Tax Misunderstandings

LOS ANGELES – Misunderstandings and misconceptions abound when it comes to preparing tax returns.

But with a tax code containing 11 subtitles, 100 or so chapters, thousands of regulations, revenue rulings, revenue procedures and memorandums, it's no surprise you're confused.

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It would be surprising if you weren't. Here are answers to a few questions and comments that came into TaxMama's mailbag recently:

Tax software isn't forever

Mark A. was among the many people who wrote about one remark in a recent column on tax software:

Eva, I scanned your article regarding tax software and I immediately noticed what appears to be a factual inaccuracy. If you buy tax preparation software in a box, you must still purchase it every year. Each year usually has several tax law changes and potential rate table changes. That is why tax preparation packages have a tax year associated with them.

TaxMama responds:

Mark is talking about this statement: "You can use that software forever. If you ever need it five years from now, just hold on the box."

As the statement was misunderstood by so many, clearly it needs to be re-written.

Of course you can't buy tax software once and re-use the same software to prepare future years' tax returns. Even if, by some odd quirk of fate, none of the tax laws change — all the forms will have a different year on them.

However, if you hold onto the 2005 software, you'll be able to use it to correct 2005 tax returns, or prepare new ones for friends, as long as your computer can read the software. The disks don't take up much space. And you never know when a new boyfriend, or old family member will need your help to prepare an unfiled year's tax return. And what a great way to build a tax library! The deluxe versions of the software often contain reference libraries, or worksheets you can use to help get organized.

Gambling with taxes

Jung is a winner — at least as far as his W-2Gs are concerned. But he wants to know, if he has enough losses to offset gambling winnings, where does he put it in the 1040 form if he does not itemize?

TaxMama responds:

Reporting gambling losses is commonly misunderstood. Gamblers know that losses are deductible, so they often just net the losses against the winnings — and report only the money they got to keep.

It doesn't work that way. You have to report all the income that's on each W-2G. IRS's computer will be looking for the total on page 1 of your Form 1040.

You may only deduct your losses, up to your winnings, on Schedule A, as Miscellaneous Deductions, not subject to the 2% adjusted gross income limitations.

But, if you don't have enough deductions to itemize, even after reporting the losses...you just simply don't get to use them. Chalk it up to just one more gambling disappointment.

Matriculating son

"Easy" in Woodbridge, NJ has a son, 22, who is in graduate school and has been receiving a Stafford Loan ($8,500 a year) since August 2005. His total expenses for the academic year (tuition, board, books, car, gas, insurance, clothes etc) come to about $37,000 a year. He has a small amount of money of his own. His parents provide almost total support for him. Their support is easily about $20,000 a year.

Easy wants to know if he can continue to claim his son as a dependent in their income tax returns?

TaxMama responds:

Your son meets at least three of the 4 support tests:

Relationship — he is your son. Residency — as a full-time student, he may either live with you or be away at college. Age — he's under 24 and a full-time student.

Now, we come to support. According to the IRS, we can disregard scholarships:

Scholarships. A scholarship received by a child who is a full-time student is not taken into account in determining whether the child provided more than half of his or her own support.

The Stafford Loan is a loan, not a scholarship. So, that $8,500 is not part of the equation anyway.

That leaves $8,500 from the $37,000 it took to support him. Your son is only providing $8,500 towards his own support.

That's far less than half of what it cost to support him. And the IRS says he qualifies as your dependent as long as the child did not provide over half of his or her own support during the year. So, you meet the support test.

Sure, you're able to take him as a dependent. Just make sure that when your son files his tax return, he doesn't take himself as a dependent.

Even though each one of these issues seems straightforward and simple, you'll find that they're open to interpretation, dispute and sometimes even appeal. In fact, we're sure you'll be writing with your views on the subjects, too. And we welcome your comments.

Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new book, "Small Business Taxes Made Easy." Reach her at taxwatch@gmail.com.

Click here to visit FOXBusiness.com's Tax Planning page.