Tax Dependents

December 7, 2018

One of the easiest ways to increase your tax benefits at the time of taxation is to claim a dependent for a child or adult. You can save some of the tax you owe, because certain dependents or a certain age and relationship can reduce your tax liability. You can claim the child tax credit, the earned income credit and the child care credit by claiming dependents. If you are unmarried but can claim a child as a dependent, you may be eligible to file your return using the head of household status.

The IRS has a separate set of criteria for who can be a dependent. In order for a taxpayer to claim as a dependent a child or an adult relative, the following requirements must be met: the filing taxpayer can not be claimed as a dependent on the return of anyone else. If the dependent is married, they can not file a joint return with their spouse unless, when they file separately, they owe no taxes and only file for the purpose of a refund. The dependent meets a residence / citizenship test, which means that he or she is a US citizen or a resident alien. There are situations in which the dependent may be a Canadian or Mexican resident. Each dependent has the right to be claimed only once, so that he can not be claimed at the return of another person. Dependent children must have been living with the taxpayer for more than six months in the tax year. The person who claims the dependent must have paid more than 50% of the support. It is important to examine all the IRS requirements for children and relatives who can be claimed as dependent. If you claim the same dependent as another taxpayer, you increase your chance of being audited. Each government loan has specific rules as to who can be claimed as dependent.

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Many taxpayers need some extra help in dealing with their dependents. Those who take care of their disabled relatives or childcare for their children under 13 so that they can work may be eligible to reimburse their child and dependent care expenses. This tax credit amounts to up to 35 percent of the qualifying expenses incurred while you are at work due to the care of a dependent. Taxpayers are eligible to receive child and dependent childcare credit if they have paid for childcare services for children under 13 years of age. Children over 12 years of age can be eligible if they are unable to take care of themselves due to a disability. You will have to prove that the employee can not take care of himself. You will also need to prove that you were employed or were looking for a job as a result of childcare. If your employer offers childcare benefits, you must deduct the amount from your expenses before you claim the credit.

Another requirement states that the dependent must have lived more than half a year in your home. You have to provide support to the child or adult with disabilities for their living expenses. Sometimes, if the parents of the child are divorced, the non – custodial parent is eligible to claim the child as a dependent. In these cases, even if the child is not dependent on the parent, the parent with whom the child lives can claim the credit. There are certain requirements that the caregiver must fulfill to be eligible to claim the credit from the parent. When filing, you will be asked to provide the caretaker’s name, address, company name (if a company) and a tax identification number that is normally their social security number or employee identification number if they work in a company. This information is submitted on Form 2441, which claims the child’s and dependent care credit.

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Form 2441

December 5, 2018

Finding someone to take care of your child during work or school holidays can make a large part of your budget. You can send your children off to school for a lot of your childcare needs, but if your children are younger than the school age or on summer vacation, you will probably pay more for childcare. The government wants to help parents compensate for the costs of childcare for children under 13 years of age by offering a tax credit. The child to whom care is given must be a dependent of the taxpayer and separate rules apply to divorced or separated parents. Various types of childcare are eligible for the tax credit. It is important to be aware of the eligible care so that you can maximize your benefits and reduce tax expenses.

You may be entitled to a tax credit if you send your child to a day camp, including specialized camps (those focusing on a single sport or craft). It is imperative that the day camp complies with all state laws in relation to other centers of care. Camps don’t qualify where the child stays overnight. Expenses for the childcare tax credit before or after school for children in the kindergarten or at a higher level. Even children who are still not in the kindergarten can qualify if they have school costs. Facilities that serve six or more children are eligible for credit if they comply with all local and state laws. Parents whose children attend a day care center qualify for credit at home: this is an important distinction. If you pay someone to look at your child at home, you are not eligible for the loan. This is because the caregiver is your employee and you should follow payroll and taxation rules.

The childcare tax credit ranges from 20 to 35% of your expenses in relation to your annual income. The higher your income, the less you have a right to credit. For one child, the credit can be valued from $ 600 to $ 1,050 everywhere, as you can claim up to $ 3,000 in annual expenses. The expenditure limit for more than one child is increased to $ 6,000, but this is the maximum amount regardless of how many children are cared for. You will be required to submit information about the child care facility, such as the name, address, tax ID number of the provider for non-exempt organizations. You should ask for all this information when you pay for the service, so that you can claim the credit. In addition to federal credit, some states offer a tax credit. If you are residing in a state with this option, you may need to provide additional information such as a telephone number to claim the cost. If you file a joint return with your spouse, you can also qualify for the credit provided that your spouse is a full – time student. In addition, those who are the primary caregiver for their spouse with disabilities can qualify for the credit.

