Whether you are single or married, low- or middle-income or wealthy, you probably have some pressing last-minute income tax questions as the filing deadline approaches. Tax expert Ed Mendlowitz, CPA, answered some key questions from our readers during our recent Facebook chat on tax preparation. The answers can help make sure that you take advantage of all the deductions available to you and avoid painful tax traps. Also see our recent articles, “7 Tricky Tax Return Questions—Answered“…”Will Your Tax Preparer Get You in Trouble?” …and our Online Guide to Tax Deductions.

READER: I have a health savings account (HSA), and I was covered with high-deductible insurance for part of last year until I changed jobs. How do I report the HSA distributions on my tax form?
MENDLOWITZ: Use Form 8889 (attached to your Form 1040) to report distributions. You will have to pay tax (and possibly a penalty) only on “taxable distributions,” which are distributions not used for valid medical or health costs.
READER: I have no house, no children and no business of my own. The only tax credit that I know I am able to get is for an IRA. What other credits would you suggest I might be able to qualify for?
MENDLOWITZ: I do not know your income, but possibly you can itemize deductions on Schedule A. You can also check out page 1 of Form 1040 lines 23–35, and page 2 lines 47–53 to see if any of these write-offs apply to you.
READER: I am single, and I have been filing as a head of household for more than 20 years, claiming my 87-year-old mother as a dependent. This year, the federal form doesn’t allow me to claim an adult as a dependent—only a child. Have there been any changes? When I do my federal taxes online through H&R Block, there is no option to claim an adult as a dependent. I’m not sure why.
MENDLOWITZ: The software is not right. It is clear in the IRS instructions that you can claim your mother as a dependent. Make sure that you updated the software for the latest version.
READER: I make less than $300,000, but my tax program isn’t giving me a deduction for my dependent student daughter. Any idea why?
MENDLOWITZ: The $300,000 limitation is for married filing jointly. If you are single or head of household, then there are lower thresholds. You should look at IRS instructions for line 42 on page 40 of the instructions (you can get the instructions online at www.IRS.gov). If you are subject to the alternative minimum tax (AMT), then you will not get the exemption. You need to go over the AMT Form 6251. That is a killer!
READER: I paid 2012 back taxes in 2013. Can I deduct the amount of the back taxes from my 2013 income?
MENDLOWITZ: If you itemize, you can claim the state taxes paid as a deduction. You cannot claim the interest or penalties paid or any federal taxes paid.
READER: I sold off a lot of personal possessions via eBay for less than my cost basis—basically an online garage sale. I got a 1099 statement from PayPal for $28,000. Should I report the 1099 income on Schedule C and show it as a loss after expenses?
MENDLOWITZ: Since you sold personal possessions, you cannot deduct any loss. You must report the amount on Form 1099. However, if your cost was greater than the proceeds, you can claim a cost basis equivalent to the amount received and show a zero gain or loss.
READER: Do you anticipate any future tax breaks for people paying higher deductibles/premiums than they did before because of the new Affordable Care Act?
MENDLOWITZ: I do not. If anything changes, it will be to increase taxes. There is a very unfavorable climate in Congress toward simplifying taxes or adding tax breaks.
READER: My children are filling out tax returns for the first time. I want to have them go through the steps. What is the most economical way to have them do this?
MENDLOWITZ: Just fill out the form manually starting with page 1. If they do not itemize, then they can also fill out page 2. They will need the instruction book to get the rates to calculate their taxes. That is a smart way to teach your children about taxes (and finances).
READER: As a self-employed sole proprietor, how do I claim medical expenses and insurance?
MENDLOWITZ: Health insurance is claimed on line 29 on page 1. Medical expenses are claimed as an itemized deduction with the 10% limitation on Schedule A (7.5% if you’re 65 or older).
READER: How is Form 1098 (Tuition Statement) to be used, and is there anything to watch out for?
MENDLOWITZ: Go through Form 8917, and transfer amounts to line 34, page 1. You can get the form online (www.IRS.gov) and read the instructions for that form.
READER: In your experience, what are some deductions that are commonly omitted by self-employed sole proprietors that would be good to remind us about?
MENDLOWITZ: Office at home. Out-of-pocket expenses where you do not have receipts, but you can deduct anything you spent that is entered contemporaneously in a diary as long as each item is less than $25. You can deduct contributions to a Simplified Employee Pension (SEP) even if it was not set up in the prior year. If you have substantial income, then consider a one-person 401(k) for 2014 (too late for 2013). Business gifts (limited to $25 per person per year). People make plenty of these, such as flowers or a book to a business associate. Allocate part of your accountant’s fee to Schedule C. Many people lose this deduction on Schedule A. Health insurance is deductible in full on page 1.
READER: I barter with my consultant—we strategize about my business and I “pay” him in the form of a lunch or dinner. I probably have 15 meetings a year with him. I have receipts for all the meetings. Are these lunch/dinner receipts legitimate?
MENDLOWITZ: Actually, you are not bartering—you are having a business lunch or dinner, and that is deductible subject to a 50% offset. Also out-of-pocket costs without receipts are deductible if you wrote them down, such as parking or tips, coat check or a drink at the bar before dinner where you paid cash.
READER: If my husband’s employer deducts health insurance payments from my husband’s paycheck, is it legal to instead have me (as sole proprietor) make those payments to my husband’s employer for health insurance and thus deduct those payments on line 29 on page 1?
MENDLOWITZ: You do not have to reimburse the employer. Amounts paid by your spouse are deductible as self-employed health insurance on a joint return. Note: Health insurance is deductible this way as long as there is a profit from the business.
READER: So if I look at his end-of-year pay stub and add up the medical and dental insurance amounts and it comes to $10,000, I can put that $10,000 on line 29 page 1 without me doing anything with my income because we are filing jointly (married)?
READER: I am subject to the alternative minimum tax (AMT) each year. Should I therefore favor non–tax-deferred Roth 401(k) contributions at my workplace rather than tax-deferred traditional 401(k) contributions, since that AMT adds back tax for me anyway?
MENDLOWITZ: Yes—do the Roth. I highly recommend it in these situations. And then invest it aggressively!

Some more tax tips from Ed Mendlowitz…

If you had self-employment income, you might want to open and/or fund a SEP for last year. By extending, you will have until October 15 to make your decision. If you have a Keogh, 401(k) or SIMPLE plan, the contribution for last year can be made by the extended due date, but the Keogh and 401(k) must have been established by December 31, 2013, and the SIMPLE by September 30, 2013 (crazy and inconsistent rules for basically the same type of deductions).

If you received an incorrect 1099 and want to file before you receive a corrected form, report the incorrect amount and on a different line enter the difference as a subtraction. This way, you will end up reporting the correct amount and will not get a notice from the IRS because the amount of income on the 1099 did not match what you reported.

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