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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If this is the first year you’ve been affected by the Affordable Care Act, you may not really know what to expect at tax time. For starters, the bill mandates that all taxpayers have health insurance, and offers a credit to help offset the cost of monthly premiums.

According to the IRS, approximately 80% of taxpayers won’t be affected or notice an impact. The other 20%, however, may notice a big difference at tax-time when it comes to their return. The Affordable Care Act will affect you based on your health care coverage status.

Types of Health Care Coverage

There are four different levels of health care coverage that factor into how you will be taxed under the Affordable Care Act.

  1. Government or Employer sponsored: Generally, these taxpayers are within the 80% that don’t notice much of a change. Whether you have Medicaid, Medicare, or coverage through your job, you only need to check a line on your tax form that indicates you are covered.
  2. Marketplace with Tax Credit: A new tax form is sent to taxpayers who purchased health care coverage through the Health Insurance Marketplace. Form 1095-A Health Insurance Marketplace Statement will document all the information you need to file your taxes. If you opted for a premium subsidy, you’ll need to reconcile the amount you received as a credit with the amount you are actually eligible to receive, resulting in either a refund or required payment.
  3. Direct Coverage without Credit: in some cases taxpayers can opt to purchase care directly from an insurance company, while others may not have opted to use the premium tax credit on a Marketplace plan. Taxpayers who are directly covered just have to check the appropriate line on the tax form to indicate coverage, while plans without a subsidy will require important information from the Form 1095-A in order to file taxes.
  4. No coverage: taxpayers who remain uncovered for three or more months may have to pay a penalty. While the calculation for the penalty is complicated, if you aren’t required to pay taxes because your income is below $10,150 as a single filer, you won’t be subject to the penalty, which normally ranges between $95 to $11,000.

The Affordable Care Act has many exemptions that can be applied for, though some have to be claimed directly through the health care exchange. Otherwise, you can claim exemptions on the Form 8965 in which you reconcile your premium credit.

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Unfortunately, every tax year 20% of Americans who are eligible for the Earned Income Credit don’t claim it, which can mean a loss of $2,400 for those taxpayers. It’s simple to determine your eligibility, so there’s no reason you shouldn’t claim the credit if you can. If you have qualifying children, the income threshold goes as high as $53,267, which can net you a refund of up to $6,242. Even without children, a married couple filing jointly may be eligible for a credit up to $503.

How to Qualify

You have to meet the following qualifications in order to claim the Earned Income Tax Credit:

  • Citizen: You are a U.S. citizen with a valid Social Security Number or were a full year esident alien.
  • Income: You must have earned your income through self-employment or through another employer.
  • Investment income: You cannot have more than $3,400 in investment income.
  • Dependent: You cannot be listed as a qualifying child on another’s tax return in which they claim the EITC.
  • Filing status: You can’t file separately with your spouse. If you are married, you must file jointly.
  • Forms: You are not able to file Forms 2555 or 2555-EZ, Foreign Earned Income.

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When the time comes to file your tax return, it’s incredibly important to ensure you’ve filled out every section with the utmost accuracy. Otherwise, you risk a delay in processing and incorrect refunds. Before you click “submit” or drop your return in the mailbox, double check all sections for the most common tax filing mistakes made each year.

Forgetting to Sign

Your signature makes everything official and certifies that the information you have provided is correct. However, the IRS reports that submitting a return without a signature is one of the most common mistakes seen on tax returns. If you file jointly with your spouse and use a paper return, both parties have to sign. This is one of the major benefits to filing an electronic return because you can’t send it to the IRS without a digital signature.

Using the Wrong Filing Status

While it may not be difficult to determine if you are married or single, other filing statuses can cause taxpayers a bit of confusion. Generally, the Head of Household status is the biggest culprit of misused filing status errors, whether it is done on purpose or not. (more…)

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Working taxpayers with lower incomes may qualify for a special credit called the Earned Income Tax Credit. It helps ensure those who can work, do, by offering an incentive to low income taxpayers. Next to Medicaid, this credit comes in second as far as the amount of help it provides to taxpayers at lower income levels. The credit takes into account income amounts, filing status, and dependents and is refundable in certain situations.

The Earned Income Tax Credit is assessed based on you modified adjusted gross income, earned income, and the number of qualifying children listed on your tax return. In order to be eligible for the credit, you must have income paid to you through an employer or through self-employment.

Who is a Qualifying Child?

The EITC factors the amount of qualifying children you have, although those without children may still meet the requirements to claim a portion of the credit. A qualifying child must meet the following conditions:

  • Be eligible for the dependency exemption
  • Under 19 years old unless they are a full time student under age 24. (special rules apply to those who are permanently disabled)
  • Live in the taxpayers home for greater than 50% of the year
  • If married by end of the tax year, must still be eligible to be claimed as a dependent
  • Is a resident or citizen of the U.S.

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Are you the parent of a child under the age of 17? You can claim a tax credit worth $1,000 per eligible child. Every tax year until the child turns 17 you are qualified to claim the Child Tax Credit in addition to the dependency exemption for the child, which means you can stack the savings.

Because you can claim the credit for each child under the age of 17, you may end up with more in credit than your required tax. If this happens, you may be entitled to a refund as long as you meet certain requirements.

In order to claim the credit, you must:

  • Have a qualifying child, defined as a child under the age of 17 by the end of the tax year.
  • Have a modified adjusted gross income is less than the set threshold for the year.

If your MAGI is more than the threshold, you still may be entitled to a reduced credit amount.