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Form 1040X

December 4, 2018

If you have detected errors in your tax return after it has been filed, you may need to file a modified return, depending on the type of error and the circumstances. However, it can be a difficult process to determine when to file a modified return. In some cases, taxpayers may note that their dividend income for the previous year has changed after receiving their return from their financial institution. If the change is a minimal amount, although it is sufficient to justify a small reimbursement, many financial advisors recommend that the difference be ignored. It would often cost you more than it would be worth to file the updated return. However, if you are informed of a pending refund for a large amount of money, you want to change your tune. The IRS suggests you file a modified return if your original return contains an error in the filing status. The status of filing may affect income, deductions and credits and taxpayers submitting an amended return should use Form1040X. It is also necessary to determine and comply with the specific requirements for your state.

According to the IRS, the best practice when you expect reimbursement from the original return is to wait until you have received the reimbursement. The processing of a Form 1040X request may take 12 weeks, but it is acceptable to cash the original refund check while waiting for a modified return. If you owe extra taxes, the IRS expects the balance to be paid as quickly as possible. To avoid unnecessary interest and penalties, you should live up to this expectation. Your amended return status is available three weeks after your submission. You can check the status on the IRS website (irs.gov) and click on the link: “Where’s My Amended Return?” If you have no internet access, you can call the IRS hotline at 866-464-2050. The tracking system can provide a revised return status for the last three years.

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Form 1099-MISC

December 3, 2018

You can’t run away from the IRS. No matter what your job, the IRS wants you to pay your taxes, even if you are an independent contractor, and they will find a way to make sure they get their money. With the form 1099-MISC, independent contractors are able to file their taxes and avoid IRS scrutiny. The IRS receives your client’s form and corresponds to the information you send. Independent contractors receiving over $600 in compensation from a single client throughout the tax year will have to submit a 1099-MISC application. If you do not receive the form by mail, you should contact the customer and send them a form. It is your responsibility to ensure that you submit your 1099-MISC, as the IRS will see. Some customers may not be aware that they need to send the form, so you should always proactively approach your 1099-MISC.

You must report your income regardless of whether or not the customer sends the form. Although there is a $600 threshold for filing a 1099-MISC, this does not mean that you do not have to report income below that amount. Typically, taxpayers who file their taxes using a 1099-MISC form can use Schedule C to calculate their earned income and qualifying deductions. Those taxpayers who are self – employed or self – employed contractors must also submit a Schedule SE to account for Medicare and social security, which the taxpayer may have to pay. There is no reason to make it difficult to file your taxes with a 1099-MISc. Actually, the process is practically completed for you when you use the tax preparation software. Those who submit a 1099-MISC can maximize their benefits by using deductions and exemptions, and independent contractors are often eligible for a wide range of money – saving options.

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Head of Household filing status is beneficial to taxpayers who qualify because the income brackets expand. For example, a taxpayer filing head of household can earn up to $50,800 and remain in the 15% tax bracket. One requirement: You MUST claim a dependent to file using the head of household status. If not, you’re required to use the single status, and will be taxed at 25%, as the threshold is $37,950.

To claim head of household, you must have at least one dependent and not be married. If you’re separated from your spouse, though not legally divorced yet, you may be considered unmarried by the rules of the IRS. You need to have lived separately from your spouse, in a different residence for at least the final six months of the year.

To be a qualifying dependent, the individual must be closely related to the taxpayer either through birth or marriage. Additionally, they must live with the taxpayers claiming HOH for over half of the year, and the taxpayer has to be responsible for paying a more than 50% of the household expenses.

Other filing statuses abide by different dependent qualifications. For example, under many filing statuses you can claim an elderly parent as a dependent, and they are not required to live in the same household. However, to claim a parent under head of household, the parent does need to live with you at least half the year, similar to other dependents in this status. You can claim a parent if you have another dependent who lives with you for the entire year. Head of household status is the only filing status that directly relates to how much you pay towards expenses to maintain your home.

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Often, taxpayers qualify to claim the Earned Income Tax Credit (EITC), however they forget when they file their return. The IRS reports that one out of every five qualified taxpayers don’t claim the credit. Like all tax credits, the EITC decreases the amount of taxes you owe the IRS, and depending on the number of dependents and other circumstances, you may even be eligible for a refund! In some cases, the refund may be more than you paid in taxes, so don’t forget to claim the EITC when eligible. It’s a very important tax credit that can save you a ton of money. Who doesn’t love extra cash back?

Explaining the EITC

The EITC is a tax benefit for low-to-moderate income families that can reduce tax debt and sometimes fully eliminate any money owed. During the last tax season, approximately 26 million taxpayers claimed the EITC and were able to put over $63 billion back in their household income. On average, that’s $2,470 per tax return!

