We have a smorgasbord of tax issues this week. A few readers have expressed some skepticism about the Internal Revenue Service's ability to keep track of IRA contributions. It's not a good idea to underestimate the IRS. We'll also discuss whether traders can deduct health insurance premiums. And we'll look at how to "share" Form 1099.
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Tracking IRA Contributions
How does the IRS confirm that taxpayers have actually made IRA deposits when they claim a deduction for them? -- William Kendrick
Every time you make a contribution, the company holding your IRA -- your broker or mutual fund company -- has to report the amount to the IRS. So if you don't report the contribution, the company will anyway.
Even so, you still have to report your contributions on your tax return. Deductible IRA contributions are reported on line 15 of your
Form 1040 --
U.S. Individual Income Tax Return
. Nondeductible contributions should be reported on
Form 8606 --
. If you're supposed to file this form and you don't, you'll be hit with a $50 fine, warns Bill Fleming, director of personal financial services for
In the end, the IRS probably knows more about your IRA than you do, notes Fleming.
Reporting Options Trades
Why doesn't the IRS require brokerage firms to report option transactions? -- Nilesh Thakker
Who knows? "That's a question I am asked often, but I have no idea why not," says Ted Tesser, a CPA in Boca Raton, Fla., and author of
The Trader's Tax Survival Guide
. He believes the IRS probably will get around to requiring it at some point, but there has been no suggestion as to when.
"I still tell my clients to always report the income, even if it's not on a 1099," says Tesser
And keep all the supporting documentation. If you're ever audited, you want to appear as credible as possible, says Tesser. One of the first things the IRS will want to verify is how truthful you were in reporting your extra option income.
Insurance Deduction for Traders
Self-employed individuals have had the opportunity to deduct increasing amounts of health insurance premiums from earned income under recent tax law. Since trading income is not "earned income" for some purposes, do you know whether a trader can take a deduction for health insurance? -- Dan Jones
It's important to note that nothing has been written on this topic. But based on interpretations of current law, if you elect trader status, you can't take a self-employed health insurance deduction, says Tesser.
When you elect trader status, your income is treated as ordinary income, not self-employed income. "How can you deduct self-employed health insurance and still take the position that it is not self-employment income? I don't think you can," says Tesser. (For more on claiming trader status, see our
Taxes for Traders series.)
You are right, though, about the bigger increases in health insurance deductions for the self-employed. In 1998, self-employed taxpayers could deduct 45% of the cost of medical insurance for themselves, their spouses and their dependents. In 1999, 2000 and 2001, the deductible amount jumps to 60%. It will be 70% in 2002 and 100% in 2003 and thereafter, according to the
Research Institute of America
Code Sec. 162(l)(1)(B)
for more details.)
Splitting a Form 1099?
On my tax return (married filing separately), I have to report interest that was paid partly to me and partly to my wife. All of it was reported to me on a Form 1099 with my Social Security number. But my wife is responsible for paying tax on half of this income. How should I report this, for example, on Schedule B? -- Richard Buck
This is not a problem. You simply must show a little extra work on your
Schedule B --
Interest and Dividends
Form 1099INT --
is in your name, you must include the whole amount on your Schedule B, says Fleming. But on the line below that amount, subtract the amount attributable to your wife and write, "Amount received as nominee for
your wife's name,
your wife's Social Security number," instructs Clarence Kehoe, partner and director of employee benefits at
Anchin, Block & Anchin
. Then show that the balance is the amount on which you will pay taxes.
Your wife can report her portion of the total on her Schedule B and note that an additional amount will be reported on your tax return. She can include a copy of the original 1099, although it is not necessary, says Kehoe. The IRS will not be too concerned that she reported extra taxable income without documentation. The IRS likes that kind of thing.
The IRS will be concerned about your return because you are including a Form 1099 that is in your name but you're not paying tax on the full amount. This is why it's important to make very clear on Schedule B that you are sharing the amount with your wife.
Extra Stuff from My Broker
I just received my Form 1099 from Waterhouse, and for the first time, it includes all sales and purchase activity. Is this just for my benefit, or do I have to send the full form with my tax return? -- Jack Moolick
This time of year, you'll be getting lots of documents in the mail. The trick is to determine what you need for your tax return and what's just "extra stuff" for your files.
In your case, I think the additional document you're referring to is a detailed income statement Waterhouse Securities sent to all its customers along with Form 1099 for the first time this year, says company spokeswoman Melissa Gitter.
The statement contains a recap of all transactions you made during 1998. You do not have to send the statement in with your tax return.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
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