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Are you a dependent, in relation to federal taxes, of another taxpayer? If so, you may be wondering whether or not you are required to file your own tax return. The following terms can help you make an accurate determination of your need to file:

  • Earned Income: wages, salaries, tips, or other professional monies acquired for services rendered, including taxable scholarships or grants
  • Unearned Income: taxable, interest ordinary dividends, and distributions of capital gains received throughout the tax year. Unearned income can include unemployment compensation, annuities pensions, taxable portions of social security benefits, and trust fund payments.
  • Gross Income: the combines total of earned and unearned income

Dependents are required to file a tax return when the following statements are true:

  • You have unearned income greater than $1,000
  • You have earned income over $6,200
  • Your gross income was greater than $1,000 or the amount of your earned income (up to $5,850) plus $350.

Dependents under the age of 18 with unearned income that exceeds $2,000 are taxed at the same rate as their parents, if the parental rate is higher. Certain rule apply to older dependents as well.

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Don’t say the IRS doesn’t give you anything. While you’re forced to pay taxes, the IRS offers a personal exemption just for doing so. That means you get a deduction of a set amount each year just because you pay taxes. In 2015, the personal exemption amount is $4,000, which is an increase of $50 over last year.

There are no specific requirements in order to claim a personal exemption. They are available to every taxpayer who files a return. If you’re married, both you and your spouse are eligible to claim a personal exemption as long as they file jointly, meaning their return will have two exemptions listed. Those who file separately from their spouse are only able to claim their spouse’s exemption if the spouse has zero income and is not a dependent of another taxpayer.

Dependents who are claimed on another’s tax return are not eligible for a personal exemption. This generally occurs when children have income and have to file a tax return of their own, but are claimed as a dependent on their parent’s return. In these situations, the child cannot claim a personal exemption on their own return.

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Are you planning for retirement by saving now? While you probably know that it’s a smart investment in your future, you may not be aware that retirement savings can net you some extra benefits at tax time. Retirement savings can positively affect your tax situation, though you are still responsible for any penalties or fees assessed for late or early withdrawals. There are several different types of retirement savings accounts, so depending on the type you have, the following tax facts apply:

  • 401(k): if you want to save immediately, you can chose to defer paying the income tax on your contributions, and won’t be responsible to pay it until you withdraw the funds. You are allowed to defer tax on up to $18,000 of contributions to a 401(k), 403(b), or a Thrift Savings Plan.
  • IRA: similar to the rules for a 401(k), you can defer tax on up to $5,500 of contributions made to a traditional IRA plan. You should consider making a contribution right before you file your taxes, as it can lower your tax obligation and possibly grant you a bigger refund.
  • Roth IRA: money put into a Roth IRA is subject to the same limitations as a traditional IRA, however the contributions are made after taxes. When you begin distributions during retirement, the money is tax-free.
  • Roth 401(k): while the tax benefit for this type of account isn’t immediate, you aren’t required to pay taxes on any withdrawals from accounts you’ve had longer than five years. Additionally, your savings can multiply with the worry of taxation on your contributions.

Other Retirement Savings

If you are an employee over the age of 50, you are eligible to add $6,000 to a 401(k) or IRA savings plan above the usual limitations. Traditional IRA contributions are finished at the age of 70 ½ so it’s important to plan as necessary.

Early withdrawals can be damaging to both your taxes and your retirement accounts. Early withdrawals occur when a taxpayer takes a distribution of their savings before age 59 ½. The withdrawals are taxed 10%, although exceptions are in place if the money is withdrawn from an IRA and used for college, first home purchase, medical bills, or health insurance.

After the age of 70 ½, you are required to begin distribution from your traditional IRA and 401 (k) plans. If you don’t take a minimum withdrawal amount, you could be penalized at up to 50% tax rate. You can delay your distributions from your current employer if you are still working at age 70 ½ and own less than 5% of the company.

Don’t forget about the Saver’s Credit. It’s in addition to other tax deductions for employees who file Single status and have an adjusted gross income of less than $30,500 ($45,750 head of household, $61,000 for married status). This credit benefit is between 10% and 50% of your current retirement savings, up to $2,000 for single filers, and $4,000 for couples. Basically, the less you make, the bigger you’ll get credit-wise.

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Get a Deduction Just For Your Kids

If you’re a parent, you may find some comfort in the fact that your children can actually save you money. While most of your parenthood is spent, spending, the IRS offers you a tax deduction just for having kids. The following tax savers may come in handy for your family, as far as putting a little extra cash back into your budget.

  • Child Tax Credit allows parents to deduct $1,000 per child under the age of 17. Taxpayers who are married and file jointly with an AGI more than $110,000 may be eligible for a reduced credit of $50 over the AGI limit.
  • The dependent exemption allows parents to save $4,000 per eligible child, in so much so that that amount of the parents’ income will remain untaxed. Generally, taxpayers in the 25% bracket can save $1000.
  • The Child and Dependent Care Credit can save parents who pay for care of their child while they work. There are certain requirements that must be met in order to claim the expenses, and can be worth up to $600 for one dependent.
  • The Adoption Tax Credit is excellent for those who adopted a child during the tax year. This tax credit can cover $13,190 worth of adoption expenses, and has certain limitations for parents at specific income levels.
  • If you chose to employ your own child, under the age of 18, following specific child employment protocol, you may be able to save money at tax time. While you have to file a W-4 and complete all paperwork for employing a child, you may be able to save tax dollars by paying up to the maximum standard deduction, before you’re required to pay employment and income taxes.
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