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Author: jpinksta Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121595  
Subject: Negative income in 1998 Date: 4/16/2000 5:10 PM
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Two questions:

#1. In 1998 my income for federal taxes was $1053. I contributed $2000 into a traditional IRA. The person preparing my taxes put this as a deduction bringing my AGI to -$947. I converted the traditional IRA to a Roth IRA this year and am now paying taxes on a little over $6000 (three years contributions of $2000). It doesn't seem correct that I should have to pay taxes on the $947 that didn't act to set off any income in 1998. Someone mentioned that I might need to file Form 1045. This loss was not business related (if that matters). This is the first year I have prepared my own taxes and this nuance is driving me crazy. Would someone please help to put my brain at ease.

#2. Regarding estimated taxes. I have about $30000 in capital gains for the first quarter of 2000. However, my last year total tax liability was about $1231. Can I simply divide 1231 by 4 and send this amount each quarter as my estimate taxes and make up the difference on April 15, 2001? (Since the safe harbor rule states that if you pay 90% of last year's tax liability you do not get penalized) Better yet, can I wait and pay $1231 in the third or fourth quarter? (probably not but just checking)

Thank you
jpinksta
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34481 of 121595
Subject: Re: Negative income in 1998 Date: 4/16/2000 9:37 PM
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<<#1. In 1998 my income for federal taxes was $1053. I contributed $2000 into a traditional IRA. The person preparing my taxes put this as a deduction bringing my AGI to -$947.>>

Bad move to begin with. The contribution should have been made to a Roth IRA back in 1998.

<< I converted the traditional IRA to a Roth IRA this year and am now paying taxes on a little over $6000 (three years contributions of $2000).>>

And that's exactly right. Plus, you'll be paying conversion taxes on the earnings. So it was a bad deal all the way around.

<< It doesn't seem correct that I should have to pay taxes on the $947 that didn't act to set off any income in 1998.>>

A smart tax preparer would have mentioned that very fact to you (along with making a Roth IRA contribution in 1998 rather than a traditional IRA contribution). But it looks like the person who prepared your tax return didn't provide you with that insight. It might not seem fair, but it's the law. You (or your tax preparer) could have done something about it (at least for 1998 by contributing to a Roth IRA), but you elected not to. Uncle Sammy can hold your hand only so far.

<<Someone mentioned that I might need to file Form 1045. This loss was not business related (if that matters).>>

No good. The IRA contribution is not business related (as you note), which means that it's unlikely that you have a Net Operating Loss.

<< This is the first year I have prepared my own taxes and this nuance is driving me crazy. Would someone please help to put my brain at ease.>>

Perhaps you should have done your own taxes LAST year...and made the Roth IRA rather than the traditional IRA. Sorry...but you've got it right.

<<#2. Regarding estimated taxes. I have about $30000 in capital gains for the first quarter of 2000. However, my last year total tax liability was about $1231.>>

Ok...congrats on your gains. And I assume that you mean that you 1999 total tax liability amounts to $1,231.

<< Can I simply divide 1231 by 4 and send this amount each quarter as my estimate taxes and make up the difference on April 15, 2001?>>

Yup...you sure can. You'll meet the safe harbor that way and will owe no penalties or interest on any balance due on April 15, 2001.

<< (Since the safe harbor rule states that if you pay 90% of last year's tax liability you do not get penalized)>>

No...the safe harbor rules allow you to pay 100% (or a bit higher depending upon your AGI) of your prior year liability to avoid any penalties. The 90% payment would apply to 90% of your CURRENT (year 2000)liability. You want to use 100% of your prior year liability if you believe that your income (and taxes) will rise in 2000.

<< Better yet, can I wait and pay $1231 in the third or fourth quarter? (probably not but just checking)>>

Nope. Sorry. You can read more about estimated tax and safe harbor issues in the Taxes FAQ area. Check it out.

TMF Taxes
Roy



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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34483 of 121595
Subject: Re: Negative income in 1998 Date: 4/16/2000 9:42 PM
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<<#1. In 1998 my income for federal taxes was $1053. I contributed $2000 into a traditional IRA.

Isn't this an error -- if your income is $1053, wouldn't your maximum contribution to an IRA for that year be $1053?

Just curious,
Phooley

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34485 of 121595
Subject: Re: Negative income in 1998 Date: 4/16/2000 9:44 PM
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<< #1. In 1998 my income for federal taxes was $1053. I contributed $2000 into a traditional IRA. >>

Let's stop here for a minute. What exactly was the $1053? I ask because if you didn't have at least $2,000 in earned income, you overcontributed to your IRA.

<< The person preparing my taxes put this as a deduction bringing my AGI to -$947. >>

Well, now I see that your AGI was $1053. Assuming for the moment that you were able to make the $2,000 contribution, your preparer really messed up in showing any of it as deductible. You should go back and amend the 1998 return, showing the entire contribution as nondeductible on Form 8606.

<< I converted the traditional IRA to a Roth IRA this year and am now paying taxes on a little over $6000 (three years contributions of $2000). It doesn't seem correct that I should have to pay taxes on the $947 that didn't act to set off any income in 1998. >>

See above. Once you amend the 1998, you will have a $2,000 basis in your traditional IRA and will only pay conversion tax on the excess over $2,000 that was converted.

<< Someone mentioned that I might need to file Form 1045. This loss was not business related (if that matters). This is the first year I have prepared my own taxes and this nuance is driving me crazy. Would someone please help to put my brain at ease. >>

You don't need a 1045, but you do need the amended 1998 return. Assuming the conversion was done in 1999, go ahead and show the $2,000 basis on your 1999 Form 8606, line 15. Just don't forget to do the amended 1998.

<< #2. Regarding estimated taxes. I have about $30000 in capital gains for the first quarter of 2000. However, my last year total tax liability was about $1231. Can I simply divide 1231 by 4 and send this amount each quarter as my estimate taxes and make up the difference on April 15, 2001? (Since the safe harbor rule states that if you pay 90% of last year's tax liability you do not get penalized) Better yet, can I wait and pay $1231 in the third or fourth quarter? (probably not but just checking) >>

The safe harbor is 100% of last year's tax, not 90%, and it must be paid in four equal, timely estimated tax payments. You can divide your $1231 in 1999 tax by 4 and pay that amount for each of your timely estimated tax payments, paying the rest of the balance 4/15/2001.

TMF ExRO
Phil Marti

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Author: jpinksta Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34534 of 121595
Subject: Re: Negative income in 1998 Date: 4/17/2000 11:49 AM
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I don't think so because I had over $2000 in earned income but took a loss on some investments. But if in fact I am wrong, please let me know!



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Author: jpinksta Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34537 of 121595
Subject: Re: Negative income in 1998 Date: 4/17/2000 11:55 AM
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TMF ExRO,

Thank you for the advice. I was under the impression that since I elected to take the deduction on my 1998 Form 1040, I can not amend it. Not true?

jpinksta

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34661 of 121595
Subject: Re: Negative income in 1998 Date: 4/17/2000 11:55 PM
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<< Thank you for the advice. I was under the impression that since I elected to take the deduction on my 1998 Form 1040, I can not amend it. Not true? >>

Not true. See "Amending Form 8606" on page 4 of the Form 8606 instructions.

TMF ExRO
Phil Marti

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