June 19, 2013

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Tax Changes Surviving Spouses Must Prepare For

May 20, 2013 By

Most people don’t like thinking about death, which is an inevitable part of human life. The passing on of a loved one is stressful and can be devastating, but the surviving spouse has to make major decisions that will definitely affect how he or she will pay his or her taxes in the future without the other party. Just like marriage and divorce, death of a spouse changes many tax aspects of the surviving spouse, some with serious tax consequences.

There are two distinct issues that will determine how a surviving spouse will file the tax returns with the IRS:

Example one: The married status of a surviving spouse will be a factor to consider in the first scenario. If for example, John married Betty but unfortunately, Betty passes way in February within the same year. If John marries again in October, he will have to either file married jointly or married but separately with the new wife. Betty’s tax returns filing can be filed as married but separately if need be.

Example Two: If John remains single, he and Betty can file jointly or separately as a married couple. But in this case, John will pick the best alternative since the IRS doesn’t stipulate any exemptions for surviving spouses who file their tax returns jointly as married even if their spouses died within the same fiscal year of tax return filing.

The following year after the death of a spouse, the surviving spouse will file their tax returns depending on whether they have dependants or not. If John has a child who fully depends on him and one who stays in his home for the whole fiscal year, then Qualifying Widow (Widower) can apply in John’s case. If he decides to use this option, then he gets the opportunity to benefit from the standard deductions on Joint Married Filing as well as using the tax tables.

However, if John does not have a dependant, he will file single status. But in case there is a dependent child, then he can qualify and benefit from the Head of Household filing status two years after the passing of a spouse but it is imperative to note that some states do not have such a special status for surviving spouses.

If one loses his or her spouse within a given fiscal year and they chose to remain single, he or she can file a joint return within that very year, and so long as he or she has qualified dependant(s), he or she can benefit from tax relief on the basis of a surviving spouse in the next two subsequent years. Although losing a loved one can be a devastating event, one should capitalize on every tax break with their new filing status in order to lessen the financial blow of losing a partner.

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Tax Filing Mistakes You Must Avoid

April 12, 2013 By

Tax filing can be not only tedious, but a bit intimidating. Yes, most people are fearful of complete their returns for fear of committing tax mistakes during the process. The IRS tax consequences of some mistakes have been blown out of proportion, with taxpayers claiming to receive streams of nasty letters, penalties and even audit threats.  Relax; things are not as bad as many people believe and the IRS is not so insensitive (at least sometimes). Some mistakes like math errors are automatically corrected by the IRS officers and other than a routine notification about the alterations, there is absolutely nothing to worry about.

However, this doesn’t mean that you should be careless when filing your IRS Form 1040s (the 1040A or 1040EZ). All it takes to file accurately is proper prior planning and avoiding last minute rushes. Here are common tax mistakes to avoid:

1. Math Errors: This is the most common tax filling error even though subtraction, addition, and multiplication errors have been on the decline in the recent past, thanks to tax preparation software. Every amount you enter into the forms must be triple checked, as a wrong entry can be spread across the whole return by the software.

2. Wrong Social Security Numbers: Ensure that you fill in the nine-digit correct SSN numbers for the tax software to capture your data. Returns with false Social Security Numbers will automatically be rejected and this means that you cannot claim deductions and credits you might be entitled to, especially those related to dependents.

3. Wrong Form 1040: You don’t have to fear the complex and multiple-page forms and opt for simple ones like the IRS Form 1040EZ. You will realize that using the 1040A and 1040 grants more tax breaks, even though they have some intricate, but manageable complexities.

4. Dependents: Before claiming any dependent-related tax deductions, ensure that they qualify. These requirements differ and you must therefore, read and understand the eligibility criteria of every specific case before claiming.

5. Erroneous Methods of Deduction: Deductions are bound change; you might be claiming standard deductions and yet, you qualify for itemized deductions due to some changes in your life. If you bought a home or incurred a huge medical bill, you sure will want to itemize your deductions.

6. The Filing Status: Did you get married or divorced during the year or took custody of a child? Accurate filing status like Head of Household will entitle you to some tax advantages and deductions. 

