You may qualify for the Child Care Credit if you are employed and pay for childcare services where you work. There are certain requirements that you must meet in order to claim the credit on your federal tax return. Ask your tax adviser if you need help determining whether you qualify to claim the child care tax credit.

Which Types of Child Care Qualify?

Day care services are the most common types of child care that meets the criteria for the child care tax credit. While overnight camps do not qualify, day camp expenses are eligible. The child care services must be used so you can work or seek regular employment opportunities. Taxpayers can claim the credit whether they file single or jointly. If you are married and you claim the Child Care Tax Credit both you and your spouse must work, or be a full-time student.

Which Children Qualify?

Children who are your dependents and under age 13 who receive care from a qualified child care provider are eligible to have expenses considered under the Child Care Tax Credit. The age requirement is extended for children over the age of 12 who are physically or mentally incapable of self-care. The child must live in your residence for at least half of the year in order for their expenses to be eligible. Major life changes, such as birth, death, or divorce can alter the requirements.

Who is a Qualified Provider?

Certain providers, such as a nanny or babysitter, may provide child care in your home and still qualify. Your spouse does not qualify as a care provider in terms of the Child Tax Credit, nor does care services provided by another dependent child or a non-dependent under the age of 19.

What is the Maximum Credit?

If you pay for care for one child you can claim up to $3,000 of expenses, with the limit extended to $6,000 for two or more children. The credit is then assessed at 20 to 30% of your unreimbursed childcare expenses.

Which Form to File?

When filing your tax return, you must include Form 2441, Child and Dependent Care Expenses. You’ll be required to provide the child care servicer’s contact information, including name address and employer identification number.

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If Social Security or Railroad Retirement Benefits are your entire source of income for the tax year, you may not have to file a tax return. Even if you received any other form of income, your benefits are typically tax-free as long as your modified adjusted gross income (MAGI) is more than the base level for the filing status you use.

Even if your Social Security benefits aren’t taxed, you may still need to file a tax return if you receive other income. You can use a Form 1040 worksheet to calculate your MAGI and which portion of your benefits are taxable. If you receive benefits for prior tax years, you may be able to claim a lump-sum election, which lessens the benefit amount subject to taxes.

To determine if your benefits are taxable, you’ll have to include in your gross income those benefits which you have a legal entitlement to. If both you and a dependent (such as a spouse or child) receive benefits, you only have to calculate those you are entitled to, no matter who the check was distributed to. So, if your child receives benefits in your name, you do not calculate those benefits in your own tax return, and instead will have to be added into other sources of income for the child.

Those who have taxable benefits will need to file a Form 1040 or 1040A, U.S. Individual Income Tax Return. You can’t file a 1040EZ. The benefits you receive will be documented on either Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board. These forms will also state any worker’s compensation benefits you received, as well as the amounts paid to legal recipients.

If you file a joint return, you need to combine your income, as well as social security benefits and railroad retirement benefits. You’ll have to add your spouse’s income in order to calculate the correct amount of benefits that are taxable.

You can chose to withhold additional tax from income sources outside of your benefits in order to cover the amount you may owe in taxes, or you can pay estimated tax quarterly throughout the year. You can also opt to have income tax withheld directly from your benefits.

Categories: General Tags: ,

Alimony and the IRS

August 25, 2015

If you pay alimony as part of a divorce or separation agreement, you need to know how it will affect your taxes. In order for payments to be considered alimony, they must meet seven requirements:

  1. You can’t file a joint return with your former partner
  2. You pay via cash, check, or money order
  3. The payment goes directly to your former spouse
  4. The divorce or separation decree does not state specifically that the money is NOT alimony
  5. You don’t have to continue payments once your former spouse becomes deceased
  6. The payment isn’t considered child support or property settlement
  7. You are not living together at the time of payment

Not every payment you make to your spouse as per the legal separation decree is necessarily considered alimony. Alimony payments do not include:

  • Voluntary gifts or payments
  • Property use
  • Payments for property maintenance
  • Your spouse’s portion of community property income
  • Noncash property settlements
  • Child support payments

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Does someone owe you money? Are you afraid you’ll never see it again, primarily because you have no way to collect the funds? You’re faced with “Bad Debt”. Don’t worry though, you are able to deduct bad debt at tax time, as long as you have previously included the amount in your income. You had to have actually received the money at some point, which means you can’t deduct rent or payment for services that you anticipated, but never actually got. You’ll also need to show proof that the money you lent wasn’t a gift, and that repayment was directly stated and understood by both parties.

