My Ex Claimed My Kid: Now What Do I Do?

What to do if an ex spouse claims your chlid for taxes

It’s a hassle if someone else claims your child on their tax return, but that doesn’t mean you have to give up.

 

This happens to people all the time.  You go to electronically file your tax return and it gets rejected because someone else has already claimed your child.  What do you do?  I say fight back, and here’s how.

 

The first step to fighting back is to make sure that you’re in the right.  Ask yourself these questions:

 

1.  Are you the biological parent of the child?  Hint:  if your answer is “I’ve raised her like my own.”  You’re going to have trouble winning.  If you’re a grandparent, step parent, aunt or uncle; and the person who claimed the child is the actual parent, you don’t stand much of a chance.  (That said, some folks will have a credible case, but I’d suggest professional help here because it is tricky.)  To go this route you should be the real parent.

 

2.  Did the child live with you all year?  If not all year, for at least over half of the year?  If you had custody all year you have a much better shot of winning.  You absolutely must have had custody for over half of the year to even think of trying this.  If you’re on the border line, where your ex had the child for half the year and you had half, this might not be worth it.

 

3.  Is this good for your child?  Generally you’d think that having more money in the household would be good for your child, but if fighting with your ex could cause harm to your child, you might want to stop and think about it a bit.

 

Step two.  Once you’ve determined that you are in the right and that you are entitled to claim your child, then what you need to do is print out, sign and mail that rejected return to the IRS —keeping your child as your dependent on the tax return.  When you do this, the IRS has to take it in.  They have to look at it and it’s going to throw whoever claimed your child into an audit.  If an Earned Income Tax Credit is involved then those audit papers generally run 11 to 22 pages long.  (11 pages for a straight EIC audit, 22 for an EIC and head of household audit, they’re the same questions it’s just that 22 pages is more intimidating.)

 

Here’s the scary part, you’re going to get the same paperwork.  It is a little intimidating, but you’re expecting it.  Because you’re the custodial parent, that is your child lives with you, you can answer those questions with no problem.  People who shouldn’t be claiming your kids can’t answer the questions and that’s why you’ll win.  If your kids are in school, you’ll need a document from the school saying they attend and where they live.  If they’re too young for school, you can get a statement from the doctor’s office that you’re their parent and you pay their medical bills.  You’ll have the resources to prove that you’re the parent.

 

If you’re reading this and thinking, “I can’t prove I have custody of my kids,” then maybe you shouldn’t be filing for them.  You will have to provide some proof:  school records, doctor’s files, church documents, day care receipts, health insurance records, something professional.   Your Mom or a friend can’t vouch for you.

 

Once you’ve received the audit papers, completed them and sent them back, then it’s a waiting game.  Your ex (or whoever claimed your child) will have to complete the same paperwork.  The IRS will examine the papers and determine who had the proper right to claim your child.  But since it’s you, you will win.

 

The big downside to this is that it will take months to settle.  Months.  On the upside, once your ex has lost an audit case for claiming your child, it will be very difficult to ever try it again.  You’re not just solving a problem for one year, you’re preventing future problems as well.

 

What if you need the money now?  That’s the most common question.  Sorry, but that’s impossible.  What you’ve lost, you can’t get back without a fight.  If you have more than one child, and only one was claimed incorrectly, you could file now and at least get part of your refund, then file an amended return later.  I don’t recommend doing that, but I also understand sometimes you need the cash now.

 

If you try doing this as an amended return there are two consequences:  first, it will slow everything down even more.  You can’t file an amended return until your first return is completely processed.  An amended return will take about 16 weeks to run through the system before the whole audit process begins so you’re basically adding 4 to 5 months to the timeline for solving this issue.  Second, filing a return and amending to add a child reduces your credibility with the IRS.  Your documentation had better be rock solid because you will have no wiggle room for doubt if you submit an amended return to claim your child.