7. Ignored Income: Other than employment, did you earn some other income say from investments or side jobs? Salaried taxpayers are less likely to commit this mistake because of the W-2 withholding, but if you have any other source of income, remember to include it on your return, lest you receive a 1099 reminding you about the unreported income.  

Other common errors include failing to deduct charitable donations and missing other important tax credits. Finally, you must give accurate account and routing numbers for direct deposit refunds from the IRS. When filing, take your time and don’t rush to avoid these mistakes and to avoid overlooking potential tax breaks. If your tax is handled by a tax pro, it is safe to still review the return because you will be held liable for any mistakes. The same rule applies to joint filers; you are signatory to the return and therefore, directly liable for its content.

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Should Your Claim Your Adult Children as Dependents on Your Tax Return

April 5, 2013 By

If you are a parent of adult-aged kids, then you must be wondering whether or not to claim them as dependents on your tax returns. The main objective of claiming tax deductions for dependent kids is to lower the overall cost of bringing up a family. The deductible amount varies but in 2011, taxpayers were allowed to claim $3,700 in exclusion for every eligible child. If you are a family falling in the 25% tax range, then you could save approximately $925 for every child.

Before making up your mind whether or not to claim a child as a dependent, there are a few factors that you have to consider. This shouldn’t however, be a problem, especially for the purposes of tax deductions, as it is always safer to claim your kids as dependents for as long as possible. In fact, tax experts argue that they can be claimed as dependents on your return forever unless of course, they earn a lot of money or you are barred by the law from claiming them. Consider the following factors to decide whether you qualify and if it is economically feasible to retain your kids as dependents.

Age Factor: Legally, any child aged 19 and below can be claimed as a dependent kid. If they go to college, the age limit is extended to 24. Even if they finally hit 24 years or older, get employed, but earn less than $3,700 annually, they can still be claimed as “qualifying relatives” where the parent saves more in taxes than the child.

Your Children’s Education: If you have a child in college, then you may find it beneficial to claim, since you are likely to realize better tax benefits like the $2,500 education credit plus tuition and fees deduction until they turn 24, get married, graduate with a bachelors degree, etc.

Medical Expenses: If you still have a child living under your roof, then you can deduct medical costs as itemized deductions. This includes out-of-pocket child care. Please note that your kids automatically qualify for your medical insurance benefits until they turn 26, whether they are claimed as dependents on tax returns or not. This is as per the Affordable Care Act.

You must consider these factors when filing your tax return and go for the option that makes the best tax sense.

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Valentine Gifts May Save You Some Money!

February 13, 2013 By

Valentine’s Day is tomorrow and couples look forward to the cake, corny cards, chocolate and candy. Here is another innovative way to sweeten valentines even more: there are gifts that can actually place you at a tax advantage. Consider the following eleven gifts that keep on giving, tax wise!

