Raising children on your own isn’t easy. Single parents can use any help they can get, which is why, at tax time, there are certain tips that can come as a welcome relief. When filing your tax return as a single parent, consider the following eight points:

  1. Head of Household Status – if your children lived with you for over 50% of the year, and you were single by the end of the tax year, you can file using the head of household status. You have to have made a majority of the household income, but it can greatly reduce your tax burden and offer new deductions.
  2. Dependent Qualifications – the amount of dependents you claim can change which credits and deductions you may be eligible for. Deductions for one child can’t be split between parents, so usually a written decree (from divorce or separation) is in place to state who can claim the child. Generally, the custodial parent is entitled to the deduction for dependents, as they meet all the requirements on care and household support. A dependent child is one who lived with you for at least six months of the year and has been financially supported by your income during that time.
  3. Exemptions – Every taxpayer is entitled to a personal exemption, but you can also claim a dependent exemption for each of your qualified dependents. These exemptions can add up, but if you make over $279,650 a year and claim Head of Household, you can’t claim these exemptions.
  4. Dependent Credits –those who earn less than $75,000 are able to claim a $1000 credit per dependent child under the age of 17 on the final day of December.
  5. Child Care Tax Credit – paying for someone else to care for your child while you work can net you a $3,000 credit for a single child ($6,000 for two or more). The types of child care that qualify vary, but can include after school programs and day camps.
  6. Dependent Spending Accounts – You can contribute up to $5,000 tax free in a special account provided by your employer that allows for dependent expenses.
  7. Earned Income Credit – parents who earn less than $46,997 and have three or more dependent children qualify for this credit, which is based on income and dependent amounts. Taxpayers with less children may qualify for a portion of the credit.
  8. Adoption credit – Federal tax credits apply to help offset the costs you may have incurred for an adoption throughout the tax year.
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If you sell a service or a product, the money you make is generally defined as business income. Additionally, business income includes real estate rents and any fees for service that is paid to an individual. Business income must be reported at tax time, regardless of the type of business.

There are three different classifications for the type of businesses one can own.

  1. Sole Proprietorship is defined as an individual-owned business that has no incorporation. If the owner leaves, the business is no longer active. An important distinction is that all business debts and expenses belong to the individual owner and are considered personal. If your business is registered as a limited liability corporation (LLC), the IRS will consider it a sole proprietorship if you are the only owner. However, you can chose to have your LLC taxed as a Corporation if you chose. Sole Proprietorship businesses will file Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ when completing a tax return. These types of businesses which make greater than $400 net profit are required to pay Social Security and Medicare taxes, which can be calculated by filing a Schedule SE, Self-Employment Tax.
  2. Partnership is defined as a business venture with two or more individuals responsible for the operation of the business, trade or finances. This type of business is not incorporated, and each “owner” is responsible for the operation of the business in order to gain shares and the rights to losses. LLCs with multiple owners are treated as a partnership, unless the LLC has opted to be taxed as a corporation. Each partner is responsible for a distribution of the taxes, instead of the entire partnership being taxed as a single business. The partners will report on their individual returns the amount of partnership taxes stated on a Form 1065 Schedule K-1.
  3. Corporation is defined as its own legal entity that is completely detached from both owners and shareholders. Businesses, such as LLCs, can chose to be taxed under the corporation regulations. In doing so, all businesses taxed as a corporation are required to report their net profits using Form 1120, U.S. Corporation Income Tax Return. Corporations can chose to be taxed as a subchapter S corporation, provided certain regulations are met. S corporations generally are taxed under the guidelines for a partnership, where regular income tax is not applicable. Instead, the shareholders are taxed and need to report the amount individually on their tax returns.
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Are you a stockholder for any corporations? In some cases, stockholders can receive dividends from the corporation as property distribution. These dividends are generally paid in cash, though they may also be distributed as additional stock or property.

