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Tax Break for Supporting Adult Children

August 31, 2012 By

One’s home is always the best place to turn to whenever life throws its usual and seemingly unfair punches. The best possession an individual can have is a supportive family where one is guaranteed support during hard-hitting times. These tough economic times that has left many jobless young adults without much prospects for employment, which has resulted in masses of them seeking refuge in their parents’ homes. Although parents have unlimited love for their children, they don’t necessarily have unlimited funds to help them. However, there are some methods of being able to lighten the financial strain of taking in a loved one. As loving parents take their kids back into their homes, there are some tax breaks that one can take advantage of.

It is common knowledge to parents that every minor child can be claimed as a dependent. This means that they automatically benefit from a claimable exemption. In 2011 returns, this amounted to about $3,700 deducted from the gross income while in 2012 tax year, the exemption was $3,800. These figures are dependents who are minors. What of the adult-children who just returned home? Well, the situation is not as bad, as you can still qualify for the extra exemption.

Even though your child, who is now an adult, might not qualify as a dependent child, it doesn’t change the simple fact that the grown child will always remain a baby, at least to you. The adult child can however, be counted as an eligible relative for the purposes of tax dependency. This can only be the case if the individual meets three other requirements:

To begin with, you child must live with you or at least be under your care as a member of your household for the whole year. If the individual is related to you, then he or she doesn’t necessarily have to live in your house all through the year. The second factor requires that the individual’s cumulative gross income doesn’t exceed the exempted amount, which was in 2011, set at $3,700. Finally, you must be providing over 50% of the individual’s support for the tax year. So long as the individual is not making anything more than $3,700, these requirements are not so tough to meet.

On meeting all the listed requirements, ensure that you claim the person as a dependent to benefit from the additional exemption value. Also bear in mind that this exemption is not only limited to your children. There are people who help their aging parents as well, who can be counted as dependents for tax reasons. These steps will help alleviate the financial load that comes with providing for a loved one.

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Safeguard Tax Records from Hurricanes and Disasters

August 30, 2012 By

 

With all the hurricanes and earthquakes currently occuring throughout the nation, one should consider safeguarding one’s tax records. How tax-ready and guarded are you against hurricanes and disasters that sweep through the country each year? Businesses and individuals are always encouraged by the IRS to guard themselves against natural catastrophes by adhering to a few safety precautions.

Back Up Your Records Electronically: Every taxpayer is advised to create some form of backup of his or her records that should then be kept away from the original ones. Electronic backing up of records like bank statements, insurance policies, etc. is much easier today in that most institutions provide online electronic copies. If you only have the paper copies, then scan and store them in electronic formats, then download them to a storage device like an external hard drive or burn them onto DVDs or CDS.

Document Valuables: Taxpayers are also advised to take photos or videos of their home’s contents. Most important items to document should be those of higher monetary value. Using the IRS’s disaster loss workbook-Publication 584, you can easily gather a room-by-room list of your belongings. The photographic record put together can be used as evidence in determining the market value of items for insurance and claims of casualty loss. If possible, keep these photos with a friend or family member residing in a different location from yours.

Keep Emergency Plans Updated: Just like other plans individuals make, emergency plans must be reviewed annually. This is because business and individual environment keep changing over time and so should the needs to prepare for disasters. Employers acquire new employees, companies alters functions, among others. In the same line, proper updating of emergency plans and appropriate communication to all affected parties is highly encouraged.

Review Fiduciary Bonds: Employers who rely in payroll providers must ask if the provider put in place, a fiduciary bond. This is important because when the payroll provider defaults, the employer is covered by the bond.

Get IRS Help: The IRS has put in place, measures to ensure that all taxpayers affected by disasters get prompt help. Affected taxpayers should call 1-866-562-5227 to get help from an IRS specialist that is specifically trained to handle disaster-related issues. You can request back copies of tax returns plus their attachments of previous tax filing by filling Form 4506-Request Copy of Tax Return.

Don’t wait till you are hit by a catastrophe; always stay ahead of a disaster by preparing beforehand.

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The Errors and Terrors of Procrastinating on Taxes

August 29, 2012 By

Every year, individuals have nine months (if a request for an extension is filed) while partnerships and corporations usually have a little over eight months to gather their previous year’s tax data and start filing their tax returns. This period can be assumed to be sufficient to enable taxpayers have their taxes in order. Unfortunately, the reality is far from the truth that procrastination is widespread, which has some serious tax consequences and affects many taxpayers.

