1040PC to Debut Nationwide This Tax Season

Q: The latest income tax pamphlet from the Internal Revenue Service mentions a Form 1040PC that taxpayers can create on their own personal computers. The booklet also discusses the ease of filing income tax returns electronically. Can taxpayers file directly to the IRS through their personal computers? What is this all about? --M.J.

A: The IRS is pushing hard to get taxpayers to use the latest in technology at tax time because it’s labor saving for the government and promotes more accurate filings. However, the average taxpayer cannot create a tax form on a personal computer and then electronically file it directly to the IRS via a telephone modem. At least not yet.

Here’s what is happening right now. Beginning this year, the IRS is allowing taxpayers throughout the nation to create their own specialized tax forms on personal computers. These forms, known as 1040PC, are then completed, printed and mailed to the local IRS processing facility. The IRS tested the program last year in the Memphis area and found the accuracy rate on the 1.5 million 1040PC forms received was 96.4%, compared to 84% for conventionally completed filings.

The IRS does not provide the personal computer software needed to generate these forms, but rather has allowed a handful of private companies to advertise their products as “IRS accepted.” These programs are commonly available in software stores and cost from $30 to $100.

All the programs generate all the special forms most taxpayers need in addition to the standard 1040 form. Instructions appear on the screen so there’s no more wading through stacks of manuals to figure out what to do next. Some offer “what if” work sheets that allow taxpayers to test different tax strategies and compare the bottom lines. Although the IRS makes no product endorsements, Lawrence Magid, the Times Computer File columnist, has recommended MacinTax and the Windows version of TurboTax from ChipSoft and TaxCut from Meca.

Although personal computer tax programs have been around for years, 1993 marks the national rollout of the 1040PC. Previously, tax preparation software programs have recreated only the standard tax forms. However, the 1040PC is a greatly abbreviated version of the standard 1040 that is designed to reduce computation errors by taxpayers as well as transcription errors by IRS workers who must transfer the data into government computers.

The shorter forms also reduce paper handling and storage at the IRS and are considered a potential major money-saver for the agency.

For more information about Form 1040PC filings, taxpayers in Southern California may call the IRS at (800) 829-4477; the special code for an audio explanation of 1040PC is 106. For written information, call (800) 829-3676 (nationwide) and ask for Publication 1673.

Electronic filing is available to taxpayers who prepare their own filings as well as to those hiring a professional. Taxpayers doing their own work can expect to pay $25 to $35 for a tax preparation service, such as H&R; Block, to make the electronic filing. Taxpayers hiring a professional may also be charged an additional filing fee for the electronic transfer.

Why pay up to $35 for what you can get with a 29-cent stamp? Faster refunds.

The government says refunds are sent within three weeks to taxpayers filing electronically. Last year, the IRS says 10.8 million taxpayers took the gambit. For more information on electronic filing, Southern California residents may call the IRS at (800) 829-4477; the special code for information on this subject is 112.

6% Price Break on House Unwarranted

Q: My older sister and I each inherited a half-interest in my mother’s house. Because I had lived in the house with my mom, her will allowed me the option to buy out my sister’s half-interest. I took the option and reached a compromise price with my sister--except for one issue. My advisers said the price should be reduced by 6%, the cost of a real estate sales commission. It makes sense to me, but my sister has balked. Can you help settle this? --T.Y.

A: Sorry, but our advisers side with your sister. Why, they ask, should you get the benefit of a price break for a service that you didn’t use? Even if you will be completely responsible for a full commission if and when you sell the home in the future, your sister shouldn’t be required to put up half of the cost now.

Frankly, our advisers say they haven’t heard of inter-family deals where the sales price is adjusted by the commission of a nonexistent real estate broker.

Perhaps your advisers are thinking about family deals where the sales price is reduced by generous sellers, such as parents, who are anxious to save their children as much money as possible while still making a deal at market prices. In these cases, deducting a sales commission not only saves the buyers money, but reduces the property tax assessment of the home. But in these cases, the adjustment is made willingly by a seller happy to help out the buyer. Clearly this is not the case in your transaction with your sister.

Not All Assets Are the Same to Uncle Sam

Q: I understand that assets held as community property are revalued as of a deceased spouse’s date of death. Does that mean that if my individual retirement account has increased in value from $100,000 to $200,000 over my lifetime that my estate will not be liable for any potential taxes on that appreciation? --D.E.A.

A: No. Although the government allows a step-up in basis for such assets as real estate, stocks and collectibles, it does not afford the same treatment to what are termed “ordinary income assets.”

What are these? They include IRAs, pensions, installment sale notes, annuities, U.S. Treasury securities and savings bonds.

The reason for treating these assets differently from real estate, stocks and the like, say our experts, is that the deceased taxpayer had elected to defer taxation on these “ordinary income assets” by putting his money into these investments.

“Just because the taxpayer wants to defer taxes on his investments doesn’t mean Uncle Sam is willing to forgive the tax bill,” says Howard Gordon, a Palm Springs certified public accountant.