearing over the last several months, some folks are going to get a bill on that, right?

McCormally: Well, it’s really complicated, because, you know, in 2009, it was about a year ago this time, that the new stimulus bill, they said rather than sending us a check, they would tell our employers to just stop taking quite so much money out of our pay checks. So everybody’s pay went up a few dollars a week.

But in order to really get the credits, you have to claim it on your 2009 return, and you have to file a new form called the Schedule M. And what this will do, it’ll reduce your tax bill by $400 or $800, because everything that is withheld from your paycheck goes into a little account at the IRS, with your name on it. And this account now, for you, has $400 in it less than it would have without the credit.

Vigeland: Ah, OK. So federal government next time, just write a check. Well, unfortunately, we have a lot more people dealing with unemployment benefits on their taxes this year. And people do owe taxes on their unemployment benefits, correct?

McCormally: Yeah. This is one of the “gives with one hand, takes with the other” that really confuses a lot of people. The government pays you this unemployment compensation, and then, the federal government taxes you on it. But, as part of the stimulus bill, Congress decided that the first $2,400 of unemployment compensation is tax-free for 2009. But the state is not going to tell you that, the form is not going to tell you that. The only place you’re going to find that is if you read the instructions for the 1040; it’s going to say whatever that 1099-G says, subtract $2,400 and put the remainder in the spot.

Vigeland: All right, let’s go to our final question. I like this one, this is having to do with eBay. And Corbb is studying economics in Washington D.C. He wrote in with this question…

Corbb: I buy a lot of my textbooks on Half.com or on eBay. But when I sell them back, I sell them back even more at a discount. I’m curious if that is still income to the IRS?

McCormally: The IRS says that for auctions sales like eBay, there’s sort of a garage sale exception. You know, if you have a garage sale, you paid more for the stuff you’re selling than you’re actually getting; there’s no profit involved. The IRS doesn’t want to hear about it. But with the auctions like eBay, they’re getting very suspicious that there are a lot of people making a lot of money. In fact, they’re starting next year. PayPal is going to have to start reporting to the IRS anybody that does more than 200 transactions or makes more than $20,000 from auction sales. They’re going to have to report how much money these people got to the government. But again, selling one textbook or even five or 10, for less than you paid for, the IRS doesn’t care. There’s no profit there. The only time there’s going to be a profit is if your textbook happens to be a first edition, you find out it’s really valuable, but that’s not going to happen very often.

Vigeland: Well, Kevin, hey, great stuff. Really appreciate it. Kevin McCormally covers taxes for Kiplinger’s Personal Finance. He’s also the editorial director there. And we’ll just call him our tax guru here on Marketplace Money. Thanks so much.

McCormally: Thank you, Tess.

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