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How Children Affect Your Taxes: Dependent Exemptions

There are a number of ways that children can impact your taxes, and I am going to use the next several posts to examine them.  First up is one of the simplest, which is the effect on exemptions.

What is an exemption?  On your federal tax return, you are allowed one personal exemption for yourself, and one for your spouse if you are married.  Each exemption reduces your taxable income by $4,050 for tax year 2016.

There are five tests that must be met to claim a child for a dependent exemption.  The first test is the relationship test.  To meet this test, a child must be:

Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or

Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.

The second test is the age test.  To meet this test, a child must be:

Under age 19 at the end of the year and younger than you (or your spouse, if filing jointly),

A student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly), or

Permanently and totally disabled at any time during the year, regardless of age.

The third test is the residency test.  To meet this test, your child must have lived with you for more than half the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents.

The fourth test is the support test.  To meet this test, the child can’t have provided more than half of his or her own support for the year.

The fifth test is the joint return test.  To meet this test, the child cannot file a joint return for the year. 

If a child meets all of these tests, then the child can be claimed as a dependent.  Next up is how children affect the standard deduction.

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The IRS Dirty Dozen: Phishing

Each year since 2014, the IRS has published a list of the "Dirty Dozen" tax scams.  The 2017 list started being revealed on February 1, with a mainstay of the prior year lists, "Phishing".  No, this is not referring to the Vermont jam band with the drummer that wears a housedress and plays vacuum cleaner solos and fans that enjoy hacky-sack and patchouli.  This "phishing" is an email scam that attempts to steal personal and financial information.  From the IRS:

     Phishing is a scam typically carried out with the help of unsolicited email or a fake website        that poses as a legitimate site to lure in potential victims and prompt them to provide                valuable personal and financial information. Armed with this information, a criminal can              commit identity theft or financial theft.

     If you receive an unsolicited email that appears to be from either the IRS or an organization      closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS),                report it by sending it to phishing@irs.gov.

     It is important to keep in mind the IRS does not initiate contact with taxpayers by email to        request personal or financial information. This includes any type of electronic                              communication, such as text messages and social media channels. The IRS has information        online that can help you protect yourself from email scams.

Keep in mind that if you get an email from a foreign "prince" or the US Secretary of State (I got that one this week) offering you millions of dollars, it is fake and delete it.

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Follow Up on the Earned Income Tax Credit

Following up on my post from last Thursday about the Earned Income Tax Credit, I have two practical points I want to share.  First is that I have learned that the EITC for Oklahoma state tax returns is no longer a refundable credit.  Last year, the Oklahoma legislature voted to make this change for the 2016 tax year.  What this means is that even if you qualify for the OK EITC, you can only claim it up to the amount of tax you owe.  There is a proposed bill to reinstate the EITC as a refundable credit for 2017 (see here).

Second is that beginning this year, if you have claimed the EITC or Additional Child Tax Credit (ACTC) on your federal return, the IRS is required to hold your refund until February 15.  The IRS is advising that it is unlikely to actually receive these refunds until the week of February 27th.  You can track your refund status using the Where's My Refund tool.

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What is the Earned Income Tax Credit?

Last week was an Internal Revenue Service holiday of sorts.  It was Earned Income Tax Credit Awareness Day.  You may have heard of this credit, but have no idea what it is, how it works, or whether you might be eligible for it.  Below, I will do my best to lead you out of the darkness and shed some light on the EITC.  

The EITC is what is called a "refundable" credit.  This means that even if you owe $0 in tax, if you qualify for the EITC, you can still receive a refund.  The credit is reported on lines 66a & 66b of your 1040, and there is a Schedule EIC that must be attached to the return.  The instructions, worksheets, and calculation tables take up 17 pages of the Form 1040 instruction manual for 2016, so I would not recommend going it alone with a pencil and paper.

How much is the credit worth?  The maximum credit amount depends on the number of qualifying children the taxpayer has.  The maximum amounts for 2016 are:

$6,269 with three or more qualifying children;

$5,572 with two qualifying children,

$3,373 with one qualifying child;

$506 with no qualifying children.

Additionally, there are income limits in order to qualify:

Your tax year investment income must be $3,400 or less for the year.

Must not file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.

Your total earned income must be at least $1.

