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The Honolulu Advertiser
Posted on: Thursday, March 16, 2006

Common tax-filing questions

By Michelle Singletary

I'm so proud of my husband. He has assembled all of our tax documents, and we've already dropped them off at our accountant's office.

This, my friends, is a first. This tax season we (OK, mostly he) won't be scrambling at the last minute to get our return done.

If you're doing the same — getting your tax returns ready now — I thought you might also benefit from seeing the answers to some questions that folks recently sent in during an online discussion I had with James Dupree, the media relations specialist in the Baltimore field office of the Internal Revenue Service.

For the past several years, Dupree has answered questions from readers either in the regular online chats I host or via an electronic newsletter that I produce each week. (By the way, if you want to subscribe to the newsletter, see www.wash ingtonpost.com. The e-mail newsletter, delivered every Thursday, will help you stay on top of the big personal finance stories. I also offer tips or links to useful Web sites.)

The first tax question comes from a mother in Mount Pleasant, S.C. She asked: "My son is a college student with unsubsidized Stafford loans. He pays the interest on the loans quarterly, so it is not added to the loan now. We claim him as a dependent. He has some income from wages, interest and dividends. Can he deduct the interest on the Stafford loans from his 1040A?"

Dupree says that the son cannot claim a student loan interest deduction for any year in which someone claims him as a dependent. The maximum deductible interest on a qualified student loan is $2,500 per return. Depending on your income, the deduction may be reduced or not allowed.

An Arlington, Va., reader asked: "My husband has made some money this year doing handyman-type work. He always receives cash. How do we include these earnings on our taxes?"

Bravo to this couple for claiming the cash income. Many people wouldn't.

Anyway, use Schedule C or Schedule C-EZ to report the business earnings from this self-employment income, says Dupree. The C-EZ can be used if this man's business expenses are less than $5,000, if he uses the cash method of accounting, does not have an inventory, does not have a net loss from his earnings, had no employees, does not use depreciation and is not taking any deduction for business use of your home.

In addition, if his net earnings are more than $433.13, he must file Schedule SE to pay Social Security and Medicare tax.

There have increasingly been questions about the Alternative Minimum Tax. This is a separately figured tax that eliminates many deductions and credits. It was created to make sure the insanely rich don't get off without paying some taxes. But many middle- and upper-income people are being hit with the tax.

Here's one worried taxpayer. "Are there any general guidelines for who is covered by the AMT? I'm single, no dependents, and made around $65,000 last year. I also have heavy deductions, including over $15,000 in medical expenses."

The IRS has created a simple online tool with a list of questions to help you determine if you have to pay the tax. You can find the "AMT Assistant" by going to www.irs.gov.