Saturday, February 18, 2012

Answers To The Top Five Most Common Income Tax Questions


Tax season is officially under way, and with tax season comes tax questions. Everything from the common "Can I claim my boyfriend as a dependent?" to the "How do I determine the cost basis of the stock I sold?"

-- Who can I claim as a dependent? Questions about who can be claimed as a dependent have been a top question for taxpayers for years. Taxpayers often have questions related to claiming a boyfriend, girlfriend's child, a parent who lives with them, or a child who has moved back home after college. You can claim a "qualified child" or "qualified relative" if they meet certain tests including residence, age and financial support. The easiest thing to do?

-- Are unemployment benefits taxable? With the average unemployment rate 9.7%, many taxpayers are wondering how this impacts their taxes. Unfortunately, 100% of unemployment benefits are taxable. However, if you were unemployed for part of the year, don't forget that job search and moving expenses may be tax deductible.

-- What are the tax consequences of withdrawing money from my 401K? Due to the economy, more Americans are considering withdrawing money early from a retirement account. Remember; if you have not reached age 59-1/2, you will be faced with an additional 10% tax penalty (in addition to the regular income tax on the withdrawal) for early withdraw. This may also result in the taxation of other income, like social security that wasn't taxable before and bump you into a higher tax bracket.

-- What can I deduct in a mortgage refinance? With 302,000 new homes sold and interest rates dropping in 2011 there are many people who have questions about the tax implications of refinancing their home. If that's you, there may be some good news. If the mortgage is your principal residence, you generally can only deduct, over the life of the new loan, the points you paid to refinance the loan. If the mortgage is a rental property, you may be able to deduct additional charges in connection with securing the loan like underwriting fees, appraisal fees, and attorney fees.

-- Is my social security income taxable? There are 78 million boomers nearing or already enjoying the benefits of retirement. First, congratulations! Second, if social security is the only income received then that income is not taxable. However if you receive other types of income, some of your social security benefits may be taxable.