Both your earned income and adjusted gross income (AGI) must be no more than:

(author's note:  this is where my lack of HTML coding skills becomes glaringly obvious.  I wanted to insert a table here, but failed miserably.)

If you are filing as single, head of household, or widowed:

$14,880 with zero qualifying children claimed;

$39,296 with one qualifying child claimed;

$44,648 with two qualifying children claimed;

$47,955 with three or more qualifying children claimed.

If you are married filing jointly:

$20,430 with zero qualifying children claimed;

$44,846 with one qualifying child claimed;

$50,198 with two qualifying children claimed;

$53,505 with three or more qualifying children claimed.

Note:  there are special exceptions that apply to members of the military, ministers and clergy, those impacted by disasters, and people with disabilities or with children with disabilities.

The IRS website has an EITC Assistant that can help you determine if you qualify.

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Return

After what was supposed to be a two month tax season sabbatical from blogging stretched into two years, I have decided it is time to start writing again.  

So what's new?  The biggest change is that my wife and I are no longer in Houston.  In fact, we're no longer in the US, or North America.  In the summer of 2015, she accepted an expat position in Norway, and we moved at the end of 2015.  We have definitely enjoyed the change of pace, and the travel opportunities (we visited 14 different countries in 2016, not counting Norway and the US).  However, all things end, and we anticipate being back in Houston during the summer of 2017.  

Professionally, there have been two big changes to my practice other than the location.  First is that I discontinued my property tax practice.  It required being on-site for protests at the county appraisal districts, and that was not possible after the move.  Second is that I have added expat taxation as a focus area of my tax practice.  We discovered that there are many other Americans living overseas with numerous tax issues.  Likewise, there is a large community of expats not only in Houston, but throughout the US, that need assistance navigating the US tax system.  

Tax filing for 2016 returns began on January 23, and all W2s were required to be filed with the Social Security Administration on January 31.  The most wonderful time of the year is beginning!

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Kickstarting Startups

One way many new businesses are getting capital to get off the ground is by using a method known as "crowdfunding".  The business will set up a page on a website such as kickstarter.com or indiegogo.com, and people can make pledges to fund the business.  Normally there are different funding levels, and often there are gifts that the funders will receive for their funding.  If the startup does not reach its funding goal, the pledges are returned.

Of course, I wouldn't be doing my civic duty if I didn't mention the tax issues with these sites. The funding donations are generally considered income to the startup.  The pledges are not considered tax deductible donations from the funders, because usually the startups are not charities, and often the funders receive something for their funds.

All varieties of startups make use of these sites.  I recently bought a pen from karaskustoms.com, which got started using kickstarter.  A friend used one to raise donations for the victims of the Oklahoma tornadoes in 2013.  And today,  a friend just began a kickstarter campaign to raise funds for a restaurant.  Sean Carroll has been operating Melange Creperie as a food cart for the last five years, and has decided to move indoors out of the weather.  He's trying to raise $50,000 by March 5, 2015.  So far he's raised more than $6,600 in 2.5 hours since going live.  My wife and I won't touch crepes from anywhere else, so help him out by clicking HERE and pledging.

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Where's My Refund?

If you are one of the many taxpayers that will receive a refund this year (this CNN/Money article  says that nearly 8 in 10 do), you will immediately begin wondering when that refund will appear in your account or mailbox as soon as the return is submitted.  So what's going on behind the scenes during that wait?

After the return is transmitted, either from your preparer or your tax software, the IRS is matching your personal info on the return to their records.  Apparently this can take 24-48 hours when using TurboTax.  The return I filed yesterday was accepted by the IRS in under ten minutes. 

After the return is accepted, you are put into a refund queue.  In 2014, over 90% of refunds were issued in under 21 days.  Of course, there are things that can hold up the refund - the two biggest being filing a paper return (which takes at least 6 weeks to process) or requesting a paper check refund.

The IRS has a website called "Where's My Refund?" that will track your refund within 24 hours of efiling.  You just have to enter your Taxpayer ID Number (normally your Social Security Number), your filing status, and the exact refund amount, click, and you'll know how much longer you'll have to wait.

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Deductions for Fostering Pets

One deduction that many people are unaware with is associated with fostering pets.  If you foster for a 501(c)(3) not-for-profit organization, the money you spend on food, vet bills, and even mileage can be considered gifts to charity and included as itemized deductions on Schedule A of your tax return.  Unfortunately, this only applies to foster pets and not your household pets.  

