Top 10 tax questions from Bankrate readers
By Bankrate.com

Every tax situation is as individual as the filer. But there are some tax questions that seem to come up with regularity. Here are the 10 most common tax questions -- and answers -- we encountered this filing season.

1. Do I owe capital gains and if so, how can I reduce them?
Many of our readers last year were wheeling and dealing and looking for help in reducing capital gains on their property sales. Generally, if you own an asset for investment purposes -- for example, real property, stocks or mutual funds -- you must pay taxes on any capital gain you make from the sale of the asset. But this tax season there's good news if you made money on investments: Law changes have reduced the capital gains rates for most investors.

Even before the law change, capital gains tax rates were lower than tax rates for ordinary income. In most cases, the rate now is 15 percent on assets held for more than a year (referred to as a long-term gains), whereas a taxpayer could face taxes up to 35 percent on ordinary income reported on a 2003 return. Lower-income investors could pay as little as 5 percent.

Bankrate tax expert George Saenz explains how capital gains can get complicated when you're selling only a portion of your property. He also looks at ways to minimize capital gains on real estate sale proceeds. Sometimes it's simply a matter of timing your sale. Or you might explore a property swap as a way to defer taxes on investment holdings. But in some instances, says Saenz, a good price on a property makes the tax cost worth it.

If you lose money on the asset's sale, it still might do you some tax good. You can use that to reduce other gains and, if you lost more than you made, it can help reduce some of your regular taxable income. (A note here: The rules are different for sale of your house, which the Internal Revenue Service views as your primary residence rather than a way for you to make money when you sell. Check out question number 6.)

2. Is property I inherited taxable?
An inheritance is generally not subject to income tax. That holds even if your inheritance comes from a non-U.S. benefactor. However, income earned on the inheritance such as interest, dividends and rents is subject to income tax.

And keep in mind, when you sell inherited property you'll face capital gains taxes. The good news here: when you figure that gain, the IRS allows you to consider the property's fair market value as its worth on the date the original owner died, rather than its price when it was actually purchased. This generally will give you a larger basis and lower tax bill. You can read more about this in Tax Talk.

3. My son had an after-school job? Does he have to file a tax return?
The IRS generally holds children responsible for filing their own tax returns and for paying taxes, but the agency also looks at the total of the child's earned and unearned income. Earned income is income received from a job. Unearned income includes interest, dividends and capital gains.

A child doesn't have to file a 2002 return as long as the youngster's unearned income last year was less than $750. As for earned income, a child who made less than $4,700 doesn't have to file a return either. (The limit edges up to $4,750 on 2003 returns.) But if the youngster had tax withheld, the only way he or she can get that money back is to file a return.

You can read more about kids and taxes in Bankrate's look at filing requirements for young taxpayers, as well as our tip discussing the reporting of a child's investment income.

4. Can I deduct the miles I drive to work?
Sorry, but commuting is a personal expenditure and not deductible. Bankrate's Tax Talk adviser explains why.

However, unreimbursed employee business expenses -- including use of your car for your job -- could provide you with a tax deduction. Some auto costs also pay off at tax time if you're only partially reimbursed.

5. I work from my home. What deductions can I take?
If you work from your home, either as self-employed or as an employee, you have several tax deduction options. As an employee, some tax breaks include depreciation on a computer or cellular telephone required to do your job, professional dues and license fees, travel expenses and a home office that you use to fulfill your job duties. These expenses for an employee are limited to the amount in excess of 2 percent of your adjusted gross income. Bankrate's tax adviser also takes a closer look at the guidelines for a worker who completes some of her full-time job duties at home.

If, however, you're self-employed, even as a side job to your salaried work, such expenses that are directly related to your entrepreneurial venture can be used more directly to reduce your independent income. Check out these dozen deductions for the small business owner.

6. I just sold my house. How do I report the sale and taxes?
Homeowners got a big break in 1997 when tax law regarding house sales was changed. Before then, when you made money on the sale of your home, you only were able to postpone payment of tax on that cash. You also had to report your sale details on a separate tax form so the IRS could keep track of your eventual earnings to be taxed.

Now, however, as long as you've owned and lived in your home for two of the last five years you're pretty much off the tax hook. Up to $250,000 profit from a house sale ($500,000 if married filing jointly) is not taxable. That means if you bought your home for $150,000 and sold it five years later for $300,000, then you don't owe tax on your $150,000 profit. And there's no additional tax form to file.