Assuming that you have all the necessary documents except one by the April deadline, you are free to file for an extension if the missing document can be obtained after the April deadline. Many tax representatives will remind you about the missing document, which can be obtained in some way or another. Eventually, even with all these available options, one may end up missing the extended October tax filing deadline, which means only one thing: trouble with the IRS.

To ensure that taxpayers file their taxes in time, the IRS charges a 25% late-filing penalty, a 5% late-payment penalty, plus about 5% interest. If you have $1,000 due, you end up paying an extra $300, a figure that would have been as low as a $25 underpayment penalty had you filed in April, even if you overestimated your deductions and expenses, and underpaid your estimated tax payment in April.

It is natural that many people tend to take some tasks more seriously at the eleventh hour. Filing of taxes is a complex process that requires sufficient time to verify and ensure that all the information has been filled in the tax return forms appropriately. Last minute filing will mean that you won’t have sufficient time to review them and find out if there are any tax credits you are entitled to but didn’t claim. Eventually, this will shortchange you a lot of money that could have gone to other important things in your life.

The IRS sends out notices to tax defaulters and if they don’t hear from a taxpayer; they communicate with the state and prepare substitute tax returns for the taxpayer, also known as an SFR (Substitute for Return). Your balance due is computed as a single filer without any dependents, free from any deductions and exclusions, according to the information contained on your W-2s and 1099s. As a result, you end up with the highest tax possible and if you don’t come forward, your bank account can be seized or your wages garnished.

It doesn’t matter whether you never owe and always expect tax refunds. Your refunds will be gone for good if you fail to file a claim for over three years. Escape the errors and terrors of late filing of taxes by eliminating procrastination; keep an eye on the calendar and always file on time.

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Tax Credit for Child and Dependent Care Expenses

August 28, 2012 By

Caring after children and dependents can be hard and at times, and many busy taxpayers seek the services of caretakers to look after their kids, spouses, or dependents. If you paid a caretaker, then you might be eligible for the Child and Dependent Care Credit, which should be claimed when filing your Federal income tax return. However, you must understand the following facts.

To begin with, note that that you can only claim the credit if the care was provided for one or more eligible persons. The eligible individuals can either be your kids aged 12 or younger or a spouse and other individuals under your care that are either mentally or physically unable to take care of themselves. Every eligible person must be identified on your tax return when filing.

Also, the claimed care must have been provided so that you (and spouse for joint filers) could either work or search for employment. Furthermore, income must have been earned from tips, salaries, wages or other employee compensation or net earnings from self-employment.

The IRS cannot however make the payments for care to a spouse, parents of a qualifying person, a person you can claim on your returns as a dependent, or a child who will still be younger than 19 years by the close of the year, even if the child is not your dependent. Ensure that the care provider(s) are identified on your tax returns.

The filing status also matters, and must either be single, married filing jointly, eligible widow(er) with a dependent child, or a head of household. Furthermore, the eligible individuals must have lived with you for over six months. However, there are a few exceptions touching on the birth or death of eligible persons or kids of divorced or separated parents. You can find out more from the IRS Publication 503, Child and Dependent Care Expenses.

The credit amount varies as per a taxpayer’s adjusted gross income, which can amount to 35% of your qualifying expenses. This value changes from one year to another; taxpayers in 2011 were allowed up to $3,000 for an eligible individual or double the amount ($6,000) for two or more qualifying persons to determine the credit. Furthermore, the eligible costs have to be cut by the amount of any independent care benefits that an employer provides that is excluded from the income, like daycare expenses and flexible spending accounts.

It is important to remember that the IRS will consider you a household employer when you hire someone to take care of spouse or dependent from your home. You might therefore, be required to withhold and pay Social Security and Medicare taxes. Please review Publication 926-Household Employer’s Tax Guide for additional information.

You can find more information on this from Publication 503- Child and Dependent Care Expenses, which is available for download for free on the IRS website. Alternatively, place a telephone order by calling 800-TAX-FORM (800-829-3676).