In the court case that decided these were legitimate deductions, the taxpayer was allowed more than $12,000 in deductions.  If you do include these expenses on your return, be sure you keep your receipts.

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The Tax Issues of Jet Ownership

Scooter and I had a nice discussion about the tax issues concerning his jet this afternoon.

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Do I Have To Issue A 1099-MISC To My Office Landlord?

Yesterday I was asked whether a business owner should issue a 1099-MISC to his/her landlord?  The short answer to this is "yes".  If in the course of business in the past calendar year, you paid more than $600 to an individual, partnership or estate (corporations are exempted in most cases), then you are required to issue a 1099-MISC to the payee (in this case your landlord).  The total amount of rent paid during the year should be entered into Box 1 of the 1099-MISC.  The 1099 should be provided to the landlord by January 31.

Many of you have received 1099s as independent contractors at some point.  However, the nuances of independent contractors are a topic for another week.  If you issue 1099s, you are also required to file copies of them, along with a form 1096, with the IRS.  These are the pesky red forms that you cannot download and office supply stores charge an arm and a leg for.  The IRS filings have to be postmarked by February 28.  Pro tip:  you can get 1099s, 1096s, W2s and W3s for free from the IRS at this page, but you never know when the forms will show up, or if all of them are in stock.

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New Mileage Rates for 2015

In December, the IRS announced updated mileage rates for 2015 in Notice 2014-79.  The following excerpt gives the rates for business, medical and moving, and charitable miles driven.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

57.5 cents per mile for business miles driven, up from 56 cents in 2014

23 cents per mile driven for medical or moving purposes, down half a cent from 2014 

14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

Assuming that oil prices don't recover from the drastic decrease over the past month, it is quite likely that these rates will be adjusted downward on July 1.  Either way, if you plan to claim deductions for use of your vehicle, be certain to keep good records.  There are a number of apps that you can use for this, although I have not personally tried any.  

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IRS Budget Cuts to Delay Customer Service & Refunds

On Tuesday, the IRS Commissioner sent out an internal memo warning of potential problems during this season resulting from budget cuts.  These included an extension of a hiring freeze that will result in 3,000-4,000 unfilled positions, less resources for customer service, enforcement, and overtime, and a potential two day furlough for employees.  When considering inflation, the IRS budget is at its lowest since 1998.

How will this impact taxpayers?  It will be felt most directly in customer service.  Over the past six months, hold times when calling the IRS have increased dramatically.  I called the practitioner line on Tuesday, and was on hold for an hour and forty minutes before getting an actual person.  A client called the IRS on Tuesday on the business line, and was on hold for a total of two hours.  The National Taxpayer Advocate, Nina Olson, filed a report on Wednesday surmising that any calls to the IRS during this filing season will be subject to waits of at least 30 minutes, and that 57% of calls might not be answered at all.  I have personal experience with this too, having spent more than an hour on hold multiple times recently only to have the call disconnect.

The Commissioner also noted that aging IT systems will not be replaced.  I suspect these systems are still run by punchcards, or at best, MS-DOS.  This will also impact return processing and call times.  Another potential problem is a delay to refunds due to increased processing time of new and revised forms, particularly with returns that are paper filed.

The IRS starts accepting 2014 returns on Tuesday, January 20.  It's the most wonderful time of the year!

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TurboTax Nearly Doubles Fees for Many Users

Although I do not personally know anyone that has all the info to prepare their 2014 tax return yet, it has come to light that TurboTax has restructured their pricing tiers.  In the past, many users were able to use the Deluxe package to prepare their returns without any problem.  However, this year the Deluxe package does not provide guided interviews for Schedule C, which is used to report self employment income, Schedule D, which is used for reporting capital gains and losses, and Schedule E, which is used to report income and loss from rental restate, royalties, partnerships, S-corps, estates, and trusts, among other things.  The basic forms are still available, but that is not why people use TurboTax.

The Deluxe package has a list price of $59.99, but can be found for $39.99.  If you need access to the guided Schedule C, you would now have to upgrade to the Home & Business package, which is currently $84.99 on amazon.com.  If you don't need Schedule C, but still need Schedules D and/or E, it is currently $74.99 on amazon.com.  