Even if you don't meet the two-year residency rule, you still may get a reduced tax break on your home sale. The IRS has made claiming a partial exclusion even easier by defining the special circumstances that qualify for this tax break.

But if you happened to lose money on the sale, sorry. It's not an allowable capital gains loss.

And all homeowners, whether their place is on the market or not, can read more on how a house can help out at tax time in this Bankrate story.

7. I've heard that you can claim more exemptions and therefore receive more dollars in your paycheck. Is this true? How do I do this?
It's a good idea to periodically check out your tax situation and adjust your paycheck withholding amount. You can claim more exemptions if you have several dependents or expect to have deductions, such as a home mortgage, that will reduce your eventual tax bill. The more exemptions you claim, the less income tax your boss will take from your pay, giving you more money to meet your daily expenses.

If you always get back a big refund, that means you're giving Uncle Sam too much each pay period. Take your cash back now by filing a new W-4 with your employer to adjust your exemptions. Check out Tax Talk's recommendations on figuring exactly how many exemptions you should claim.

Be careful here. Miscalculated exemptions -- by you or your boss -- could be costly.

8. Can I use my IRA money to help buy a house?
Individual retirement accounts are a great way to save for your retirement years. But in some cases, the IRS allows you to use some of that money now. This is the case if you're a first-time home buyer. You can take up to $10,000 for the home down payment. If the funds come from a deductible IRA, you'll have to pay taxes on the cash, but you won't face any additional penalties for the early withdrawal.

Saenz says using such an IRA distribution to purchase a new home is an excellent tax-planning tool for first-time home buyers trying to save up enough money to purchase a house. The tax you have to pay, says Saenz, generally will be offset with the deduction of home mortgage interest and taxes if you buy the home early in the tax year. And you will own a home that you may not otherwise have been able to afford without using the IRA money.

Check out Tax Talk's added advice on the steps you need to take to ensure you don't face the 10-percent penalty. And this tax tip explains other instances when the IRS says it's OK to tap your nest egg early.

9. What are the tax breaks for second homes?
Owning a second home can be great. Not only do you have a place to go when you need a break from your day-to-day grind, it can provide added income if you rent it out and you get several tax advantages as well.

Exactly what those tax breaks are depend in part on whether the second home is only for your personal use or you earn some rental income from it. If the property is never rented to others, then you can deduct the taxes and interest you pay on the property on Schedule A along with your primary home's interest and taxes. If you do rent it occasionally, that rent could be taxable income to you -- if you lease the property for two weeks or more a year. Tax Talk has details and recommendations on defining a second home for tax purposes.

And a second home isn't limited to four walls and a roof. It can include a timeshare unit, a boat or a recreational vehicle, as long as it has sleeping, cooking and bathroom facilities.

10. Finally, the issue of who qualifies as a dependent for tax-filing purposes raises lots of questions. For example:

• I live with my parents and have a child. Do my parents or I get to claim the baby as a dependent? The dependent exemption generally belongs to the person who provides more than half of the support. Support includes amounts spent for food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. If your folks are providing more than half of these amounts for you and the baby, they are entitled to the exemptions.
• My husband and I are divorced. We have two kids? Can we each claim one as a dependent on our tax returns? Generally, the parent who has custody of the children is the one entitled to claim them as dependents. If you are the custodial parent and the divorce decree does not state that your ex gets the exemption, then you are entitled to claim both children. Check out out Tax Talk column for more on this situation.
• Can I claim my working child as a dependent? You can continue to claim a child as a dependent, regardless of the child's income, if he or she is younger than 19 at the end of the tax year or is a full-time student under the age of 24. The child, however, might need to file a return even if he or she is claimed on your taxes.
• My mom is in a nursing home that I pay for. Can I claim her as a dependent? The key to claiming a parent as a dependent also rests on just how much support you provide to mom or dad.

Bankrate's tax tip on the basic IRS rules for claiming dependents has more information.

We hope that one of your questions was among this group and you now have all the answers you need to file your return. If not, ask our Bankrate tax expert. And if you simply want to see what other taxpayers are concerned about, check out earlier Tax Talk questions and answers.

-- Updated: April. 28, 2003