Archive for Children

What is a Qualifying Child for the Child Tax Credit – IRS Publication 972

April 24, 2012 John R. Dundon II Child Tax, Children, Tax Credit

A qualifying child for the child tax credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.

1. Age test To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.

2. Relationship test To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

3. Support test In order to claim a child for this credit, the child must not have provided more than half of his/her own support.

4. Dependent test You must claim the child as a dependent on your federal tax return.

5. Joint return test The qualifying child can not file a joint return for the year (or files it only as a claim for refund).

6. Citizenship test To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.

7. Residence test The child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.

The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.

If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Share
No comments ,

Tax Advantages of Employing Your Children

April 11, 2012 John R. Dundon II Children, Employment Tax

Payments for the services of a child under the age of twenty-one who works for his or her parent whether or not in a trade or business, are not subject to federal unemployment taxes (FUTA). These exceptions are not the case with a corporation (C or S), even if the corporation is completely controlled by the child’s parents. Significant tax shelter is provided through the employment of children in a sole proprietorship or partnership by shifting income to persons in lower tax brackets. A child is allowed to earn the amount of the standard deduction tax-free every year ($5,700 in 2010). Above that level, the child can receive income and pay tax at the lower ten percent and fifteen percent rates.

Of course, the employment arrangement must be bona fide, and the compensation must be appropriate for the age and skill set
of the child. But as the child matures, it is reasonable that compensation would increase. For a parent who would like to put money away for a child’s education, the family business still provides a great opportunity.

Share
No comments

IRS Form 8332 Outweighs Divorce Decree Regarding Dependency Exemption

September 6, 2011 John R. Dundon II Child Tax, Children, Dependent

Section 152(e) of the tax code specifies how to determine the dependent status of children of divorced parents. This code section states that the noncustodial parent can claim the dependency exemption for a child when the custodial parent signs a written
declaration that the custodial parent will not claim such child as a dependent for any taxable year beginning on the date of such taxable year.  I always recommend doing this using IRS Form 8332.

According to Leslie Himes, et ux., v. Commissioner TC Memo 2010-97 when a custodial parent does not release the dependency exemption, the custodial parent is deemed to be the taxpayer who is entitled to claim the exemption for the child.

Share
No comments , ,

If Your Child’s Investment Income is Greater Than $1,900 in 2010 It May Be Taxable at Your Tax Rate

March 19, 2011 John R. Dundon II Child Tax, Children

Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income. Your child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2010:

  1. Was under age 18 at the end of the year,

  2. Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or

  3. Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

To figure the child’s tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, PDF 49K and attach it to the child’s federal income tax return. (Instructions for IRS Form 8615 PDF 24K). When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents’ Election To Report Child’s Interest and Dividends. PDF 43K.  More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. PDF 220K

Share
No comments ,

Student Loan Applications and the IRS

December 5, 2010 John R. Dundon II Children, Student Loan

Preparing for college often means applying for student loans to pay for it as well. Every year students struggle and stress while trying to complete the Free Application for Federal Student Aid (FAFSA).

Completing your student financial aid application is now easier than ever. Department of Education/Federal Student Aid, mandated through the American Recovery and Reinvestment Act, has made the FAFSA process simpler by partnering with the IRS to provide tax data needed to complete the FAFSA on the Web (FOTW) via the IRS’ Federal Student Aid-Datashare tool.

During the application process, you or dependent uses a Personal Identification Number (PIN) to access the optional tool. After additional authentication is achieved, the tool retrieves your tax data and displays it on your web browser. You can then choose to skip the use of the tool or securely transfer the tax data into the FOTW and print it for future use. You can save time completing the financial aid application by using this innovative data retrieval tool.

Who can use it? If you or your dependent meet the following criteria, you’ll be given the option to retrieve, display and transfer your IRS tax information:

• If you filed a 2010 tax return
• If you have a valid Social Security Number
• If you have a Federal Student Aid PIN. If you do not have a PIN, you will be given the option to apply for one
• If your marital status has not changed since Dec. 31, 2010.

Who should not use it? If any of the following conditions apply to you or your dependent, you should not use this tool:

• If you filed an amended federal tax return for 2009 or 2010
• If you did not file a federal IRS tax return for 2009 or 2010
• If your 2009 or 2010 IRS tax filing status is married filing separately
• If you filed both a federal IRS tax return and a foreign return

How does the FSA-D tool work with FAFSA on the Web?

If you choose to use the tool to gain access to tax information, you should follow these steps:

• Enter your PIN or apply for a PIN (If one was not previously secured).
• Click on “Link to IRS” to begin.
• Authenticated data will be displayed; however, you will need to provide additional information to further validate your identity. You must enter the information exactly as it appears on your prior year tax return.
• Once authenticated, the previous year tax return data will be displayed, along with the corresponding FAFSA question numbers. You will then be given the option to transfer the data or return to the FAFSA without transferring the data.
• If you select the “Transfer” option, the tax information provided will populate to the appropriate FAFSA question.
• After the FAFSA is populated, the IRS session will end and you will be returned to the FOTW.
• Before submitting your information, please be sure to print the federal tax information page for your records.

