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Passive activity

Question: What’s a “passive activity” loss? Answer: The complicated “passive activity rules” were created to curb a growing abuse by taxpayers who were using tax-shelter losses to offset ordinary income (wages, interest, dividends, etc.). Passive investments include real estate, limited partnerships, and other businesses in which a taxpayer doesn’t play an active role. The rules…

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Offer in compromise

Question: What is an Offer in Compromise (OIC) with the IRS? Answer: If the IRS has determined that you are unable to pay the full amount due to them either with your current assets or with your future income stream less certain living allowances, they may enter into an Offer in Compromise. This will allow…

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Nanny tax

Question: What is the nanny tax? Answer: The nanny tax is nothing more than three federal employment taxes (social security, Medicare, and federal unemployment tax) that employers must pay if the wages of certain household workers exceed a threshold amount. The nanny tax only applies to your employees. A worker is generally considered to be…

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Marriage penalty

Question: What is the marriage penalty? Answer: Some married couples pay more federal income tax than two single taxpayers with a like amount of income. The difference in these tax numbers is referred to as the marriage penalty. Married taxpayers have the choice of filing “jointly” or as “married filing separate.” However, the married filing…

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Itemized deductions

Question: Should I itemize my deductions? Answer: If you have enough personal expenses, you may save income taxes if you itemize your deductions. Compare your itemized deductions with the standard deduction for your filing status, and use the larger of the two. Itemized deductions include the following: 1) Medical expenses – only to the extent…

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IRA

Question: Can I make penalty-free IRA withdrawals? Answer: The tax law generally makes you pay a 10% penalty if you take money out of an IRA before you reach age 59½. However, there are several ways to tap your IRA earlier without incurring the 10% penalty. Equal withdrawals. One way is to elect to take…

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Interest-points

Question: I refinanced my home mortgage this year. Can I write off the loan costs? Answer: If you refinanced to consolidate your debts or to obtain a lower interest rate, you must amortize (write off) the points over the term of your loan. However, to the extent you used the loan proceeds to make improvements…

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Interest

Question: When is interest deductible? Answer: Interest is generally grouped into the following categories: business, mortgage, education, investment, or personal. Except for personal interest, all the other categories may be tax-deductible. Your recordkeeping and your individual situation will determine what category your interest falls into and whether it is deductible. Here are some general guidelines:…

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Information returns

Question: I disagree with the amount of wages reported on my Form W-2? What should I do? Answer: Contact your employer immediately and ask for a corrected W-2 (Form W-2C, Corrected Wage and Tax Statement). Question: My employer went out of business and I didn’t receive a Form W-2. I can’t locate the owner. What…

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Home sales

Question: Is the sale of my residence taxable? Answer: That depends on the amount of profit from the sale. Single taxpayers can exclude from tax up to $250,000 of profit on a home sale and married couples can exclude up to $500,000. To take the full exclusion, you must generally have owned and used the…

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