Tracy Byrnes and Ernst & Young's Martin Nissenbaum chatted about taxes on Yahoo! on March 23.

TSCEllen:

Welcome everyone! The tax chat with Martin Nissenbaum and Tracy Byrnes will begin in just a moment.

TSCtracy:

Hey there everyone! Are you getting excited for April 15th? Here's something you might appreciate ... I already electronically filed my tax return. Don't hate me ... but listen to this! I got my refund back in seven ... yes, seven days! I had it directly deposited right into my checking account! Try it! You'll love it! So are you still having trouble coming up with those last-minute deductions? We'll help you think of a few more. Home office deduction got you down? We'll take care of that. Has that Roth got you all sorts of confused? Then you've come to the right place! I hope you all got a chance to check out the series we did at: Here's the link:

www.thestreet.com/funds/taxes/724768.html. OK. So let's get started! It's our pleasure to have Martin Nissenbaum of Ernst & Young with us today. Martin is as close as you'll get to Uncle Sam ... so don't be shy!

M_Nissenbaum:

Thanks, Tracy.

BearCatBen asks:

What are the advantages of being an LLC in terms of federal taxes?

M_Nissenbaum:

An LLC is simply treated as a partnership for tax purposes So all of the income flows through directly through to your tax return as if you were self-employed The LLC form really doesn't have any particular tax advantages -- whatever tax benefits you could take as a self-employed person are available to you as a member of an LLC.

ddave63_35male asks:

My girlfriend and I own a house together -- both names on the mortgage. Can one of us deduct all the interest or do we have to split it? Thank you.

M_Nissenbaum:

As long as both of you are liable on the mortgage, the person who actually paid the interest can take the deduction. But you can't arbitrarily allocate it between the 2 of you.

TSCtracy:

I hear Martin typing like a madman!

NSyncer4Life asks

Is it really that good of an idea to do your taxes through the Internet?

M_Nissenbaum:

Doing your taxes over the Internet can mean a number of things. For example, Intuit gives it software free for anyone with agi of 20,000 or less. That's a great deal, but if you mean e-filing, then it might be worth it if you have a relatively simple return but you still have to file your signature and some people say, although it's not confirmed, that the IRS has an easier time auditing you if you filed electronically.

TSCtracy:

Martin, do you think there are security issues?

M_Nissenbaum:

The IRS commissioner is a computer person. I have to hope that security was his No. 1 priority. As a matter of fact, the e-file program was delayed for years because of that issue. I think that the IRS security system is probably in good shape. I wouldn't worry.

TSCtracy:

But I e-filed and got my return back in 7 days!

dayinv24 asks:

I am still somewhat confused about the character of the trading income under the 475(f) election. The election makes the income ordinary income except for purposes of self-employment tax. So I can offset regular other income with a trading loss. Can I carry back this loss to a prior year?

M_Nissenbaum:

Since the loss is considered ordinary, it's like any other loss from a business.

TSCtracy:

Check out our Taxes for Traders Series for more info:

www.thestreet.com/basics/tradertaxes/716317.html.

M_Nissenbaum:

A net operating loss (i.e. your losses exceeded your income) you can carry back the NOL 2 years and apply for a refund.

TSCtracy:

Sounds good to me.

ItaInv asks:

Is it possible to have Long Term Cap. Gains with LEAP Options?

M_Nissenbaum:

A LEAP is a long term option. If you held the option over a year and sell it, you would have long term cap gains.

TSCtracy:

A LEAP: Long-term Equity Anticipation Securities.

rowdydog_1 asks:

If you are over 65 and on social security and on other income, do you have to file a tax return?

M_Nissenbaum:

If you have no other income, none of your benefit is taxable and you don't have to file a return.

hushaphone asks:

If I sell mutual fund shares at a loss, (both short term and long term), do I have to break the loss down into short and long-term on my return?

M_Nissenbaum:

Yes, although you can calculate your basis using an average.

TSCtracy:

Martin, don't some mutual fund share holders have to deal with the mid-term cap gains rate? Curse Uncle Sam for that mid-term nonsense.

M_Nissenbaum:

Very few. The midterm rate (28%) would only apply where the mutual fund was a shareholder in another fund or partnership which had transactions early in 1997 which are reportable in 1998. Your 1099 will make this clear.

TSCtracy:

We can only hope.

yawanna39 asks:

Tracy, if I filed bankruptcy chap 13, why did my attorney tell me to send my refund to the court trustee? Can i keep it?

