Tax Q&A

Answers to your tax questions

Options • Depreciating business software • Rental expenses • Adoption credit

By Lawrence Farber, Senior Editor

Q: I let a call—an option to buy stock at a specified price—expire last year. Should I deduct the cost of the call as an investment expense?

A: No, list it as a capital loss on Schedule D. The loss is long term or short term, depending on whether the option period was more than a year. If you had exercised the call, its cost would have increased the tax basis of the stock you acquired.

Q: I bought a practice in 2000 and was told that deductions for the cost of certain "intangible" items like goodwill and patient files have to be spread over 15 years. Does that apply to computer software?

A: It does if the software was specially created or adapted for the practice. But if the software is commercially available in its present form and isn't under exclusive license, you can depreciate it over 36 months.

Q:I rented out my vacation home for several holiday weekends last year. Since the rental days totaled fewer than 15, I know I don't have to report the income. But must I reduce my mortgage interest and property tax deductions proportionately?

A: No. But you can't claim maintenance, depreciation, or other costs. One exception: Casualty losses remain deductible.

Q: Last year, our newly formed partnership paid for our health insurance. If the partnership deducts the premiums on its return, do the partners owe tax on them?

A: Yes. Include your share of the premium cost as salary income on Schedule E of your individual return. But you can claim 60 percent of the amount as a self-employed health insurance deduction on line 28 of Form 1040.

Q:We adopted a Bosnian girl last year. Can we claim a credit for adoption expenses even though she was born in another country?

A: Yes. You can claim a credit for up to $5,000 of the total spent for adoption fees, court costs, attorney fees, and travel expenses. However, you lose $125 of credit for each $1,000 of adjusted gross income above $75,000, so you get no credit if your AGI was $115,000 or more last year. File for the credit on Form 8839.

Q:Last year, I received $1,500 in dividends and interest, plus $9,000 of rental income from investment real estate. I paid $2,200 interest on my margin account. Is all of that margin interest deductible?

A: No. Your interest deduction for the year can't exceed your net investment income, not including your take from rents and other passive activities. So you can deduct only $1,500 on your 2000 return. However, you can carry over the remaining $700 and add it to your 2001 interest expense. If the total turns out to be greater than your investment income then, you can use the excess in future years.

Q: In November 1999, I paid the property tax on my home for the year from July 1, 1999, through June 30, 2000, and deducted it on my 1999 return. I sold the house last March 1. What now?

A: Assuming the usual property tax allocation between buyer and seller, you were liable for only about two-thirds of the total tax payment you claimed in 1999. So one-third of the tax counts as income to you in 2000. This is true whether or not you were reimbursed for the buyer's share at the sale closing.

Q: Last year, I paid a lawyer $2,500 to defend my title to a commercial property when an associate of the former owner disputed it in court. Can I deduct the legal fee from the rental income I report for the property?

A: No. You have to treat it as a capital expense and add it to the property's cost basis. That way, it will reduce your taxable gain (or increase your loss) when you eventually dispose of the property.

Q: In 2000, I employed a cleaning woman regularly but didn't withhold her share of Social Security and Medicare (FICA) taxes from her wages. Am I liable for that amount?

A: Yes, if you paid her at least $1,200 for the year, unless she was younger than 18 and didn't work for you full time. You must include your payment of her share in the total wages you report on her W-2 form, but the payment itself isn't subject to FICA taxes.

Q: When the outlook for some of my investments became cloudy early last year, I cashed in a lot of my gains. The unexpected boost in income caused my estimated tax payments to fall short in a couple of quarters. Am I stuck with a big penalty?

A: You may be able to reduce or eliminate the penalty by using the annualized income method to figure the amount of your underpayments. This is more complicated than basing them on four equal quarterly payments. You'll find helpful information and worksheets in IRS Publication 505 and on Form 2210. Or you can use either of the most popular computer tax programs, Quicken TurboTax or Kiplinger TaxCut, to do the calculation for you.

 

Lawrence Farber. Answers to your tax questions. Medical Economics 2001;6:117.