When you file this year’s tax return, don’t forget to check your eligibility to claim the EITC. If you determined that you forgot to claim the credit in previous tax years (up to three year prior) and you were eligible, the IRS may still provide you with a refund. Let them know as soon as possible, and remember to claim the EITC whenever you can!

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Most taxpayers know that there are certain income limitations that they must fall under to claim the Earned Income Tax Credit (EITC), however income is not the only thing that can affect your eligibility. The other requirements one must meet in order to claim the EITC follow:

  • You must have at least $1.00 in earned income, not including pensions and unemployment compensation, as these types of income do not qualify under the EITC rules for earned income.
  • You hold less than $3,450 in investment income for the year.
  • If married, you’ll have to file a joint return with your spouse to claim the EITC. Married, filing separate taxpayers are ineligible.
  • You do not file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.

Military members and clergy are subject to certain rules and exceptions. The same is true for those who have disabled dependents or who receive disability income themselves.

Another portion of the EITC relates to your number of qualifying dependents. For your children to qualify as a dependent for purposes of the EITC, they must meet these requirements:

  • They must be related to you in one of the following ways: son, daughter, adopted child, stepchild, foster child, grandchild, brother, sister, half-sibling, step-sibling, niece or nephew.
  • They must be under 19 years of age at the end of the tax year, and younger than you and your spouse (if married) OR under 24 if they are a full-time student for at least five months of the tax year. This requirement does not apply to children who are permanently and totally disabled.
  • They must have lived with you in the U.S. for more than half of the year.

Prepare to provide the IRS with a valid Social Security number with the child’s exact name as printed on the card, and the full date of birth for each dependent.

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This year, don’t forget to take advantage of tax credits and benefits that can save your family money. The following credits are important to taxpayers and their families:

Child Tax Credit: is worth up to $1,000 per child, depending on income. The higher your annual income, the smaller the credit. Married taxpayers who file jointly are subject to a credit reduction at over $110,000 of annual gross income.

Child and Dependent Care Credit: helps parents recoup some of the cost spent for supervision of their children while they work or search for work. The credit covers expenses up to $3,000 for services such as daycare for an individual dependent’s care, and a maximum of $6,000 for two or more dependents. Dependents who qualify for care in terms of this credit include children younger than age 13, a spouse or parent who cannot care for themselves, and other dependents who meet certain individual requirements. Depending on your income, the credit amount ranges between 20% and 35% of your expenses up to the $3,000 threshold ($6,000 for multiple dependents). Taxpayers with an AGI of $15,000 or less can receive the full 35% of the credit. Every $2,000 over the $15,000 in AGI will reduce the credit by one percent.  Taxpayers with AGI of over $43,000 can claim 20% of their expenses through this credit. Note: if you pay with a flexible spending account or other tax advantaged program through your employer, the credit may be further reduced.

Earned Income Tax Credit: was designed to help put more money into the hands of low-income earners, relative to the size of their family. Based off your number of dependents, your income, and your filing status (married or single), this credit should be a serious consideration for families with an AGI that falls below $55,000. Be aware that investment income, along with other factors can affect your eligibility for this credit. You must have less than $3,500 in investment income, dividends, or capital gains to claim the EITC. Even if you don’t have any children or dependents, you may be qualified for up to $520 back if your income is less than $15,310 (single) or $21,000 (married, joint filers).

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At tax time, students and those who have graduated may be eligible for special education tax credits that can significantly save them money.

American Opportunity Credit

Students who are enrolled in their first four years of college may claim this credit worth up to $2,500 in tuition, activity fees, books, equipment and supplies. The student must be enrolled at least half-time and must not have any felony drug convictions on their record. Parents of students can also claim the credit on behalf of their eligible child, if the same student is claimed as a dependent on their tax return. This credit phases out at higher incomes, maxing out at $90,000 in annual income for single filers, with double that ($180,000) for joint taxpayers.

Lifetime Learning Credit

Like the AOC, the Lifetime Learning Credit is used for tuition, fees, books, equipment and supplies, up to $2,000. However, this credit extends beyond the first four years of undergraduate education, allowing those taking graduate courses and classes that don’t lead to a degree to also be eligible to claim the credit. There aren’t any requirements for enrollment time, meaning you can be a full-time or part time student. You can only claim this credit once on your return, no matter how many eligible students you claim, and the credit maxes out at $2,000. Like the AOC, there are income phaseouts to be aware of: single filers- Modified adjusted gross income of $65,000; joint filers – $131,000 modified adjusted gross income.

Though both credits are excellent money savers for student sand their families, you are only able to claim one of the credits, so choose wisely. If you opt for the AOC, you can’t claim the Lifetime Learning Credit, and vice versa.

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