TSCtracy:

No ... nice try though!

M_Nissenbaum:

Tracy, what's your mailing address for that check?

TSCtracy:

tbyrnes@thestreet.com!

ddave63_35male asks:

Is it a problem if it was paid with a joint checking account, I have too many deductions and pay the stinking Alternative Minimum tax, so what if her contributions to the joint account paid the interest?

TSCtracy:

Great questions!

M_Nissenbaum:

If it's a joint account but she contributed the funds, she would get the deduction.

TSCtracy:

You mean the @#$%^ alt min tax, don't you?

M_Nissenbaum:

It is allowed for the damn AMT also.

UW_dude asks:

I still haven't received my W2 from the military. What should I do?

M_Nissenbaum:

Report the Government to the IRS. Seriously, contact the payroll manager and ask for them a substitute. It probably got lost in the mail.

katiegreatie asks:

I've got a bunch of freelance income from last year, much of it in increments of less than $600 (the minimum for the publications to file a 1099). What happens if I don't declare it? Are they going to catch me?

M_Nissenbaum:

They may not, but you still have to report the income. If they audit you and check your bank account records they'll see those deposits.

TSCtracy:

Let your conscience be your guide.

M_Nissenbaum:

Unless you got paid in currency.

hoseheadd asks:

If you own a stock for 20 years, does the IRS know when you bought it?

M_Nissenbaum:

The IRS does not know when you bought it, but if you don't keep records, they'll assume your basis is zero.

TSCtracy:

Seems like folks are trying to pull the wool over the IRS' eyes, hmm?

hushaphone asks:

I got stock from an estate. It's priced from the date of the person's death, right? I sold it immediately, though when I sold it was more than a year after the person's death. So it's a long-term gain, right?

M_Nissenbaum:

Actually, even if you did sell it immediately after death, any postdeath appreciation would be long term.

M_Nissenbaum:

Even if held for less than 12 months and a day. The IRS is nice to dead people, sometimes.

MUCKALT17 asks:

Can you please explain the capital gains tax, and to which ages have to pay which percentages of their gains? Thanks.

TSCtracy:

How much time do you have?

bracket M_Nissenbaum:

If your gain is in the 15% bracket the gain is taxed at 10%; otherwise at 20%

TSCtracy:

It's a novel idea though to pay tax based on your age ... maybe we should propose it to Congress, Martin?

M_Nissenbaum:

Actually, the kiddie tax does depend on age If you have a child under 14, their income is taxed at your rate 14 and over, they're taxed at their own brackets.

TSCtracy:

You got all serious on me!

dayinv24 asks:

I had a net loss in 1996 from the trading. Can I go back and amend that return, do a 475 election and then carry back to the prior years?

TSCtracy:

That's a great question ... we'll get back to it though!

DoggNutts99 asks:

What about daytraders? Where should one get info or software on the subject?

TSCtracy:

We did a piece on the pros and cons of these software packages. Here's the link:

www.thestreet.com/basics/tradertaxes/716317.html. Just note that not many handle the wash sale. Hey dayinv24 ... just so you know ... the 475(f) election was not available in 1996. It started in 1997, so you can't go back and amend. Sorry!

oose2 asks:

At what age don't you have to file a tax return?

M_Nissenbaum:

There is no age. If you have more than 700 of unearned investment income, a return must be filed.

M_Nissenbaum:

If you're only a year old your parents can do it.

kewgardens98 asks:

I have a passive loss which I cannot claim this year due to the adjust gross income limit. Can I carry over this loss for next year's taxes?

M_Nissenbaum:

Yes, but you'll be subject to the same limitations based on your income in the subsequent year. You'll be able to deduct the full passive loss carryovers when you dispose of the property.

yawanna39 asks:

Tracy, does Turbo Tax do state also?

TSCtracy:

Yes it does ... but you have to buy each state individually Or you can download them off Intuit's site.

ddave63_35male asks:

Speaking of the @#$%^ AMT, how can this be beaten, legally of course!

M_Nissenbaum:

That ^%&^%%* AMT is usually created by excess itemized deductions or income adjustements.

M_Nissenbaum:

If you can get deductions above the line that would help Or try to time adjustments (like ISO exercises) so that your AMT and regular tax are about the same Being a trader helps since your deductions are above the line.

