Answers to your Tax Season Questions

For the 1999 tax year, I received a $137 income tax refund from the State of Indiana.  I also itemized my deductions on my 1999 federal tax form. I was always under the impression you had to report state/local tax refunds as income (on your federal tax form) the following tax year. However, I have not yet received a 1099-G from Indiana.  Should I still report the 1999 state refund as income on my 2000 federal taxes? B.J. via e-mail

Shame on the state of Indiana for not sending you a 1099-G form! Nevertheless, you are responsible for reporting the income. There's probably a form floating around out there somewhere, and you can assume the IRS has a copy of it. Even if they don’t, you still need to report the income.

If you hadn't itemized, it would be a different story. You are only required to report the state tax refund as income if you got a tax benefit from deducting the tax on a previous tax return.   

The income won't be taxable in Indiana, and there is a line on the Indiana return (line 3) where you can reduce your federal income by the amount of the state tax refund.   

My husband and I were doing this year's taxes using a software program and to our surprise we found a huge error on previous years' returns. We itemized interest and taxes on a rental property in addition to a Schedule E. This error is not in our favor and we have prepared an amendment for those years. My question is, when should we submit the amendment and should we just send in a check for the error or wait for them to contact us after they receive the amendment? Are there penalties for this? S.L. via e-mail

You should go ahead and file the amended returns and send in the payment for the extra tax due on those returns. There will be a penalty for the underpaid portion of the tax, and the IRS will be glad to compute that amount for you and will send you a bill after they process the amendment.  

The amended returns won't be processed nearly as quickly as your regular tax return for this year, because the IRS of course is swamped with 2000 tax returns right now. If you file the amended return now, expect to hear back from the IRS sometime this summer with a statement accepting your change and a bill for any interest and penalty that you owe.   

How much can I deduct for medical expenses? P.M. via e-mail

The amount of deduction you can claim for medical expenses depends on the level of your income. First, of course, you have to be able to itemize your deductions. You can itemize if your total allowable deductions (like mortgage interest, real estate tax, contributions, and the medical expenses) exceed your standard deduction.  

The standard deductions for 2000 are:  

• Single - $4,400  

• Married filing jointly - $7,350   

• Qualifying widow(er) with dependent child - $7,350   

• Married filing separately - $3,675   

• Head of household - $6,450   

Assuming you can itemize your deductions, the amount of medical expenses you can deduct is the amount by which your total medical expenses (doctor and hospital bills, prescription drugs, lab fees) for you and your dependents exceeds 7.5% of your adjusted gross income.   

So, if your adjusted gross income is $40,000, and you can itemize your deductions, you would be allowed to deduct any medical expenses that you paid over the first $3,000.