Using PC Technology at Tax Time
Q: Would you tell me more about the Internal Revenue Service’s 1040 PC tax forms that I keep hearing about? And what about electronic filing of tax returns? It seems as though these are both matters more of us should know about, especially at this time of year. -- H.F .
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 file it directly to the IRS via a telephone modem. At least not yet.
Two years ago the IRS began allowing taxpayers nationwide to create their own specialized tax forms on personal computers. These forms, known as the 1040 PC, are completed by the taxpayer, printed and mailed to the local IRS processing facility. IRS tests of the process have found that the accuracy rate on 1040 PC forms was 96.4% compared to 84% for conventionally completed filings.
Be advised, however, that 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 range from $30 to $100 in price. 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.
For more information about Form 1040 PC filings, taxpayers in Southern California may call the IRS at (800) 829-4477; the special code for an audio explanation of 1040PC is 251. For written information call (800) 829-3673 and ask for Publication 1673.
As regards electronic filing, it is available to taxpayers who prepare their own 1040 forms as well as to those hiring a professional to complete their tax forms.
Taxpayers doing their own work can expect to pay $25 to $35 for a tax preparation service to transfer that information onto a special electronic filing. Taxpayers hiring a professional to complete their tax forms may also be charged an additional fee for the electronic transfer.
Why pay extra for what you can get with a 32-cent stamp? Faster refunds. The government says refunds are sent within three weeks to taxpayers filing electronically. 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 252.
Options Available on 401(k) Rollovers
Q: Please tell me more about 401(k) rollovers into IRA accounts and income averaging upon taking disbursements from these accounts. I understand there are steps taxpayers can take to take advantage of the income averaging even if they roll 401(k) account proceeds into an IRA. -- R.V .
A: Taxpayers leaving a company where they have established a 401(k) plan are allowed to move those funds into other tax-deferred savings plans, namely another 401(k) plan with their new employer, an IRA, a SEP-IRA or a Keogh plan. While all these plans offer tax deferral on funds accumulating in the accounts, they do not all treat disbursements alike.
Lump sum withdrawals from Keogh and 401(k) plans can be treated to a special 10- or 5-year income averaging; withdrawals from IRA and SEP-IRA (for the self-employed) plans do not enjoy this advantage. (Ten-year income averaging is available to taxpayers who turned age 50 before Jan. 1, 1986; only five-year averaging is available to everyone else.)
The reason for the difference, tax experts say, is that 401(k) and Keogh accounts are considered “qualified pension plans” and IRAs and SEP-IRAs are not included in that category.
However, taxpayers who roll a 401(k) account into an IRA upon leaving their employer do not necessarily give up forever the opportunity to invoke the income averaging. By keeping that rollover IRA “pure"--that is, by not mingling those funds with any others--they may at a later point transfer the account proceeds into another 401(k) or Keogh plan. Then, withdrawals from either of those accounts could be treated to income averaging.
Claiming Business Loss in Rental Property Sale
Q: If I sell a piece of rental property and sustain a high loss, may I carry this loss forward to offset capital gains and ordinary income in future years? -- J.J .
A: Assuming that your real estate rental is not a passive investment, its sale will generate a business loss that you may claim in its entirety in the first year. You have mistakenly assumed that the sale will generate a capital loss that can only be deducted against capital gains and up to a maximum of $3,000 per year of ordinary income, with any excess carried over to future years.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
More on Earthquake Insurance
* Times on Demand has prepared a compilation from the Money Talk column of the most-asked questions and answers on how taxpayers should treat casualty losses, insurance payments and FEMA grants on their 1994 tax return. To order, call 808-8463, press *8630 and select option 1. Order Item No. 2823. $4, plus 50 cents delivery.