TSCtracy:

Heads-up on above the line.

M_Nissenbaum:

Above the line deductions are deducted in calculating AGI -- like business expenses, IRA deductions, alimony.

Kennys_doll asks:

In Canada do taxes have to be filed by the beginning of April or the end? Thank you.

TSCtracy:

How's the weather up there?

M_Nissenbaum:

I know nothing abooot Canadian taxes. Sorry.

klpetre asks:

What are the basic tax advantages of being a trader over being an investor?

TSCtracy:

To start, if you elect trader status, you can include all you expenses on Schedule C. Then they are unlimited. IF you elect to mark to market your trades, as a trader, then everything can go on Schedule C -- and you won't have to deal with SE tax. Check out our Taxes for Traders Series!

M_Nissenbaum:

Actually there's no election to be trader, you have to meet the requirements which are not all that clear. It basically depends on the extent and volume of your trades.

katiegreatie asks:

I only have about 30 bucks in interest income. Do I have to declare that?

TSCtracy:

After this bull market, only $30?

M_Nissenbaum:

If a bank pays 10 or more dollars to you in interest they report it to the IRS. If YOU don't report it you'll be hit with an automatic penalty.

TSCtracy:

But isn't it true that int and div under $400, means that you don't have to file Schedule B?

M_Nissenbaum:

Yep, you just put the total on the front of your 1040, 1040A or 1040-EZ.

grappav asks:

I have a mutual fund account and I borrowed against it to get cash. Does that money I took out count as taxable income?

M_Nissenbaum:

When you borrow, the loan is not taxable income. Whether the interest on the loan is deductible depends on what you did with the proceeds. I assume you didn't sell your shares.

ddave63_35male asks:

Mr. Nissenbaum, what about these people that say the income tax is voluntary and don't pay -- does it fly?

M_Nissenbaum:

Case comes up every week -- last week one that said salary was not income. Courts hate these cases and throw the book at the non-taxpayer as will the IRS.

TSCtracy:

But if its voluntary -- then Martin will be out of a job!

M_Nissenbaum:

I'll become a trader.

TSCtracy:

You and everyone else!

gonzo_7_98 asks:

If I have one child, do I get the child tax credit?

M_Nissenbaum:

As long as the child is under 17. The credit is not refundable unless you have more than 2 children, but you can always use the credit against your tax liability.

TSCtracy:

There's an adjusted gross income phase-out right? Actually there's an AGI phase out for most things!

M_Nissenbaum:

Gets phased out for AGI over 110,000 (joint).

texasboob asks:

What is the short-term capital gains rate? and what is the long-term rate?

M_Nissenbaum:

Short-term gains are taxed at the same rates as ordinary income from 15% to 39.6%, although you can offset them by capital losses -- long or short. Long-term gains in the 15% bracket are taxed at 10%, otherwise they're taxed at 20%

TSCtracy:

Remember -- long term means 12 months and a day.

ddave63_35male asks:

If you hold stock in a company that goes bankrupt (FPAM Medical) do you have to sell it? for pennies, when does the loss occur? It is technically still trading.

M_Nissenbaum:

If it's still trading and has ANY value, you can't write it off. You must sell it to take the loss. If it's technically trading but there are no trades (?) then it's probably worthless now.

kewgardens98 asks:

If I have a loss on the sale of stocks but I also have capital gain also, do these 2 amounts offset each other? And does it matter if it's a long term or short term?

M_Nissenbaum:

Capital gains and losses are offset within the short and long categories. You then net any losses against any gains for example, a net st gain of 5000 could be directly offset by a net lt loss of 4000 to produce 1000 of st gain.

ddave63_35male asks:

What if the 401K loan was used for a deposit on a house? is the interest paid on the 401 k loan deductible?

M_Nissenbaum:

No, because the loan would have to be secured by your residence to be deductible. If it's secured by your 401k, it's not deductible. Some plans actually will take a mortgage, but this is rare.

TSCtracy:

Yours truly did this and is regretting it as we speak ... I mean type.

gonzo_7_98 asks:

If a child of age 16 has wages of $1,600 and unearned interest of $2,500, how much of the total income is taxed at the parent's tax rate?

TSCtracy:

That's a happy 16 year old!

M_Nissenbaum:

1100, 2500 less 1400.

kewgardens98 asks:

Is there really any benefit in contributing to a IRA if you get no tax benefit?