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Six Major Alternative Minimum Tax Facts to Note

August 27, 2012 By

In what is assumed to be an effort by the IRS to ensure that every taxpayer who enjoys some tax benefits still pays at least the lowest possible tax amount, the Alternative Minimum Tax (AMT) was put in place. The AMT offers another set of rules that can still be used to calculate your income tax. Generally, these rules are meant to help establish the minimum tax amount that an individual of such income is expected to pay. In the event that the regular tax falls under this minimum, the difference must be covered by paying the Alternative Minimum Tax.

Explained below are six important facts that every taxpayer must understand about the AMT and changes that have been made recently. Please note that the IRS periodically updates this kind of information to cater for the ever changing tax environment.

1. Some types of incomes are provided with tax benefits by tax laws with provisions for special deductions as well as credits for certain costs. These benefits can significantly help lessen the tax burden of some taxpayers. The AMT has been in existence from 1969 when it was created by the congress with the core aim of targeting higher-income taxpayers who used to claim numerous deductions despite being owed little or absolutely no income tax.

2. With time, more and more middle-income taxpayers are finding out that they are subject to the AMT. This is attributed to the fact that the AMT is not adjusted for inflation.

3. If your taxable income is for normal tax requirements as well as any alterations and preference items that apply to you exceed the amount set for AMT exemption, then you might be required to pay the AMT.

4. The AMT exemption amount is not fixed. It is however, adjustable by law for every filing status.

5. Congress has always had a close interest in the AMT, and in the 2011 tax year, the exemption amount was raised in the levels listed below:

  • The AMT amount for married couples filing joint tax returns and eligible widows and widowers was set at $74,450.
  • $37,225 was set for married persons who file separately
  • Singles and household heads had their values at $48,450

6. If a child’s unearned income is taxed at the parent’s tax rate, then the 2011’s minimum AMT exemption amount was increased to $6,800.

The IRS would like taxpayers to bear these facts in mind. For any additional information, please use the AMT assistant at the IRS website to establish whether you might be subject to the AMT. Alternatively, access IRS Form 6251-Alternative Minimum Tax or call 800-TAX-FORM (800-829-3676) to order via phone.

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Tax Tip: Things You Have To Do Before Submitting Your Returns

August 24, 2012 By

It is vital that you carefully review your completed tax returns before mailing them to the IRS. It really doesn’t matter if you hired a tax preparer because you are legally responsible for any information contained on the tax return forms. If the forms are being submitted electronically, it is still important that you take time with your tax preparer to review every detail before clicking “SUBMIT.” To avoid common errors on your tax returns, consider the following factors.

Social Security Numbers: It is mandatory that the right Social Security numbers be entered on all the pages of your tax returns. You must therefore, double check that the numbers on each page are correct, as your refunds can be held up if a wrong number appears. Did you change your official name in the year because of either marriage or divorce? Please apply for a new Social Security card before filling the forms using your new last name.

Proper Signing: Do you file joint tax returns with your spouse? Then ensure that both of you sign the return. If during the year your spouse passed away, you need to write “Surviving Spouse” on your spouse’s signature line after signing on the first line. Please note that there are exceptional conditions that apply when signing for a person under a Power of Attorney or non-spouse deceased taxpayer.

Preparer Must Sign: The Internal Revenue Service issues a “PTIN” form which has to be signed by professional tax preparers you hire to prepare your returns. Also, ensure that “Copy B” of all Forms W-2, W-2Gs and 1099-Rs that have tax withholdings attached. The IRS might be forced to return the forms to you if you attach the wrong copy.

Check Address: The IRS’s mailing addresses for returns are often changed and you must ensure that you mail your tax returns to their right address, usually determined by your residential state. The addresses can be found online at the IRS website or the instructions booklet. You are required to use a payment voucher (1040-V) if you have a balance due and then mail the return to a lock box as opposed to mailing them directly to the IRS.

Ensure the Check payable to “United States Treasury Service”: Taxpayers who owe the federal government must write their check to the Treasury and not the “IRS”. Ensure that the Social Security Number and Form 1040/1040A is written on the check.

Finally, make sure that you make and retain a copy of the tax returns for personal filing and record keeping. Don’t forget to weigh the package to ascertain that you have sufficient postage. It is very risky to send off your tax return without carefully reviewing every detail; take your time, as mistakes can be costly.

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You Only Need 22 hours to Complete the Form 1040

August 23, 2012 By

Many taxpayers fail to fill out and file their tax returns mainly because of “insufficient time.” This might sound like a vague excuse, knowing that every individual taxpayer has nine whole months to put their tax returns in order. Well, you would be surprised to know that the IRS thinks an average taxpayer should spend only a mere 22 hours to complete the relatively long IRS Form 1040.

If you think 22 hours appears out of this world, then try filing Form 1040A and ensure that you don’t spend more than 10 hours. If you are a Form 1040EZ filer, then the taxman thinks seven hours would be sufficient for you.

Many taxpayers who spend days filling their 1040s will be quick to argue, as completing Form 1040 is more than filling in the lines. It is true that there is a lot of information needed when filling Form 1040, even with the help of software.  However, the IRS considered this in its time burden when making the estimates. It should take you roughly four hours to fill the form alone. However, it takes an additional one hour to submit, another three more hours to plan and an additional ten hours of record keeping. Other tax filing related activities have been assigned three more hours by the IRS as per their tax burden estimates. Cumulatively, all the time spent by an average taxpayer working on Form 1040 amounts to 22 hours.

According to the IRS, the average encompasses any other related forms and schedules covering all methods of tax preparations. Also calculated by the IRS was the average cost of each annual return for each filer. Every taxpayer’s Form 1040 annual expense was about $290, including amount spent during the preparation and submission of the form. Some of the expenses that the IRS considered when settling on this figure included out-of-pocket expenses, like preparation of the tax return fee, submission fee, postage, tax software, and copying expenses.

On the other hand, Form 1040A filers spent an average of $120 each, while the 1040EZ taxpayers part with approximately $50 each, annually. The time and the money involved when filling and filing the IRS Form 1040 as per the estimates might appear too ambitious. There is only one way to find out the truth; putting theory into practice. Before you commence, ensure that all relevant information and documentation are available.

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Same-Sex Parents Enjoying Tax Breaks as Laws Clash

August 22, 2012 By

There is confusion regarding laws that touch on gay and lesbian parents. Fortunately for the gay and lesbian couples with kids, these conflicts can turn out to be avenues for the much desired income tax breaks. Many same-sex couples adopt children but still have to work through an array of legal and financial disorders that are mainly brought about by the Defense of Marriage Act. This is a 1996 law that forbids the federal government from recognizing same-sex marriages as per accountants and tax attorneys.  

Despite the increasing legalization of same-sex marriages in various states in the U.S. like Iowa, Connecticut, New York, Washington D.C, Vermont, among others, the Internal Revenue Service has to treat such spouses without any special regard to their marital status. The federal law forbids legally married same-sex partners from enjoying similar Social Security benefits that can be enjoyed by their heterosexual counterparts. These spouses also have to pay taxes on their health insurance benefits and gifts, which are never paid by heterosexual couples.

The two sided sword that the law can however, present the same-sex parents families with a number of tax breaks. The most significant break comes from the law that prohibits same-sex couples from jointly filing their federal tax returns. This means that they are exempted from the marriage penalty, which can sometimes lead to a higher tax rate because of the joint income that pushes their income into a higher tax bracket. Even if they opt to file separately, they will still have to part with more compared to single taxpayers.

A gay or lesbian parent who provides over 50% of a child’s financial support can claim a head-of-household filing status. Such an individual ends up with a higher regular deduction and a lower tax rate compared to single taxpayers. Couples with two or more kids can each claim head-of-household status and various child tax credits. However, the IRS is not so pleased with this kind of arrangement and same-sex parents with kids are advised to talk to their tax professionals.

Same-sex couples who decide to adopt kids can claim up to $12,650 in adoption expenses per qualifying child. However, the taxpayer’s adjusted gross income must be below $189,710 to qualify for this break. Furthermore, same-sex parents can take advantage of the education credits, like the American opportunity tax credit that provides a tax break of up to $2,500 per child annually.

Gay and lesbian couples from California, Nevada and Washington must however, take extra caution when working out their taxes. The IRS declared in 2010, that any legally married same-sex couples in these states evenly split their income 50-50. This means that none of the parents can claim to be head-of-household. Such parents are however, encouraged to talk to their tax professionals for the best way to deal with their tax issues and take advantage of the available tax breaks.