  1. Buy a vacation house. Costs incurred in purchasing a property can be deducted to reduce your tax bill. Mortgage interest and real estate taxes are deductible on a Schedule A, if itemized. Expenses associated with a second home may also be claimed subject to certain restrictions. And it doesn’t have to be the Biltmore House. A second home includes not only a house but also a condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Yachts are also considered as a second home.
  1. A wedding ring also counts. People love to propose on Valentine’s Day, definitely because it’s the most romantic day of the year. The cost of the ring is not deductible; don’t get too excited! The tax break however, is there ever after. Your filing status is determined as of the last day of the year, so even if you don’t get married until December 31 this year, you can still file as married filing jointly. A lot of negative sentiment surrounds the possibility of a marriage penalty, but in truth, most married couples pay less in taxes as a result of filing jointly. Saying “I do” could actually save you some money!
  1. In the event that you have an outstanding tax debt, it is advisable that you settle it before you can get married. It’s a shame to start a life together marred by tax debts and it may cause all kinds of problems in the long run. Encourage your better half to acquire a tax relief as an ideal and thoughtful gift to yourself!
  1. If you plan to live happily ever after and sail away into the sunset, ensure that that partner is healthy. What better ways to achieve this than having regular checkups and to ensure you are well on the path to good health? The costs of all checkups regardless of age and sex, whether for heart disease, cancer, or heart disease are all deductible if itemized. It does make sense to stay healthy.
  1. Go to school, or take a loved one to school. For 2012, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for your own education or for your spouse (or other dependents).The lifetime learning credit is available for tuition and related expenses at an eligible educational institution. Any school, music, culinary, art or vocational school! An eligible education institution includes any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Enquire if you aren’t sure. Away with procrastinating about that culinary school dream and get with the program! Pursue your passion, and you just might improve your tax position!
  1. An unrivalled means of showing adoration for someone is making a donation in their name. Unsurprisingly, the tax laws make this a win- win situation for all. The charity wins, and you win your sweetie’s heart as well, in addition to a considerable reduction of your tax bill. So support the whales, cancer research, or even an orphanage, and you may claim a deduction for your gift.
  1. Smoking; there was no way to leave that one out. It kills, it’s costly, and is disgusting. Quit now and save loads of money! The cost of participation in a cessation of smoking program and for drugs to combat nicotine withdrawal is a deductible tax expense if itemized. Your other half will thank you, and so will your future self. So stop smoking now!
  1. Care and love is shown in many ways. One of them is by showing a direct concern for your spouse’s future. This can be done by contributing to a spousal IRA, if you are married and earn more than your spouse. If you file a joint return, you can make a contribution to a spousal IRA $5,000 (6000 if your spouse is over 50). Watch out for phase outs though.
  1. Raising a child isn’t easy. Kids are expensive, with all the bills, parties, school, and so on. The tax authorities, luckily, are in on this fact, and have gone a long way into making sure there are some perks associated with parenthood. Increased exemptions and the earned income tax credit are some of the tax breaks, and though they don’t offset the actual costs of raising kids, considering it would be a great way of moving a relationship to a higher level.
  1. Hire a tax professional. It has been statistically proven that most fights among couples are about money. Anything you can do to have a happy marriage is worth the cost, correct? Paying for a tax professional is tax deductible if itemized, and would save you a lot of time… time which you could better spend enjoying your relationship! Seek tax advice and save yourself a great deal of time.
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Death of Spouse and Changes in Filing Status for the Surviving Spouse

January 2, 2013 By

The death of a spouse can be devastating. Major decision making duties and other family responsibilities automatically and squarely land on the shoulders of the surviving spouse at a tough time. Most of the choices they make are affect their income taxes, but with some proper tax planning, most of these challenges can be handled amicably, including the filing status that change in a snap, altering most of the filing procedures.

Filing status of the deceased taxpayer and the surviving spouse will depend on two main factors. To begin with, the actions undertaken by the surviving spouse after the death of the other partner is crucial. If you lose a spouse and remarry in the same year, your status can either be married filing jointly or separately with your current spouse. On the other hand, the deceased return will be married, filling separately, if he or she has to file. If however, the surviving spouse doesn’t remarry, then the filing statuses prior to death can still apply, depending on which one works best for the pair. You cannot pro-rate the standard deduction and/or exemption since the spouse/partner died during the year.

After the first year (the year in which the spouse passed on), the filing status of the surviving spouse will vary based on the dependents. If by then he or she has not yet remarried, but has had a dependent child at home for the whole year, then the best option here is to go for the Qualifying Widow (Widower) filing status. Using this, the individual can use the Married Filing Jointly standard deduction and tax tables.

If however, the surviving spouse doesn’t have an eligible child or dependents, then he or she can file as Single after the year the spouse passed on. If there are dependants, one can qualify for Head of Household status. The special status is only available for the very first two years just after the death of the spouse and might not be available in some states.

The whole changes might appear complicated, but the filing status of a surviving spouse would be determined by the actions taken and whether there are any dependants in the picture. If you don’t remarry, then you can file jointly with your spouse on the year he or she dies and qualify for some special treatment for the next two years if you have dependents. This way, the surviving spouse can enjoy some tax breaks and plan for the years to come.