Bad debt can be from business or personal situations. Business bad debt typically comes from operating expenses, and is deducted on your income tax form. This type of bad debt can include loans to customers, credit sales, business loan guarantees.

It’s still necessary to include these debts in your income, even with a business. Business debts are deducted using either the charge-off method or the nonaccrual-experience method, and can be deducted either partially or in full.

Other types of bad debt are considered nonbusiness related. In order to be deducted, they have to be completely valueless, meaning there is no reasonable expectation of repayment based on the facts. You’ll need proof that several methods were used to attempt to collect the debt appropriately. Bad debt deductions need to be taken in the year when the debt becomes worthless, and with the right proof, you can avoid court.

Nonbusiness bad debts are reported as short-term capital loss on a Form 8949, Sales and Other Dispositions of Capital Assets, along with a detailed statement regarding the bad debt and attempts to collect.

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Taking out loans to pay for your education is the only option to afford college for some students. This can get expensive quickly, depending on your interest rate. However, any interest you pay on certain student loans may be deductible when you file your tax return. You are able to deduct up to $2,500 in interest, or the actual amount you paid, depending on which amount is less. Student loan interest deduction is dependent upon your modified adjusted gross income, and can be reduced if you exceed the limit annually. You don’t need to itemize to take this deduction, since it makes an adjustment to your income.

There are five requirements which must be met in order to deduct student loan interest:

  • You paid the interest on a student loan that is qualified for deduction within the tax year
  • You are required to pay the interest
  • Your filing status is not married, filing separately
  • Your modified adjusted gross income is less than the annual threshold
  • You (or your spouse if filing jointly) are not claimed as a dependent on another’s return

Normally, qualified loans are those which are used to pay for higher education. Be sure to check which expenses meet the rules for qualification.

Your student loan lender will supply you with a Form 1098-E, Student Loan Interest Statement, for interest payments in excess of $600. You claim the deduction as an adjustment to income on your Form 1040. Certain restrictions apply to students who file foreign tax returns or different tax forms.

Categories: Deductions Tags: , ,

Having outstanding debt can hurt you in a variety of ways. Debt is defined as any amounts owed for property or services, whether you are personally liable or there is property securing the amount of the debt. If debt is secured by property and is canceled, whether fully or partially, as a result of foreclosure, repossession, abandonment, voluntary surrender, or loan modification, you will receive a Form 1099-C, Cancellation of Debt at tax time. This form documents the canceled amount as gross income, as long as there are no exceptions or exclusions.

You are required by the IRS to report the taxable amounts of cancelled debt, as you may be held liable for these amounts, even if you don’t receive a Form 1099-C. You report these amounts on your regular Form 1040 when filing your taxes.

If your debt is secured by property which is taken by the creditor as payment of your debt, you’ll need to consider it as sold property in the eyes of the IRS. This means your property may be subject to taxable gains or losses, and you need to understand the different taxes that apply to property sold for capital gains. This is a separate taxation from the canceled debt, and will be taxed separately. (more…)

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Having some way to help pay for college expenses can make the whole process a lot easier. Scholarships, grants, and fellowships are a great way to make payment easier. Scholarships and grants are generally paid to a student for a specific school or institution. Fellowships are similar, although money can be used for study and research reasons. If you are the recipient of a scholarship, grantor fellowship that helps fund your education, Congratulations! However you need to know how these awards can affect you at tax time.

There are different need-based grants available to students, such as the Pell Grant or Fulbright Grant. These grants and scholarships may be fully or partially tax-free. In order to get a tax-free grant, fellowship, or scholarship, you must:

  • Seek a degree at an institution that qualifies and has regular enrollment and attendance, as well as regular faculty and a physical location and curriculum.
  • Use the amount to pay tuition and other fees, or purchase required books, supplies and equipment.

You’re required to include in your gross income:

  • Any amount you used to pay incidentals such as travel, lodging and optional supplies.
  • Any amount received in exchange for services such as teaching, researching, or other stipulation. National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program amounts are not required to be added to income.

Amounts of these awards that apply to your gross income will have to be reported to the IRS at tax time on Form 1040A. Enter SCH in the space to the left of “wages, salaries, and tips”. Other Form 1040‘s have a specific line for scholarship awards. IF you received additional funds through a grant, you may have a newly generated W-2, which you can use to file your tax return. Be aware that you may need to make estimated tax payments throughout the year.

