We’re getting lots of tax questions lately, now that the April 18 tax return filing date has passed. We’ll relay some queries…and our answers.
Q: I’m planning a reverse mortgage on my home. Will I have to pay tax on the money I get?
A: No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, not income. Also, you can’t deduct the interest you eventually pay because you’re not using the proceeds to buy, build or substantially improve the home securing the loan.
Q: I tried to e-file my 1040, and IRS rejected it, saying that I have already filed. What should I do?
A: You may very well be a victim of tax identity theft. Every year crooks using stolen Social Security numbers claim billions of dollars in fraudulent refunds. And that’s not counting the phony refunds that IRS blocks. You have two options to report the problem to the Revenue Service. Complete the online fillable IRS Form 14039, Identity Theft Affidavit, print it out and attach it to your paper return that you mail to the Service. Or submit the 14039 online at www.identitytheft.gov, a website maintained by the Federal Trade Commission, and separately mail your return to IRS.
Q: I’ve had a Roth IRA since 2008. I just opened and funded a second Roth IRA. Do I have to wait five years to take a tax-free payout from the second Roth?
A: No. The five-year rule determines whether payouts of earnings are tax-free. Generally speaking, distributions of earnings from Roth IRAs are tax-free if the owner is at least age 59½ at the time of the withdrawal and at least five tax years have passed since the owner first made a contribution into any Roth IRA. The five-year clock starts the first time money is deposited into any Roth IRA, through either a contribution or a conversion from a traditional IRA. The clock does not restart for latter Roth payins or for new Roth IRA accounts that are opened. Because you funded your first Roth in 2008, you needn’t wait five years to take money from the second Roth for the earnings to be tax-free, provided you are at least 59½. Note that it’s only the Roth earnings that the five-year rule applies to. Your Roth contributions can be withdrawn tax-free at any time. But keep in mind that you would owe the 10% early distribution penalty if you’re younger than 59½.
Q: I own a business and am considering outsourcing the payroll tax duties. What steps can I take to protect myself from payroll agent misconduct?
A: Most important, choose a trusted payroll service. The Revenue Service has a helpful chart that describes four types of third-party payroll firms…payroll service provider, reporting agent, certified professional employer organization and Section 3504 agent. Here are a couple of more things you can do. Make sure all correspondence from IRS about payroll taxes goes to your address, not to that of the payroll agent. Also, enroll in the Electronic Federal Tax Payment System to monitor deposits.