M_Nissenbaum:

I assume you mean tax benefit for the contribution, i.e. no deduction. There is still definitely a benefit since the income is tax deferred until you draw it down. If you use a Roth you could get a lifetime of tax-free income!

TSCtracy:

You read my mind. Go Roth!

ddave63_35male asks:

LOL, I'm in sales, an employee but pay all my own expenses and am compensated straight commission, since they are non reimbursed employee expenses, they say they are below the line, something about milk men being able to put them above the line, flipping crazy!

M_Nissenbaum:

There's what's known as a statutory employee -- you're treated as an employee for fica tax purposes, but you can deduct your expenses on a schedule c above the loan. There should be a box checked on your W-2 that says "statutory employee".

TSCtracy: FYI:

FICA is your SS and Medicare tax.

TSCEllen:

Tracy and Martin -- can you go into the new student loan interest deduction? And when will the government include a line for it on the EZ as that's what most students probably use?

M_Nissenbaum:

The law now allows up to a 1000 deduction for student loan interest.

TSCtracy:

You are assuming the government works logically.

M_Nissenbaum:

It's available even if you don't itemize but only for interest paid within 60 months of repayment.

TSCtracy:

Of course, there's an AGI limitation

M_Nissenbaum:

There is pending legislation that would get rid of this 60 month limit. The amount is scheduled to rise in future years the deduction is phased out between 60-75k(joint) and 40-55k for single.

TSCtracy:

Yes there is ... but Monica pushed this proposed legislation off a bit ... so sit tight for that one.

gonzo_7_98 asks:

If my friend lives with me for nine months, and I am the head of household, can I claim my friend as a dependent?

M_Nissenbaum:

To claim a dependent you have to provide over half their support, and the person can't be living with you in a relationship which violates local law.

TSCtracy:

Note that your friend must be a human being ... not your dog.

ddave63_35male asks:

If it stops trading and you still own it (hence you can't sell it) can you still get the loss?

M_Nissenbaum:

Unless your dog has a social security #.

TSCtracy:

And that's a whole other chat.

M_Nissenbaum:

Yep, it would be considered worthless once no one will buy it -- some brokers will do a courtesy purchase for a dollar just to get the record clear.

jbousquin asks:

If I have the option of claiming full-year residency in a state or part-year residency, which status is better?

M_Nissenbaum:

Wow, how'd you get an option? It really depends on where you're moving from. If your new state has a lower tax rate you probably want to be there sooner

TSCtracy:

but what if the person lived in NY ... took a job in say VA for 3 months ... then came back to good ol' NYC ... are they full year or part year resident?

M_Nissenbaum:

You're still a full year resident in New York if you intended to return so you'll pay tax to VA as a nonresident, but you'll get credit for that tax dollar for dollar on your NY return and believe it or not, New York tax rate is not that high, relatively speaking.

TSCtracy:

That's a huge surprise, all things considered.

gonzo_7_98 asks:

Is state disability insurance (SDI) taxable income?

M_Nissenbaum:

Depends on who paid the premium if it was fully paid by your employer the entire benefit is taxable. If you paid part of the premium (eg through payroll withholding) a prorated portion of the benefit is not taxable.

kewgardens98 asks:

The capital loss is limited to $3,000? Right?

M_Nissenbaum:

That's right. If your net losses (net of gains) is $3000. or more you can deduct up to $3000. and carry over the excess. Or you could make a 475 election, if you're eligible, and deduct the whole amount. Don't forget to buy the 1999 Ernst & Young Tax Guide

TSCtracy:

It's actully a great guide

M_Nissenbaum

And check out my tax tips (and picture) at www.ey.com

TSCtracy:

And I'm not just saying that

TSCEllen:

Thank you for being with us, Martin! And thanks for all the great info!

TSCtracy:

Martin, thank you so much!

M_Nissenbaum:

My pleasure!

TSCtracy:

This has been great for all of us!

TSCEllen:

Make sure to look for the transcript of this chat in the community section of TheStreet.com.

TSCtracy:

And if we didn't get to answer any of your questions, send them on to taxforum@thestreet.com I'm be sure to get Martin's in on your answers!

TSCEllen:

If you'd like to know more about TSC chats on Yahoo!, send email to chats@thestreet.com.

TSCtracy:

Looks like my fingers are tired!

M_Nissenbaum:

Bye!

TSCEllen:

Thank you so much for coming and we'll see you next time!