 

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So you chose an individual retirement arrangement (IRA) to save for your future. This choice can be beneficial at tax time, as contributions to a traditional IRA may be deductible at tax time. There are several different types of IRA plans, including a traditional and Roth IRA, and are set up through a financial institution, bank, or insurance agent.

If you have a traditional IRA, you may be eligible for a tax credit equal to a percentage of your contribution. Normally, traditional IRAs aren’t taxed until they are distributed. IRAs are individually owned, though a beneficiary can be named.

You can only make contributions to a traditional IRA if you are under the age of 70 ½ by the year end. You have to have taxable income as well, including wages, salaries, tips, bonuses, or commissions. Income can also include money earned from self-employment. Certain compensation payments, like alimony, are considered taxable income.

Income that is not included:

  • Rental income
  • Interest/dividend income
  • Pensions and annuities
  • Deferred compensation

You can calculate your deduction by using Form 1040 worksheets, and attach Form 8606, Nondeductible IRAs if you determine you cannot deduct any of your contributions. You cannot use a Form 1040-EZ, but Form 8880, Credit for Qualified Retirement Savings Contributions, will help you figure out whether or not you qualify for a tax credit.

Traditional IRAs are fully or partially taxed when distributions begin. If you fully deducted your contributions, then distributions are fully taxed. If you receive distributions from a traditional IRA before age 59 ½, you may have to pay an additional 10% tax. At age 70 ½ you should begin receiving minimum distributions, which help you avoid excise penalties and taxes.

Roth IRAs, which are designated at setup, vary from traditional IRAs by:

  • Contributions are NOT deductible
  • Qualified distributions are not taxed
  • There is no age limit for contributing

 

Categories: General Tags: , , , , ,

All retirement compensation plans are required to follow the rules enacted in 1974 by the Employee Retirement Income Security Act (ERISA) in order to be considered “qualified” by the IRS at tax time. Generally, most 401(k) plans meet these requirements and is considered a qualifying plan as far as your taxes are concerned.

Your employer contributes a specified percentage of pretax wages to your 401(k) plan, known as elective contributions. Since it is not taxed when it is put into the account, you aren’t required to report it as income on your Form 1040. However, 401(k) contributions are subject to Social Security and Medicare taxation, and your employer must report them as necessary for federal unemployment taxation regulation.

Limitations to elective contributions are applied by both the IRS and your specific 401(k) plan. You’ll find the amount of your contribution on line 12 of your W-2. When the time comes for distribution, you can either choose to accept a lump sum, or roll your funds over into another account, provided certain conditions are met.

Most 401(k) plans have a “hardship” clause that allows for withdrawals limited to the amount your employer contributed. Any income earned on the amount deferred isn’t eligible for hardship withdrawal or eligible for a rollover distribution.

You can be subject to additional taxes of 10% if you withdraw funds from your 401(k) before the age of 59 ½, even if it’s considered a hardship withdrawal. Be sure to check all the conditions of withdrawal and how it will affect your taxes before tapping into your 401(k).

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Sometimes, our job may require us to relocate to a new location. That can get costly, especially if you are paying for it yourself. You may qualify to deduct a significant portion of your relocation expenses if you’ve moved as a result of a change in your job. While you can’t deduct meals, other expenses can be deducted if you meet three tests:

  • The date of your move coincides within a reasonable time frame to the start of the new job
  • You meet the distance requirements
  • You meet the time requirements

Start Date

When you move, your relocation date has to be close to the day you start working at the new job or location. For these purposes, the acceptable time frame is within a year from move to start. The distance between the new location and your new home cannot be greater than the distance between the two places you formerly occupied.

Distance Test

Your new location of employment has to be more than 50 miles farther from your old home than your previous employment. If there was no place of employment prior, your new employment must be more than 50 miles away from your previous home.

Time Test

You have to work full-time for at least thirty-nine weeks within the first year of your move. Self-employed individuals must meet the thirty-nine weeks test as well as have a total workload of 78 weeks within two years from moving. Death, disability, and involuntary separation are a few of the exceptions to the time test. Additionally, military personnel relocating under direct order aren’t required to meet the time test.

Relocation expenses are deducted by making an adjustment to income on a Form 1040, using Form 3903, Moving Expenses, to calculate the deduction.

Categories: Deductions Tags: , ,