Q-1:

Subject: Tax question

Dear Sir,

I was wondering if there is any way I can reject some income. If for some reason, I don't want $200 of income from a part time source, because this $200 cancels some other benefit of higher value, how can I reject this income. My part time employer has issued a W2 for this amount and given me a check. But I have not cashed this check as yet and will tear it up if needed.

One possibility is that they make a correction in their returns to the IRS when reporting their taxes collected. But if they are not willing to do this, what options do I have.

Thanks,

A-1:

It depends on when you received the paycheck.  Did you receive it in 2005 or 2006? 

Kerry Kerstetter

Q-2:

Kerry,

 

Thank you so much for this timely response. I received the first check in November 2005 but I lost it and so received another check (reissued/replacement) in February 2006.

 

The check is for $200 but the incremental taxes due to the loss of a deduction is over $200 and so I am trying to find if the tax laws or practice will in any way allow me to nullify this income. If there is no legal way I can forego this income I will file my returns on Monday. Do you think it is worth filing for an extension so I can further research this issue or have you come across similar issues earlier?

 

If there is any way I can help you please do not hesitate to contact me. Best and thank you once again for your timely response.

A-2:

You're correct that the best thing to do right now is to file for an automatic six month extension.  Rushing to meet the April 17 deadline, while there are still questionable issues, is crazy.

You should then find yourself a good professional tax preparer who can take a look at your 2005 info and see if there is a way around the problem you claim to have.  While the situation you describe is entirely possible, there are also usually ways around it by moving things around on your tax return.

If it is determined that the $200 of income will actually cost you more than $200 in extra taxes, and you did in fact lose the check during 2005, there is a way to give yourself another year's grace.  You could show the full W-2 amount on the appropriate line on your 1040 so that IRS doesn't assume that you overlooked it.  You could then deduct the $200 down in the Adjustments To Gross income section, attaching an explanation of the lost check and repayment in 2006.

On your 2006 1040, you would then have to report that $200 as W-2 income.  However, you have plenty of time to spend the money before 12/31/06 on something that is deductible and will effectively cancel out that income, such as depositing it into an IRA or donating it to charity. 

You should obviously work with your professional tax advisor to see what is the best way to go.

Good luck.

Kerry Kerstetter

Q-3:

Kerry,

 

Thank you so much for this quick reply once again. This is potentially a solution! I should have been more detailed when I asked you the question.

 

Both me and my wife are Indian students and so I use the 1040 NR. In the India-US tax treaty we can count our spouses as dependents and get the second deduction of $3200 per head.

 

It was my wife who received the $200 in November 2005, lost the check and received a reissued check in March 2006. This is all her income for the year and so she will have zero taxes if she files separately.

 

Since we (non residents) don't have the option of filing as married filing jointly in the 1040 NR, I will have to file my taxes separately but could claim the $3200 as an additional deduction of my spouse (tax treaty benefit).

 

My understanding is that if my spouse files another return I may not be able to get the second deduction of $3200. The additional taxes due to losing this deduction is much higher than than the $200 income my spouse will have to report.

 

Could we follow your idea and file the $200 as income for her as 2006 income on a separate 1040NR. For 2005 could we claim no income and I file a return with her as my dependent?

 

Thanks again for the quick reply. If I can be of any help please do not hesitate to contact me.

A-3:

Now you've gotten beyond my level of expertise.  I haven't prepared a 1040NR since my days in the Bay Area so I don't want to steer you in the wrong direction. 

Yours is a perfect example of why you should work with a tax pro who is familiar with 1040NRs rather than try to stumble through it on your own.

Good luck.

Kerry

Follow-Up:

Kerry,

 

Thank you once again. I really appreciate your time. I have filed for an extension and will research this deeper with a professional. Please feel free to contact me if I can help in any way.

 

Best,

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2006 06:16:00 PM Send this post: