A: Samson,

This is an example of an issue where the tax law is pretty complex. There are at least two categories of passive income, one for purposes of limiting losses from passive activities, and another for purposes of the foreign tax credit. I am not sure whether either of these relates to your situation.

For the purpose of passive activity loss limitations, personal service income is generally non-passive income. This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services.

Non-passive income for this purpose includes portfolio income including interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. It includes gain or loss from the disposition of property that produces these types of income or that is held for investment.

For purposes of the foreign tax credit, the rules are quite different. Passive income generally includes dividends, interest, rents, royalties, annuities, certain net gains, and certain foreign company income.

If you want to know more about passive income visit the IRS Web site at IRS.gov and see Publication 925, "Passive Activity and At-Risk Rules" and Publication 514, "Foreign Tax Credit for Individuals."

Ultimately, you may want to go back to the VA for an explanation of their guidelines, which may be quite different than the tax rules on passive income.

Good luck.

A: Hi Dan,

Usually, the transfer of an installment obligation to a beneficiary as a result of the death of the seller is not a disposition, and unreported gains from the installment obligation are not treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer.

On the other hand, the stepped-up basis rules that generally apply to inherited property do not apply to inherited installment sale obligations. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

This means that in each year you (or your children if they inherit the obligation) receive a payment, part of amount received must be included in income as partly interest on the note, and partly gain on the sale. (The part that is the return of your basis in the property is not taxed.)

For more on installment sale rules including transfers when the seller passes away, please see Publication 537, "Installment Sales" at IRS.gov or order by mail at 1-800-TAX-FORM (1-800-829-3676).

Best wishes.

A: Dear Roger,

Members of the U.S. Armed Forces who serve in a combat zone can exclude certain combat pay from taxable income. Generally, only compensation paid by the U.S. Armed Forces to members of the Armed Forces is eligible for the combat zone exclusion. Armed Forces members who qualify for the exclusion do not fill out a special form because their excluded pay is not reported as taxable wages.

No civilian contractor or other civilian employee who works in a combat zone is eligible for the combat zone exclusion. However, you may qualify for a different tax benefit called the Foreign Earned Income Exclusion if your tax home is in a foreign country and you meet other conditions. This exclusion may allow a taxpayer to exclude up to $91,400 of earned income in 2009 while living and working abroad.

Certain deadlines, such as the deadline to file a tax return, are extended for Armed Forces members serving in a combat zone and other qualifying service. These deadline extensions also apply to certain non-military support personnel serving in a combat zone or a contingency operation in support of the Armed Forces. Qualified support personnel include Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the Armed Forces in support of those forces.

For state of California tax rules visit the California Franchise Tax Board at www.ftb.ca.gov or call them at 1-800-852-5711, Monday through Friday from 7 a.m. to 6 p.m.

For more information on Combat Zone service see IRS Publication 3, "Armed Forces' Tax Guide." For more on the Foreign Earned Income Exclusion see Publication 54, "Tax Guide for U.S. Citizens and Resident Aliens Abroad." Both can be downloaded on the IRS.gov Web site or order hard copies at 1-800-TAX-FORM (1-800-829-3676).

If you go, stay safe.

A: Dear Bill,

This is almost the same question I answered from a Bill in Carmichael back on May 22, so here it is again:

Q: Dear Sirs,
I am having a great deal of difficulty understanding the new tax rebate/economic stimulus recently enacted. I read an article in the Sacramento Bee about the new rebate. If I read/understood it correctly it stated that the new rebate would be in the form of reduced Federal Income Tax payments until a maximum of $800 for a married couple filing jointly was reached and that the reduced tax deductions would go into effect in March, 2009. Is that correct? Could you please explain it more completely if it is not correct? I have carefully examined my paystubs for this year and can not see any difference. I did call my emploer's payroll department and they said I was receiving any deductions I was entitled to receive but in these difficult economic times I would like to be sure I am. How can I tell if it is being applied to my salary? Does the IRS have a phone number I can call to ask about this matter?

Thank you for your help in this matter.

Sincerely,
Bill

Submitted by Bill from Carmichael,CA.

A: Bill,

The Making Work Pay credit is a key tax provision of the American Recovery and Reinvestment Act of 2009. It provides workers a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns in 2009 and 2010. As of April 1, more than 120 million workers began receiving increased take-home pay through less tax withheld from paychecks, providing an immediate economic stimulus.

Employers began implementing the credit by using revised withholding tables released by the IRS in February that reduce the amount of federal income tax withheld from employees' wages.

Keep in mind that some higher-income taxpayers will see little or no change in their take-home pay. That's because the Making Work Pay credit is phased out for a married couple filing a joint return whose modified adjusted gross income (AGI) is between $150,000 and $190,000 and other taxpayers whose modified AGI is between $75,000 and $95,000.

If you want to verify that the new withholding tables are being used at your job you can call the IRS at 1-800-829-1040 on weekdays from 7 a.m. to 10 p.m. Have your paycheck stub with you when you call.

The best source to get information about the tax provisions in the new Recovery Act is through the IRS Web site at IRS.gov.

Answered at 3:21 PM on May 22, 2009, by Jesse Weller

A: Mark,

The tax rules for nonresident aliens are quite a bit different than rules for U.S. Citizens and residents, and much too complex to discuss in great detail here.

