Dependents: What are the tax rules?

February 28, 2013

Most taxpayers believe that a “dependent” is a minor child that lives with them. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you. There is really much more to the dependent deduction than you might at first imagine.

* Exemptions and your taxable income. For 2012, each dependent deduction is worth $3,800, reducing your taxable income by this amount. In 2013, the deduction increases to $3,900 and is phased out for high-income taxpayers.

* Dependents defined. It’s impossible to present all of the rules relative to dependents here, since they are so complicated. Generally speaking, if somebody lives with you and you provide more than half of that individual’s support for the entire year, there is a good chance that person is a dependent. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but some other relatives do. A child of divorced parents doesn’t necessarily have to live with the noncustodial spouse for the dependent deduction to apply.

* People who can’t be claimed. Generally, you may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

* One dependent deduction per individual. If you claim yourself as your own dependent, anybody else who can truly meet the tests and claim you as a dependent will lose out. This is common for college students who file their own tax returns for their part-time jobs, while mom and dad really meet all of the qualifications to claim the dependent exemption.

While the dependent deduction might seem relatively minor, it can lead to other deductions on the tax return. In order to claim the child tax credit, the education credits, the dependent care credit, for example, you must claim the dependent deduction for the child that qualifies for the deduction or credit.

Finally dependent deductions can be negotiated, which is especially important for divorced taxpayers. In the past, the IRS would accept the language of the divorce decree to allow the noncustodial parent the dependent deduction. However, under the current rules, the IRS will no longer accept a divorce decree in lieu of IRS Form 8332 (Release of Exemption).

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Pay attention to restored deductions for 2012

February 21, 2013

A number of tax breaks that had expired at the end of 2011 or were to expire at the end of 2012 were extended by the recently passed law, the “American Taxpayer Relief Act of 2012.” Keep these deductions and credits in mind as you gather the paperwork for filing your 2012 tax return. Those that apply to you or your business could cut your 2012 tax bill.

FOR INDIVIDUALS. The law restored for 2012 through 2013 the following tax breaks:

* The optional deduction for state and local sales taxes instead of deducting state and local income taxes.

* The above-the-line deduction for up to $4,000 for qualified tuition and related expenses.

* The deduction for mortgage insurance premiums.

* The above-the-line deduction for up to $250 for classroom supplies purchased by teachers.

* The exclusion from income for cancellation of mortgage debt of up to $2 million on a principal residence.

FOR BUSINESSES. Included in the law’s provisions were the following items that could affect your business:

* The Section 179 first-year expensing option was increased retroactively for 2012 and extended through 2013 at $500,000 for the purchase of new and used equipment. The investment limit is set at $2,000,000.

* 50% bonus depreciation, which applies only to new equipment purchases, was extended through 2013.

* Both the research tax credit and the Work Opportunity Tax Credit were extended through 2013.

For assistance in identifying and utilizing all the tax deductions, both new and old, to which you are entitled, please give us a call.

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Tweet shorts

February 5, 2013

* February 28 is the deadline for payers to file information returns, such as 1099s, with the IRS. Electronic filers have until April 1.

* February 28 is the deadline for employers to send 2012 W-2 copies to the Social Security Admin. Electronic filers have until April 1.

* IRS extends March 1 filing deadline for farmers and fishermen to April 15.

* IRS offers simplified method for taking a home-office deduction.

* Recent report says Congress has made almost 5,000 changes to the tax law since 2001.

* The tax code contains nearly four million words. Time to simplify?

* Late passage of “American Taxpayer Relief Act of 2012″ will delay this year’s tax filing season.

* IRS may not be ready to process certain 2012 tax returns until late February or March.

* The maximum you can put in a health flexible spending account (FSA) this year is $2,500.

* The 7.5% income threshold for deducting unreimbursed medical expenses in 2013 increases to 10% for those under age 65.

* The 2013 social security tax rate on wages and self-employment income is 6.2%, up from last year’s rate of 4.2%.

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Meetings underway on payroll tax cut extension

February 14, 2012

Last December, the 4.2% social security tax rate that workers pay on wages was extended through February 29, 2012.

 Now a Congressional conference is being held to find a way to extend the lower tax rate through the end of 2012. The sticking point is lack of agreement between Republicans and Democrats on how to pay for the extension, estimated to cost $100 billion.

 House Democrats have expressed the hope that the conference will be completed by the Presidents’ Day recess scheduled for the week of February 20. The legislation would extend the current 4.2% payroll tax rate through December 31, extend unemployment insurance benefits, and prevent cuts in reimbursements to Medicare providers.

 Several legislators want to include tax extenders in the payroll tax cut legislation. These “extenders” include such provisions as the research and development credit for businesses, the optional deduction for state and local sales taxes, and the $250 deduction for school supplies purchased by teachers. Though these tax breaks appear to be universally popular, finding a way to pay for them remains the big issue.

 As you do your 2012 tax planning, keep the uncertain legislative picture in mind.

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2011 tax numbers are adjusted for inflation

January 21, 2011

Adjusting numbers in the federal income tax code to account for inflation, known as indexing, is an annual event. Indexing affects deductions, exemptions, exclusions, tax brackets – and your tax planning.

Here are selected changes to keep in mind as you review tax strategies for 2011.

* Personal exemptions will increase by $50 to $3,700. You can subtract that amount from your adjusted gross income for yourself, your spouse, and any dependents. In addition, there is no phase-out or reduction in personal exemptions for 2011, no matter how much income you have.

* The basic standard deduction is $11,600 when you’re married and file a joint return. If you’re single or married filing separately, the standard deduction is $5,800. Additional standard deductions are available for age and/or blindness. Note: The extra standard deduction for real estate taxes is not available for 2011.

* The kiddie tax threshold for 2011 is $1,900. That’s how much investment income your child under age 19 (under age 24 for students) can earn before the income is taxed at your highest rate.

* The traditional and Roth IRA contribution limit is $5,000. You can contribute an additional $1,000 if you’ll be age 50 or older by the end of the year.

* The annual gift tax exclusion is $13,000 ($26,000 when you elect to split gifts with your spouse).

* Standard mileage rates go up slightly. You can deduct 51¢ for each mile you drive your car for business purposes. The per-mile rate for calculating a charitable deduction is 14¢, and medical and moving mileage is deductible at a rate of 19¢.

Many other items are subject to indexing. In addition, some important figures, such as the alternative minimum tax exemption, are adjusted by Congress. Please contact us for additional information.

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