State Tax Collector Has Long Arm
Q: I am a California resident who will soon begin working in Japan for at least a year. Will I have to pay taxes to the state on my income while abroad? -- S.K.
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A: The answer depends on how long you will be out of California and whether you intend to return to the state after your stay in Japan.
If you will be gone for less than 18 months and intend to return to California to make your home, you will be expected to file a state tax return and pay California taxes on your earnings in Japan.
If you don’t intend to return here after a foreign excursion of 18 months or less, California authorities say you should expect to have to pay state taxes somewhere--and that could be California. It will depend, our state tax authorities say, on where your “closest ties” are, a determination that will take into account property ownership, voting activity and mailing address. So even if you intend to leave California, the state may still claim you as a tax-owing resident.
If your overseas assignment will last for 18 months or longer, you are no longer considered a California resident and owe no state taxes.
However, even if you owe no taxes on your income while abroad, California will still expect you to pay taxes on any taxable real estate or business transactions you might have within state boundaries during that period. Interest earned on any bank accounts within the state are not taxable by the state while you are not a resident here.
Head of Household Must Meet the Test
Q: I am single and under court order to support my child, who lives with her mother in an apartment where I pay the entire rent. I basically pay all my daughter’s expenses and visit her weekly. My ex-wife does not claim a deduction for her. Can I make a claim as head of household? --J.S.
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A: There are essentially four criteria taxpayers must meet to claim head-of-household status.
You must either be unmarried at the end of the tax year, or, if still married, have lived apart from your spouse for the last half of the year. You must maintain a household for your child, parent or other dependent relative. The household you maintain for that dependent must be your principal residence as well (except in the case of a dependent parent). And you must be a U.S. citizen or resident alien for the entire tax year.
As you can see, you meet all but the third requirement; the home you maintain for your child is not your principal residence.
That said, there may still be a chance for you to claim your daughter as a dependent on your tax return. Though not as great a tax break as head-of-household status, any deduction is better than none. Your claim would be based on whether your divorce or separation decree names you as the parent entitled to the deduction for a dependent relative. Even if your ex-wife is entitled, she can transfer the deduction to you by signing Internal Revenue Service Form 8332, which you then file with your income tax return.
‘Points’ May or May Not Be Deductible
Q: My daughter recently purchased a home. As part of her closing costs, she paid $1,003 in loan origination fees and $2,256 in mortgage insurance premiums. Are either of those charges deductible? --L.C .
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A: Loan origination fees, or points, are either treated as a type of prepaid interest or as a non-deductible service fee, depending on what the charge actually covers. If the fees are considered prepaid interest, as many are, they are generally deductible over the life of the loan--with two important exceptions: when they are paid on the purchase loan or a home improvement loan.
Points of these latter two types of loans are deductible in the year paid if the following five conditions are met:
1) The loan is secured by the taxpayer’s personal residence;
2) Charging such fees is an established business practice in the local community;
3) The charges do not exceed local standards;
4) The amount of the levy is computed as a percentage of the loan and is specifically noted on the closing statement as a loan-origination charge;
5) The taxpayer pays the fees directly to the lender.
Mortgage insurance premiums, like other insurance premiums, are not deductible.
Medicare Coverage: It Kicks In at 65
Q: My husband is 60 and I am 52 and we are both retired. His health insurance through his job will expire next year. He plans to begin drawing Social Security at age 62. At what age will he qualify for Medicare? -- L.F .
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A: No matter at what age you begin drawing Social Security, if you are an able-bodied taxpayer, you do not qualify for Medicare coverage until age 65.
There are only two exceptions to this rule: if you are disabled and have already been drawing Social Security disability benefits for 24 months or if you are receiving kidney dialysis or are awaiting a kidney transplant.
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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, L.A. Calif. 90053