FAFSA on the Web and the complimentary FSA-D application are available at www.fafsa.gov in both English and Spanish-language versions. Additional information and frequently asked questions about the IRS’ FSA-D tool can be found at http://www.fafsa.ed.gov/linktoirs_faq.htm.

Completing the FAFSA no longer has to be stressful or time-consuming. Preparing for college is just a click away. Go online to www.fafsa.gov and complete your FAFSA today!

Share
No comments , ,

Six Tips for Students with a Summer Job

July 9, 2010 John R. Dundon II Children, Employee Business Expense, Employment Tax, Family, FICA, Paying Taxes, Payroll Tax Problems, Personal Service Corporation, Self Employ, Small Business, Social Security Tax, Sole Proprietor, Tax Guidance & Preparation

School’s out and many students now have a summer job. Some students may not realize they have to pay taxes on their summer income. Here are the six things the IRS wants everyone to know about income earned while working a summer job.

  1. All employees fill out a W-4, Employee’s Withholding Allowance Certificate, when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on IRS.gov.

  2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

  3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

  4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

  5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

  6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

  • You are in the business of delivering newspapers.

  • All your pay for these services directly relates to sales rather than to the number of hours worked.

  • You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Share
No comments ,

Summertime Child Care Expenses May Qualify for a Tax Credit

July 7, 2010 John R. Dundon II Child Tax, Children, Dependent, Family, Self Employ, Small Business, Tax Credit, Tax Problems & Requests, Tax Relief, Taxable Income

Did you know that your summer day care expenses may qualify for an income tax credit? Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. Those expenses may help you get a credit on next year’s tax return. Here are five facts the IRS wants you to know about a tax credit available for child care expenses.

  1. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

  2. The cost of day camp may count as an expense towards the child and dependent care credit. Expenses for overnight camps do not qualify.

  3. If your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.

  4. The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.

  5. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information check out IRS Publication 503, Child and Dependent Care Expenses.

Share
No comments ,

Affordable Care Act Provides Expanded Tax Benefit to Health Professionals Who Received Student Loan Relief for Working in Underserved Areas

June 16, 2010 John R. Dundon II Children, Health Care Tax Credit, Health Insurance, Student Loan

As part of a larger Administration announcement on efforts to strengthen the health care workforce, the Internal Revenue Service today announced that under the Affordable Care Act health care professionals who received student loan relief under state programs that reward those who work in underserved communities may qualify for refunds on their 2009 federal income tax returns as well as an annual tax cut going forward.

“Doctors and nurses who choose to practice in underserved areas make a great contribution to their local communities,” Commissioner Doug Shulman said. “By expanding the tax exclusion for student loan forgiveness, the Affordable Care Act provides an even greater incentive to practice medicine in areas that need it most.”

The Affordable Care Act included a change in the law, effective in 2009, that expands a tax exclusion for amounts received by health professionals under loan repayment and forgiveness programs. Prior to the new law, only amounts received under the National Health Service Corps Loan Repayment Program or certain state loan repayment programs eligible for funding under the Public Health Service Act qualified for a tax exclusion.

The Affordable Care Act expands this tax exclusion to include any state loan repayment or loan forgiveness programs intended to increase the availability of health care services in underserved areas or health professional shortage areas and makes this exclusion retroactive to the 2009 tax year.

Health care professionals participating in these programs who have reported income from repaid or forgiven loan amounts on their 2009 returns, possibly after receiving a Form W-2, Wage and Tax Statement, or Form 1099, may be due refunds. Those who believe they qualify for this relief may want to consult their state loan program offices to determine whether the program is covered by the new law.

Health care professionals who have not yet filed for 2009 need not report eligible loan repayment or forgiveness amounts when they file. Those who have already filed may exclude eligible amounts by filing Form 1040X, Amended U.S. Individual Income Tax Return. This form can be downloaded from this website or obtained by calling the IRS toll-free at 1-800-TAX-FORM (1-800-829-3676). Individuals filing Form 1040X to claim this exclusion should write “Excluded student loan amount under 2010 Health Care Act” in the Explanation of Changes box.
Health care professionals may request an employer or other issuer to provide a Form W-2c, Corrected Wage and Tax Statement, or 1099 and may attach the corrected form to the Form 1040X. However, the Form 1040X may also be filed without attaching a corrected form.
An individual whose employer withheld and paid taxes under the Federal Insurance Contributions Act (FICA) on payments covered under the new exclusion may request that the employer seek a refund of withheld FICA on the employee’s behalf. And because employers also pay a portion of the FICA tax, the employer also may also be entitled to a refund.

To obtain a refund, an employer should file a separate Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for each Form 941, Employer’s Quarterly Federal Tax Return, which needs to be corrected. An employer filing a Form 941-X is also required to file a Form W-2c for each employee who benefits from the exclusion.

John R. Dundon, EA – 720-234-1177

Share
No comments ,
« Older Entries