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Common Tax Myths and the True Facts about Them

November 26, 2012 By

Taxpayers are likely to cling to any myth that promising and likely to lower their tax bills. In fact, many are quick to believe whatever they are told by friends, family, or even what they read on the web. The only authentic source of information on taxes is the tax law, which is best understood by the IRS and tax professionals. Explained below are some tax myths and the truth about them:

To Claim Tax Deductions, You Must Itemize

Just because most common tax deductions, like home mortgages and medical costs, require the taxpayer to file Schedule A or itemize to claim, doesn’t mean all other deductions must be itemized to be claimed. There are many other “above the line” deductions on the Adjusted Gross Income section of Form 1040 that don’t necessary require any itemization. These include alimony, moving costs, and tuition fees, amongst others.

Payments Received Below $600 don’t Have to be claimed

It is one of the most common myth and many taxpayers are misled into believing that you cannot claim received payments that is below $600. The truth is that there is a $600 threshold that payers are required to report on Form 1099. This means that you have to report the amount whether the 1099 is issued or not.

Anyone with Kids is Considered a Head of Household

The way individuals define Head of Household differs from the IRS’s definition. According to Uncle Sam, only unmarried individuals who provide for dependents can file as Heads of Households. You therefore, have to be divorced, unmarried or single at the end of the tax year and have paid over 50% of the home maintenance. Visit the IRS website to find out instances when you are considered as unmarried.

If You Evade Filing Taxes for 3, 5, or 7 Years, You are Let off the Hook by the IRS

The 3 year IRS statute of limitation that applies to most taxpayers has a number of restrictions that have to be understood. The statute in reality, never expires if you fail to file your returns. This means that the IRS will still hunt you down whenever they find sufficient reasons to.

Your Tax Professional is to Blame for Your Tax Return Flaws

Taxpayers are not excused if the tax returns prepared by tax pros contain mistakes. The IRS expects all taxpayers to read and understand tax returns before sending them. You take personal responsibility and guarantee accuracy the moment you sign against the dotted lines.
Other common myths include beliefs that correcting tax return mistakes may lead to an audit. Some believe that taxpayers are free to sell their houses tax-free after hitting 55 and minors are exempted from paying and filing tax returns. These myths are misleading and you have to be informed to avoid any troubles with the IRS.

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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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Boost your Refund with these Four Tax Credits

July 20, 2012 By

Many taxpayers glance at the amount they pay in taxes and frown, cursing Uncle Sam for being insensitive. However, aggressive complaints can never help, as the government cannot operate without your taxes. To help you pay your taxes without feeling the “pinch,” the IRS has an array of tax relief options that taxpayers can turn to, one of which being tax credits.

A tax credit is simply a dollar-for-dollar lessening of the actual amount of taxes you owe the IRS. The IRS has made some of the tax credits refundable where eligible taxpayers who claim one of the credits can get the rest as a tax refund regardless of the status of the liability, even if it has been grounded to zero.

You can increase your refund by taking advantage of the following tax credits;

1. The Earned Income Tax Credit: If your earnings from wages, farming or self-employment are less than $49,078, then this is the tax credit for you. If you have been earning more than this amount in the past, but you saw your income come down last year, you might qualify for the very first time. The amount of credit is set based on your age, the number of eligible kids and income, with the maximum set at $5,751. If you don’t have kids, you might still qualify; see the IRS Publication 596-Earned Income Credit.

2. The Child and Dependent Care Credit: Taxpayers who work or search for work but have kids aged below 13, have a disabled spouse or dependent can benefit from this credit. Review Publication 503-Child and Dependent Care Expenses for more information.

3. The Child Tax Credit: This credit has a maximum of $1,000 for every eligible child and can be claimed on top of the Child and Dependent Care Credit. Read IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contribution Credit: Also known as the Saver’s Credit, it seeks to enable low-to-moderate income earners put away some funds for their retirement. To qualify, your income has to be below a specific limit and you making contributions to an IRA or a workplace retirement plan like a 401 (k). You can get this credit on top of other applicable tax savings. See the IRS Publication 590-Individual Retirement Arrangements (IRAs) for more information.

Depending on your personal circumstances and facts, there is an array of other tax credits that might be applicable to you. Read carefully the instructions contained on tax forms to see if you are eligible. Check out the IRS website for any other additional information on these tax credits. You can also get phone support on 800-TAX-FORM (800-829-3676).