Dividends may also be received through trusts, estates, partnerships, and associations subject to tax as either a corporation, or a subchapter S corporation. If you’re a stockholder in any of those firms, you’ll be able to receive a dividend if the corporation has paid your debt, otherwise you have received services from the corporation or have be granted access to use the property of the corporation. Any services you give for the corporation could also be reciprocated through dividend payments in far more than what a third party would charge for the identical services. Distributions received as stock rights or additional stock within the corporation might not qualify as dividends.

Dividends originate from the profits of the corporation and are the most popular distribution. Dividends are divided into two categories:

  1. Ordinary: taxed similarly to regular income
  2. Qualified: taxed at a lower rate as long as they meet certain circumstances.

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On a Roll to Retirement

January 21, 2016

If you have money or assets saved in an eligible retirement plan, you may be able to transfer the funds to a different retirement plan without having to pay taxes on the withdrawal, as long as you perform a rollover. In order to be considered a rollover, the transfer has to happen within sixty days, and although it isn’t taxed, the distribution will be shown on your tax return. Not every distribution is eligible for a rollover. Some examples of non-eligible distributions include:

  • Post-tax contributions to retirement plans. There are some exceptions to this rule which may allow certain non-taxed distributions to be eligible, so as your financial planner for assistance in determining if your distributions fit the exception.
  • Distributions that are a portion of a life-time payment to you or a beneficiary, or any distributions which will be made over a period of ten years or more.
  • Distributions made as part of a required minimum statement
  • Hardship distributions
  • Dividends from employer securities
  • Life insurance coverage expenses

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If you purchased your health care through the Health Insurance Marketplace, you may have been eligible to receive a tax credit with can assist with the cost of your monthly premiums. This tax credit can be applied up front to help lower the cost of your premiums, in the form of an advance payment. In the Marketplace, the tax credit is estimated based off the income and household information you supply.

If you chose to use the tax credit as an advance payment of your premiums, you’ll have some calculations to do at tax time. You’ll have to reconcile the amount of the credit that you received with the actual amount you are eligible to receive by using Form 8963, Premium Tax Credit. You will have to use your actual income to determine the amount you should have received as an advance. If you received more of a credit than your income deems you eligible for, you will have to repay the excess you received. There are limitations on the amount you will be required to pay back.

You should expect to receive Form 1095-A, Health Insurance Marketplace Statement by the beginning of February if you used the marketplace to purchase insurance. You’ll use this form to complete your tax return, as it includes the name of your insurer, the date you are insured, premium amounts, and the amount of the credit you received, if you opted to use it. You’ll also use this form to complete the premium tax credit section of your tax return.

Categories: Credits Tags: , , , ,

Is Interest Taxable?

January 19, 2016

Interest bearing accounts can help you add a little bit extra to your savings. However, if you are able to withdraw the funds without any type of penalty, then you should be aware that interest paid to those funds is considered taxable income for the year you made it available. Interest will be reported on a Form 1099-INT or a 1099-OID, and you will be responsible for transcribing the information onto your return. All taxable interest must be reported, whether or not you receive documentation from the payer.

Examples of taxable interest:

  • Interest on savings bonds. You can include the interest each year of the bond, in which case you won’t have to report the interest once the bond has matured.
  • Treasury notes that accrue interest, even if they are exempt from state or local taxes, as they are still subject to federal taxes.
  • Bank accounts, money market accounts, certificates of deposit and insurance dividends that have accrued interest. Typically, dividend distributions are taxable and include share accounts from cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings bank accounts.

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Some distributions from retirement plans, allotted from qualifying annuity or pension plans through your employer, may be taxable.

If any of the following statements are true, your benefits may be taxable:

  • You didn’t contribute to your pension or you aren’t a contributing party to the annuity.
  • Your employer didn’t deduct the contributions from your salary.
  • You received your contributions without any applicable taxes in years previous.

Annuity payments may be partially taxable, provided you contributed the funds after they were taxed. You will not be taxed again on the portion you contributed post-tax, and is considered to be your investment in the contract. There are two methods to calculate the tax on pensions that are partially taxable: The General Rule and the Simplified Method. The Simplified Method is recommended for all annuity payments starting after November 18, 1996. (more…)

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What is Gross Income?