Or, you could save the time you would spend preparing your own tax returns, hire a professional like myself to prepare your returns for not too terribly much more, and use that time to do something more rewarding, which would be pretty much anything.  It's just a thought.

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Film of the Year

After a too-long sabbatical, I am dusting off the blog and for my return post, I am armed with news of what will surely be the most spellbinding film of 2015 (or whenever it is released).  Ben Affleck is stepping out of his comfort zone (of big budget action films, directing indie films, and the backseat of a Volkswagen) and will be starring in "The Accountant", a thriller about an accountant/assassin.  Because the two skills are clearly interrelated.  

Frankly, I'm a bit disappointed by this.  I was hoping for a superhero blockbuster where he had the powers of instantly producing Excel spreadsheets and balancing Page 5 of a partnership return by snapping his fingers.  Oh well, he was the bomb in "Phantoms" (WARNING:  language).

Here's an article from Accounting Today if you'd like to read more.

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18 DAYS UNTIL 4/15: HCAD Value Increase Map

Reminder:  there are only 18 days left to file your 2013 tax returns without an extension.

A short post today to follow up on yesterday's post about HCAD valuations.  I found a map (CLICK HERE) that shows the value increase by percentage across the Harris County Appraisal District.  The average increase in my market area was 26%.  Yay?

It is never too early to start thinking about protesting your property taxes.  If you need help with this or your income tax, call me at 832-387-4829 or email me by clicking the envelope in the upper right corner of the screen.

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19 DAYS UNTIL 4/15: HCAD Property Valuations Are Out!

Reminder:  there are only 19 days left to file your 2013 tax returns without an extension.

I am sure most of you know that Texas does not have a state income tax on individuals.  Instead, the tax revenue is generated from property taxes.  If you live in Harris County and own real property (a house or land), you probably have already received your valuation notice for your 2014 property taxes.  I am sure that the surrounding counties will be sending out their valuations soon.  I opened ours this morning, and our valuation increased significantly.

The valuation of the property is what the taxes are based on, so if your valuation increases so do your taxes.  However, you can protest your valuation yourself, or hire someone to do it for you.  The standard fee practice is that the protest is handled on a contingency basis, meaning that if your protest is not successful in reducing your valuation and taxes, you owe nothing.  If the protest is successful, the representative gets a percentage of the tax savings as a fee.  This is usually a 50/50 split between the homeowner and the representative.

I began handling these protests professionally last year, and had a very good success record.   My fee structure is also cheaper - 60% to the homeowner, 40% to me.  I have concluded that even if your valuation does not increase, you lose nothing by protesting, and may come out ahead.  If you do not protest, you have no way of knowing what data was used to arrive at your valuation.  

If you need help with your income taxes or property taxes, call me at 832-387-4829 or email me by clicking the envelope in the upper right corner of the screen.

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20 DAYS UNTIL 4/15: Charitable Contributions of Clothing & Household Items

Reminder:  there are only 20 days left to file your 2013 tax returns without an extension.

The last few days I have covered different issues (here, here, and here) related to charitable contributions.  Today we'll look at the slightly more complicated type of donation - property.

So what is property?  Property is anything you own that isn't money.  There are special rules for donating 10 different types of property.  I will discuss several of these over the next few days.  Here are the ones with special rules:

Clothing or household items.

A car, boat, or airplane.

Taxidermy property.

Property subject to a debt.

A partial interest in property.

A fractional interest in tangible personal property.

A qualified conservation contribution.

A future interest in tangible personal property.

Inventory from your business.

A patent or other intellectual property.

The first and most common type of property contribution is clothing and household items.  These must be in good used or better condition to be eligible for a deduction.  There is an exception to this rule.  If an item is not in good used or better condition, you may claim a deduction if it is worth more than $500 and you include a qualified appraisal with your return.

Property considered to be "household items" are furniture & furnishings, electronics, appliances, linens, and "other similar items.

Property that is NOT considered to be "household items" include food, paintings, antiques, and other objects of art, jewelry and gems, and collections.

The value of the deduction is limited to the fair market value of the item(s).  Fair market value is considered to be "the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts."

Two resources that you can use to value your donations of clothing & household items are from Goodwill and the Salvation Army.  The DC Goodwill has a calculator on their site, and Intuit has a calculator called "It's Deductible".

If you need help with your taxes, give me a call at 832-387-4829 or email me by clicking the envelope in the upper right corner of the screen.