A Free-Lancer Frets His Tax Bill
Q. I have been retained for a special free-lance project that could pay me as much as $12,000 this year. No taxes were withheld from my first payment of $3,000. Should I file an estimated tax form with both the state Franchise Tax Board and the IRS? I already have taxes withheld from my salary for my “day job.” --T.N.T .
A. You could file estimated tax payments each quarter on your free-lance income, but it may not be necessary. Basically, you can avoid penalties for under-withholding of taxes in one of two ways: Prepay 90% of your total obligation for the tax year, either through withholding or estimated quarterly payments, or prepay an amount equal to your previous year’s tax obligation.
It’s possible that the amount your employer withholds from your regular salary is sufficient to cover your tax obligation on your free-lance income as well. Did you get a tax refund this year? If so, and if you haven’t changed your level of withholding, you shouldn’t worry about any penalties because the amount of your withholding this year will be equal to your total tax obligation from last year.
Furthermore, your withholding from your regular job might be sufficient to cover the taxes on your free-lance income, freeing you from the possibility of having to come up with a big tax payment next April.
Still, if you want to be extra sure that you won’t get hit with a big tax bill next April, you could simply ask your employer to increase the amount withheld from your salary.
Rental Income Is Gone With Tenant
Q. We finally evicted a tenant who had not paid his rent for two years. When he left he owed us $8,900 in back rent. Are we entitled to deduct this loss of rental income from our taxes? -- W.L.W .
A. A deduction for lost rental income is allowed only when you are reporting your rental income on an accrual basis.
What does this mean? In some cases, notably when a business leases real estate, the rental income is reported for the year in which the business is entitled to receive it, regardless of whether it is actually paid.
Most individuals handle their rental income on a cash basis, reporting it for the year in which it was actually or “constructively” received.
If you accrue payments that you never receive, you may deduct your loss of rental income because you have already declared it. However, if you report your rental income on a cash basis, you are not entitled to a deduction for income you have never declared.
In other words: Uncle Sam doesn’t give you a tax deduction for income you didn’t get or that wasn’t subject to taxation.
Tracking Down That Missing Tax Refund
Q. I am expecting a refund from the Internal Revenue Service. Is there some way I can find out why it’s taking so long? F.T.O .
A. In general, you can expect to wait up to eight weeks after filing to receive your refund. You can find out if the IRS has received your return and where it is by calling the agency’s number: (800) 829-4477.
Be sure to have a copy of your return on hand. You will be asked to punch in your Social Security number as well as the exact amount of the refund you calculated on your return.
How to Compute the $125,000 Exclusion
Q. I want to sell my house and use the one-time exclusion of $125,000 for which I am completely qualified. How do I apply this exclusion? I paid $50,000 for my house and could realize $171,000 from the sale, after commissions and closing costs. Do I deduct both the $125,000 and my cost basis in the house, thus leaving me no taxable gain? --L.G .
A. The actual computation you must make will depend on whether you intend on purchasing another house. If you do not plan to buy another home, you should deduct your adjusted cost basis in the house from its adjusted sales price to arrive at your unreinvested profit. Now you take the one-time exclusion of $125,000. In your case, the math might look like this: $171,000 minus $50,000, equaling $121,000. Once you deduct the $125,000 you will find that you will have no unreinvested profit to report.
By the way, you cannot “save” or hold over any unused portion of the $125,000 exclusion. Anything unused at the time you invoke the exclusion is forever lost.
If you plan to purchase another home for less than your adjusted sales price and use the $125,000 exclusion to avoid taxes on the difference, you would first deduct the exclusion from your adjusted sales price. It is at this point that many taxpayers get confused. The IRS allows you to next deduct the larger of either your taxable basis or the purchase price of the new home. You cannot deduct both amounts.
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.