January 17, 2016

We all like getting paid. When payday rolls around, it can be the happiest time of the month, at least until the next one. But did you know any salary, wages or tips you receive are considered part of your gross income and must be included at tax time. Withholdings, such as Medicare, income tax, and Social Security, are included in your income for the tax year they were withheld.

If you contribute to a pension through your employer, you typically don’t have to report those contributions as part of your gross income, as well as withholdings that were part of a salary reduction plan. It’s important to note that such withholdings are still subject to Social Security and Medicare taxes for the year they were withheld.

Your employer will provide a Form W-2, stating the total amount of income you received from them, as well as withholdings they took. You’ll need this information to complete a tax return, and should you chose to file jointly with your spouse, you’ll also have to include their gross income.

You may receive multiple W-2s if you have multiple employers. If you file your return, and then receive another W-2, you’ll have to file an amended return through Form 1040X. You’ll need to receive all of your W-2s by January 31st, so you can file before the deadline.

Self-employed individuals will report their income on a Form-1099 MISC, which is used like a W-2 to file a tax return.

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Working parents know how difficult it can be to find appropriate care for their children while they work. If you pay for someone to watch your children while you work, there’s a possibility you may be eligible to claim the Dependent Care Credit. This credit has certain requirements that must be met in order to be eligible to claim it on your tax return, but it can be a big benefit for parents.

The care must be provided during work hours, and the credit is deducted as a percentage of 20% to 35% of all expenses that qualify. The credit accounts for up to $3,000 of qualifying expenses for parents with one child, and double that for two or more dependents. If child care expenses are reimbursed by your employer, the IRS allows you to exclude up to $5,000 in reimbursement from your income.

What are the Requirements?

The following six qualifications must be met in order to claim the credit:

  1. Expenses must result from child care provided to you so you can earn a living.
  2. The child cared for must be your dependent, and you must financially support him/her.
  3. You must pay for at least half of the household expenses.
  4. Married taxpayers are required to file jointly with their spouse.
  5. Expenses have to exceed and reimbursement amounts provided by an employer.
  6. The child care provider must meet certain requirements and you must provide their information to the IRS

What Types of Expenses Qualify?

There are different types of child care expenses which can qualify you to claim the credit. These can include:

  • Day care center
  • In-home care by a specialized service
  • Babysitting costs
  • Nursery school
  • Private school for students in kindergarten and below (exceptions apply to handicapped children)
  • Transportation expenses by a third party to a child care facility (personal transportation is not eligible)
Categories: Credits, Dependents Tags: , , , , ,

Exemptions are a quick way to save money when you file your tax return. In addition to a personal exemption, taxpayers can take an exemption for each dependent they claim, known as the dependency exemption. There are a few requirements that parents must meet in order to claim an exemption for each dependent. The exemption amount is equivalent to the personal exemption: $4,000. There are two different categories for dependents, qualifying child and qualifying individual, and each has a different set of rules and regulations.

Qualifying Child

There’s four different requirements a qualifying child must meet in order to claim the dependency exemption:

  • Relationship: The dependent must be your biological child, stepchild, and adopted children or eligible foster children. The dependent may also be a grandchild, sibling or stepsibling, niece or nephew who are younger than the person claiming the dependency exemption. The dependent must also be under age 19, or under age 24 if they are a full-time student. If the dependent is permanently disabled, there is no required age limit. Additionally, the dependent must reside in the taxpayer’s household for more than half of the year.
  • Support: The qualifying child must rely on the claiming taxpayer for more than half of his or her support. This means that the child cannot provide more than 50% of their own support, but scholarship awards are not counted toward support figures. Because the taxpayer who claims the dependent is generally accountable for most of the expenses related to the child, the IRS hasn’t set a gross income test for qualifying children. If the parents are divorced, only the parent who actually supports the child over 50% of the time can claim the dependency exemption, unless otherwise stated in a divorce decree or separation agreement.
  • Residency: the dependent must be a citizen of the United States, or a resident of either the U.S., Mexico, or Canada.
  • Filing Status: The dependent can’t file a joint return if they are married by the conclusion of the tax year.

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