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…)

Categories: General Tags: , , , , ,

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.

Categories: General Tags: , , , ,

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.

(more…)

Categories: General Tags: , , , , , , , , ,

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.

Categories: General Tags: , , , ,

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.

(more…)

Categories: Credits Tags: , , , , ,

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…)

Categories: General Tags: , , , ,

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.

(more…)

Categories: Credits Tags: , , , , , , ,

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.

(more…)

Categories: Dependents Tags: , , ,

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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