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Are You Eligible for the EITC?

June 1, 2012 By

The EITC (Earned Income Tax Credit) is simply a financial boost benefiting workers earning $49,078 or less in the year 2011. At least four out of five eligible taxpayers, who filed for their EITC last year, received them. This means anyone can get what they rightfully earned as long as they are eligible.

Here are ten key things you should know about this valuable credit:

  1. With the annual changes in one’s financial, marital or parental situations, one’s EITC eligibility may change. Review the eligibility rules often; you may have not qualified last year, but this year you may.
  2. If you are eligible, expect a credit of up to $5,751. This credit not only reduces your tax burden, but may also result in a refund. However, the amount you receive depends on your earned income and whether you have qualifying children.
  3. In case you qualify, file a tax return and claim the credit specifically. Do not forget to attach Schedule EIC (Earned Income Credit) when filing the Form 1040. In case you file Form 1040A, retain the EIC worksheet after use.
  4. If your filing status states “Marital Filing Separately”, you are not eligible for EITC.
  5. A valid Social Security Number is mandatory for yourself, spouse (for joint tax return) and any qualifying child in your household.
  6. Singles and married couples without children may still qualify. Without qualifying children, there are age and residency requirements to meet as well as dependency rules.
  7. You will only qualify if you have earned income. Be it from wages or salary, self-employment, and small business or from disability income.
  8. The IRS has special rules for members of the U.S. Armed Forces in war zones. They can choose to include their non-taxable combat pay as part of earned income for the EITC. In this case, the combat pay still remains non-taxable.
  9. Using the EITC Assistant, it is easy to determine eligibility. This is an interactive online tool spelling out the eligibility rules. Answer a few questions and find out whether you qualify and get the estimated amount of your EITC.
  10. You can also get free help when preparing to claim your EITC. At Volunteer Income Tax Assistance, you can get the figure of your credit when doing e-filing. This VITA site can be found on the IRS website and it takes away the hassle of the process of preparing and claiming one’s EITC.
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Ten Tax Benefits for Parents

May 3, 2012 By

Whenever the tax season nears, almost everybody cringes. However, did you know that your kids can be helpful when dealing with your tax headache? Here are the 10 critical tax benefits the IRS is reminding you of:

  1. Dependents – The IRS allows parents to claim a child as a dependent mostly in the year they were born. To be certain, get more information- see the IRS Publication 501.
  2. Child and Dependent Care Credit – This credit is claimable if you leave your child or children below 13 years under care of someone while working or looking for work. The IRS Publication 503 spells out the conditions.
  3. Child Tax Credit – This credit can be claimed for each under 17 year old child but if you do not get its full benefits, try the Additional Child Tax Credit.
  4. Earned Income Tax Credit – Abbreviated as EITC, this is a tax benefit for specific people working and earning from wages, farming and self-employment. This credit lowers the tax burden and may grant you a refund. For more details check out IRS Publication 596.
  5. Children earning income – If your child is earning from working, they may have to file a tax return. IRS Publication 501 has more information on the same.
  6. Adoption Credit – If you have an adopted child, you could get a tax credit for qualifying expenses of adoption of an eligible child. You can claim this credit but be sure to present accurate adoption-related documents when filling the form. Check out Qualified Adoption Expenses and IRS Form 8839 for the instructions pertaining to the filling of the forms.
  7. Children having investment income – Sometimes a child’s investment income may undergo taxation at the parent’s rate. For more details see IRS Publication 929.
  8. Self-employed health insurance deduction – In case you are self-employed and paying health insurance, you could deduct any premiums initially paid for coverage for any of your child under age 27.
  9. Interest on student loan – You could be able to deduct interest on a qualified student loan even without itemizing your tax deductions.
  10. Credits on higher education – Tax credits on education expenses can significantly lower the costs for higher education. For instance, the American Opportunity and/or the Lifetime Learning Credits can both lower your income tax bit by bit. The IRS Publication 970 has the relevant details, and so does the Tax Benefits for Education.
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