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Late Tax Form Turns Pair of Earrings Into Booby Prize

Also, how to minimize taxes when passing a house on to your child and the IRS' e-filing tallies.

Tax Forum tackles two issues this week: (1) What happens if you get a Form 1099 after you filed your return and you disagree with the number being reported? and (2) How do you pass your principal residence on to your kids without any gift tax? Plus, the e-filing numbers are in from the

Internal Revenue Service


Send any other questions to, and please include your full name.

E-Filing Explodes

The IRS received more than 111.5 million returns this tax season. That's only a 1.3% increase from the 1997 tax season. But the number of returns electronically filed via a computer jumped 27% to near 23.3 million returns.

The best part is that many of you took matters into your own hands this year. The number of tax returns filed from home computers shot up a whooping 161%, from 922,000 filed for the 1997 tax season to 2.4 million returns filed for the 1998 tax season. Way to empower yourselves!

In addition, many more of you had your refund checks directly deposited in your checking or savings accounts. The IRS deposited close to 22 million refund checks this year -- that's around 21% more than last year's tax season. The average refund hovered around $1,542, 15% higher than the average 1997 refund.

And hey, credit card users! More than 53,000 of you put your tax bill on a credit card. Just please be aware of those soaring interest rates.

If you filed for an extension in April, you still can electronically file your return up until Oct. 15.

Late 1099 Is No Prize

My wife won a pair of earrings late last year in a local store that the store claims were worth $1,000. I received a 1099 for this item in March, after I had already filed my taxes and received my refund. How should I handle this? Also, if I have to file a form to claim this item, is there a way to dispute its value? There is no way these earrings would sell for $1,000. If I must file an amendment and pay for them, can I have them appraised and pay the tax on the appraised value instead of the store's claimed value? -- Wyllys Ingersoll


First, let's look at what you do when you receive tax documents after you file your tax return. Then we'll consider how to dispute a tax document.

Technically, the

Form 1099-MISC

- Miscellaneous Income

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-- or at least a notice saying it was on its way -- should have been sent to you by the end of January, says Rande Spiegelman, personal financial services manager at



If an expected 1099 does not arrive by April 15, you would have to file an extension and factor that income into your tax payment as best you could, says Spiegelman.

But what if, as in your case, you had no idea the form was coming and you filed your tax return? You would have to file an amended return because you still would owe tax on the additional income. You also would owe accrued interest on that tax from April 15 on.

You should not have to pay any late penalties on the additional tax because it was not your fault the 1099 came late. So when you fill out

Form 1040X

- Amended U.S. Individual Income Tax Return

make sure you note in the explanation box that you received additional tax information after you filed your return.

Either way, since you already received your refund, you will have to send the

Internal Revenue Service

the difference between your original refund and your new balance.

What if you don't amend your return? Well, at this point, the IRS has received a copy of your 1099, too. So the computer eventually will figure this out, and you'll get a deficiency notice. That just means more interest and possibly penalties. You're better off amending now.

If you realized your tax bill was actually lower than the amount filed on your tax return, you would have to decide if amending your return and reclaiming your money was worth it. Let's say you realized you overpaid your tax bill by $25. Is it worth the time and money you would spend to amend your return? It's your call.

Now, about disputing your 1099. If you believe the amount reported is incorrect, first go back to the issuer and dispute it with him or her. You cannot, in your instance, get your own appraisal and just send it to the IRS. The Service won't know what to do with it, especially since a computer at the IRS -- not a person -- is going to match your 1099 to the tax paid on your return. If you paid less than the amount the computer calculates, you will get a deficiency notice and have to deal with the IRS.

But if you go back to the issuer and have the form corrected, the IRS will receive a corrected version and your numbers will match up in the system.

Again, is it worth your time? How many people will you have to hassle with to get your 1099 changed? Make sure it's cost effective. Or maybe it's a matter of principle to you. In that case, do what you need to do.

Here's a tip for your prize-winning future. When you win a prize, immediately ask what amount will be taxable. If you believe it's much more than the value of the prize, you might want to consider declining the gift, suggests Spiegelman. But don't take the prize and then give it back. The IRS would consider the returned prize a gift, and you don't want to go there.

Living in a Gift House

If I make a gift of the deed to my $250,000 full-time personal residence to my grown child and retain life use, will the gift result in any federal tax liability to either party? -- Rey Barry


Time for a gift-tax refresher.

You can make a tax-free gift up to $10,000 to any one person each year. If you're married, your spouse can do the same. So a married couple can give up to $20,000 each year to anyone.

In addition, you have a lifetime gift-tax exclusion of $650,000 (or $1.3 million for you and your spouse). The exclusion will gradually increase to $1 million per person by 2006. If you give a gift of more than $10,000 a year (or $20,000 for a married couple), the excess will count against this exclusion. So if you give your child a $15,000 gift, that extra $5,000 would eat in to your lifetime exclusion. Now you have only $645,000 left.

Now if you were to give your $250,000 house to your child, the first $10,000 (or $20,000 if you're married) will be excluded. But you will have to file a gift-tax return for the remaining $240,000, even though you don't owe gift tax on it, says Spiegelman. The return is just helping the IRS keep track of how much of your unified gift-tax credit you've used. If you give your child the house in 1999, you'd have $410,000 left of your credit.

Just be aware that although the current fair market value of the house counts against the exclusion, your child's new basis in the house is your original cost. So if your child decides to sell it, he or she will owe capital gains taxes on the difference between your original cost and the fair market value on the day of the sale.

By deciding to stay and live in the house, you must consider a few things. If you do not pay rent, your child is effectively giving that money to you, says Spiegelman. So if the current market value of the rent is above $10,000 per year, the balance will cut into

your child's

unified gift tax exclusion and he or she will have to file a gift-tax return for that difference.

A better idea may be to pay rent. The amount must be reasonable, but the great part here is that you are getting more money out of your estate and into your child's hands. Even better, no one is paying gift tax on the money, and it doesn't count toward anyone's $650,000 unified gift-tax exclusion.

There are two other estate-planning options that you may want to consider with your principal residence, suggests Spiegelman. But note that both come with big setup costs and attorney fees.

A qualified personal residence trust, or QPRT, is an irrevocable trust that allows you to give your home away at a discounted price, says Spiegelman. Basically, you transfer the home to the trust for a determined number of years and still retain ownership of it. The value of the house is discounted over those years, so when then trust expires, the house is worth much less (even though its market value may be much higher). Now you can leave the house to your child, the trust's beneficiary, and use up much less of your unified gift credit.

If you choose to stay in the house after it is transferred to your child, again, you might want to consider paying rent.

If you have additional assets, you also might consider a family limited partnership, or FLP, suggests Spiegelman. This partnership comes with big setup and maintenance costs, but here are the basics: You transfer your assets to the partnership, and their value is discounted. Why? Because the assets in the partnership are no longer available to anyone, so they're useless. That's why the IRS allows you to discount their value.

You'd then set yourself up as the general partner and give away pieces of the partnership each year until the whole partnership is in your child's name.

See a previous

story for more details.

Morningstar Conference Coverage

The annual

Morningstar Investment Conference

in Chicago brings together many of the investment industry's top executives and portfolio managers to share ideas and spotlight emerging trends.



Brenda Buttner

and staff reporter

Joe Bousquin

will provide continuous coverage of the three-day event starting Monday.

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.