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Some Tax Deductions for Pets You Need to Know

August 21, 2012 By

Americans have a way with pets, exhibited by the passionate uproar whenever an animal is mistreated and the many animal protections campaigns. According to the American Pet Products Association (APPA) National Pet Owners Survey, 62% of U.S households own at least one pet, which amounts to a whopping 72.9 million homes in total. There are 78 million dogs and 86 million cats in American homes.

The APPA survey further reveals that the pet owners spent close to $51 billion on their animals alone in 2011. This figure is expected to shoot to $53 billion in 2012, and it is not likely to drop any time soon. As a result of the Americans’ love for pets, pet supply stores are cropping up in every corner of the country to cater for the overwhelming demand.

Congress has not been left behind in trying to protect American pet owners through the Humanity and Pets Partnered Through the Years, or HAPPY Act. Had this act been enacted, pet owners would be allowed to deduct up to $3,500 for pet care alone. It is unfortunate for pet owners that this act was shot down, to the disappointment of many.

The IRS has always maintained that pet owners have no ground to claim their pets as dependents. However, there are cases when pet-related expenses can be deducted.

Pets as Medical Deductions: Pet owners can include as medical expenses the cost of buying, training, and keeping a service or guide dog or other pet to help the visual or hearing impaired persons, or people with other disabilities. These costs include food, grooming, veterinary, health, vitality, and any other maintenance costs to ensure that the animal performs its duties well.

Pets as a Business Cost: If you run a business and use the services of a pet at work, some of the pet’s expenses can be claimed. Some dogs like German shepherds are used as guard dogs and if you can prove that it protects your inventory, the IRS can accept to write off the  pet’s food expenses.

Pets as a Moving Cost: The expenses incurred when shipping the household pets to your new residence can also be deducted.

These are the three main viable reasons that you could use to claim a refund from the IRS. Please talk to your tax pro for more ways through which you can enjoy some pet-related tax breaks.

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The Tax Consequences for Renting Out Your Vacation Home

August 20, 2012 By

 

Most summers are usually characterized by high demand for vacation properties, which is in most cases, met well by eager landlords ready to cash in on the opportunity. Individuals who own multiple homes retreat to their other homes after sealing the deal with their new temporary tenants. Renting out a home however, comes with various tax consequences, especially to the landlord.

To begin with, homeowners who rent out their properties for 14 or less days a year are allowed by the tax code to enjoy the rental earnings tax-free, without even reporting on their tax returns. This is usually called the “Masters exemption” because it is used by homeowners close to the Augusta National Golf Club earning in excess of $20,000 during the annual golf tournaments. The same provision applies to individuals residing in areas close to Super Bowl locations and national political conventions. However, no depreciation or maintenance deductions can be taken by the taxpayer even though mortgage interests and property taxes can be deducted on Schedule A. This break can strictly be taken only once a year and it is voided when the property is rented for over 14 days.

It is a bit complicated when a homeowner opts to use part of the house and rent out the rest. In such a case, the rental days have to be counted and percentage of the house being used determined. Expenses like maintenance, utilities, property taxes, mortgage interests and depreciation that are usually deductible from the rental income that are shared have to be established. If a homeowner has a house that is used for 113 days a year, 92 days of which it is rented, then 81% of the listed expenses can be written off on the owner’s Schedule E from the rental income. The remaining 19% are not deductible, apart from the mortgage interest and property taxes that are shown on the owner’s Schedule A.

Proper documentation of all transactions, including repairs and maintenance of the property-even if they don’t count when tallying the total, are important since the IRS is usually extra keen when dealing with deductions of this nature. There are days when immediate family members may use the house, please note that even if they pay the market rent, the IRS might attempt to count such days as “personal days.” Depreciation is not extended to land but only the structure, furniture, and appliances.

If personal use of the property by the taxpayer exceeds 10% of the overall days rented, then the losses are not deductible, apart from the property taxes and mortgage interests. Joint filers with $100,000 or less of their adjusted gross income can deduct up to $25,000 of their normal income if their personal use falls below 10% of the rented days.

If you are planning to rent out your second home during summer, there are only two things to bear in mind; either practice proper record keeping or keep the arrangement at its simplest.

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