Income effectively connected to a U.S. trade or business, after allowable deductions, is taxed at the same graduated rates of tax that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. Rental real estate activity may fall into either category of income.

You may ultimately want to hire a tax professional to file your U.S. income tax return (very likely Form 1040NR), but here are some IRS references that may help:

* Publication 519, "U.S. Tax Guide for Aliens"
* Publication 597, "Information on the United States-Canada Income Tax Treaty"
* IRS Web page titled "Taxation of Nonresident Aliens" at http://www.irs.gov/businesses/small/international/article/0,,id=96477,00.html.

The first two publications are also available online at www.irs.gov or you may telephone the IRS International office in Philadelphia at 215-516-2000 (not toll-free) M - F from 6:00 am to 11:00 pm (EST).

You can also type "nonresident alien" in the search box for several results that may help.

Good luck.

A: Sorry Steve, I can't answer your question about the state of California's tax rules.

For help with this please contact the California Franchise Tax Board at www.ftb.ca.gov or call 1-800-852-5711, Monday through Friday from 7 a.m. to 6 p.m.

A: Great question Natasha,

The answer is YES!

Even folks who have tax-exempt income and do not have a filing requirement can qualify for the First-time Homebuyer's credit. This credit is a key provision of the American Recovery and Reinvestment Act of 2009.

Since the credit is fully refundable, it is possible to qualify for a credit and get a refund of up to $8,000 if a qualifying purchase is made before Dec. 1, 2009. Someone with no taxable income who qualifies as a first-time homebuyer - meaning they and their spouse if married have not owned a main home in the three years before the purchase - may file for the sole purpose of claiming the credit for a refund.

For more on this credit and other Recovery Act tax breaks, visit www.IRS.gov and click on "Update on Recovery Tax Provisions for Individuals and Businesses."

Happy Home Hunting.

A: Hi Sandra,

Usually, owners of a traditional IRA must start receiving distributions from the IRA by your required beginning date, which is April 1 of the year following the year in which you reach age 70 and 1/2. However, as you mentioned, a new rule provides a temporary waiver of required minimum distribution (RMD) rules for 2009.

Taxpayers are not required to take a RMD from their traditional IRA for 2009. This waiver applies to IRA participants as well as to beneficiaries. Since you reach age 70 and 1/2 in 2009, you are not required to receive your first distribution from your own IRA by April 1, 2010. Your first required distribution however must be made for 2010 by December 31, 2010.

Similarly, IRA beneficiaries do not have to take required minimum distributions from inherited IRAs for 2009. However, the RMD rules for your two inherited traditional IRAs are slightly different from RMD rules for your own IRA. For example, if you are a surviving spouse who is the sole beneficiary of your deceased spouse's IRA, you may elect to be treated as the owner and not as the beneficiary. The RMD rules for the other inherited IRA generally depend on whether the owner(s) died before, on or after his or her required beginning date.

For more on IRAs see IRS Publication 590, "Individual Retirement Arrangements" online at www.IRS.gov or order by mail at 1-800-TAX-FORM (1-800-829-3676).

Best wishes.

A: Pam,

The Making Work Pay credit is an important part of the new stimulus law, the American Recovery and Reinvestment Act of 2009. It provides workers a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns in 2009 and 2010.

You, like most wage earners, have already benefited with a larger paycheck as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit.

Some people may find that the changes built into the withholding tables result in less tax being withheld than they prefer. Those who should pay particular attention to their withholding include:

-- Married couples with two incomes
-- Individuals with multiple jobs
-- Pensioners
-- Dependents
-- Some Social Security recipients who work
-- Workers without valid Social Security numbers

If you believe your current withholding is not appropriate for your personal situation, you can perform a quick check using the IRS withholding calculator on the IRS.gov Web site. Adjustments can be made by filing a revised Form W-4, "Employee's Withholding Allowance Certificate," with your employer.

Publication 919, "How Do I Adjust My Tax Withholding?" provides additional guidance for tax withholding including a special Making Work Pay worksheet.

The best source to get information about the tax provisions in the new Recovery Act is through IRS.gov. You can also download Form W-4 or Publication 919 on IRS.gov or order them by mail at 1-800-TAX-FORM (1-800-829-3676).

Hope that you make out ok and that you have future success.

A: Hi Kurt,

Normally, the total of all social security received in one year is reported and used when determining if, and how much of your benefits are taxable, for that same year. This is true even if the payment includes benefits for an earlier year.

However, there is also a special rule called the "Lump-Sum Election" when a person receives a lump-sum payment that includes a retroactive payment for more than one year. You may be able to figure the taxable part of a lump-sum payment for the earlier year separately, using your income amount for the earlier year. You can elect this method if it lowers the amount of your 2009 taxable benefits.

In your case, if you make the election, no adjustment is made to your 2008 tax return, since the 2008 benefits are included in your 2009 income. You will not file an amended return for the earlier year.

You will receive Form SSA-1099 from the Social Security Administration in January of next year, and will report your net benefits shown in box 5 of that form on your tax return. The lump-sum payment for 2008 paid in 2009 will be shown in box 3 of Form SSA-1099.

For more on these rules, visit IRS.gov and see Publication 915, "Social Security and Equivalent Railroad Retirement Benefits," or order it by mail at 1-800-TAX-FORM (1-800-829-3676).

Best wishes for happy and healthy retirement!