 

One more thing to consider before you go through with this.  Call your ex and talk it out.  I’m not crazy, hear me out.  You’ve read this far, you know that fighting is a big hassle.  Before you go into warrior mode, maybe you can negotiate a peace treaty.  What do you stand to gain from this?  What does your ex stand to gain?  It’s important that you file your returns legally, but with divorced or never married couples, you can split an exemption:  the custodial parent claims head of household and EIC, the non-custodial parent claims the child tax credit and the exemption.  It could be a good thing for both of you and for your child.  (Remember, what’s best for the child?)  Instead of going to war, you have your ex amend his/her return and you file your return right after the amendment is accepted.  It still is slow, but much faster than going through an audit.  And it’s a peaceful solution.  (Please, don’t even think of trying this if your ex is dangerous.  Safety first.)

 

Finding out that someone else has claimed your child for taxes can be shocking and financially devastating.  The assumption is usually that it’s the ex, but that’s not always the case.   When you file to claim your child, you will never be told who the other person is.  (Of course, if it’s your ex you’ll probably get an unfriendly phone call so you’ll know.)  It’s scary how often it’s not the ex, though.  Be sure to protect your child’s social security number.  Don’t keep the card in your purse.  Don’t share the social security number with anyone.  Your child needs your protection.  It’s hard enough being a kid, being a kid with a stolen identity is worse.

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Note:  Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

 

EITC Awareness Day: A Contrary View

Earned Income Credit Awareness DayJanuary 28, is EITC Awareness Day.  EITC is the Earned Income Tax Credit.  To find out if you might qualify for and Earned Income Tax Credit, you can go to the IRS website and check out the EITC Assistant.  It basically asks you questions and helps you figure out if you can get and Earned Income credit or not.  The site is:   http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en

Last year, the IRS handed out $58 billion in Earned Income Tax Credits.  It’s estimated that only four out of every five people who qualify for an earned income credit actually claim it.  Some of the underserved categories of people who missed their EITC (also called EIC) are small business owners and farmers.  If you have self employment income, that still qualifies you for EIC. 

Another category of people who missed their EIC claims are grandparents who have custody of their grandchildren.  It seems that a few years back, when the IRS tightened up the rules about grandparents claiming their grandchildren there was the mistaken thought that grandparents could never claim their grandchildren.  That’s not the case.  If your grandchildren live with you, be sure to check the EITC eligibility page to see if you might qualify.

Okay, the IRS asked me to plug EIC today and that was the plug.  Here’s my side of the story.  As a tax professional, all year long I have heard what I consider to be veiled threats from the IRS to tax pros around the country about EIC.  They can come to our office at any time, pull our files and inspect to see that we’ve completed the proper due diligence on all of our clients.  The PTIN registration, which quite frankly only covers us “good guys who follow the rules” will be used to monitor our returns.  If one of our clients files a fraudulent EIC claim, the IRS can then pull all tax returns that have our PTIN number to check for fraud as well. 

Now I shouldn’t complain.  I don’t file very many EIC returns anyway and the ones that I do file, I’ve done the due diligence.  I have my paperwork in order so it wouldn’t be a problem if the IRS did an EIC audit of my office.  But I guess I’m just a little shocked that the IRS wants me, or anyone for that matter, to promote EIC. 

Here’s why I’m shocked:  of the $58 billion dollars that was handed out last year, the IRS estimates that $13 to $16 billion of that was erroneous payments.  Now let’s be realistic honest mistakes do happen, but a pretty fair chunk of that change is due to downright fraud.  We’re talking roughly 25% of the EIC claims are wrong.  That’s one in four EIC claims.  ONE IN FOUR!

Back in the old days, I used to do EIC audit work for a large tax company.  Many of the audit clients didn’t have their taxes done by one of our preparers, we were just the best place to go to once they got the audit letter.  Some of the “fly by night” operators who prepare those “erroneous” EIC returns disappear after April 15th and some vanish even sooner than that.  I learned a lot from that experience about what not to claim on a tax return.  Maybe this can help someone else.

Do not submit a tax return claiming head of household status if you have been incarcerated for the entire year.  Generally head of household status means that your children are living with you and most prison wardens don’t let you keep your kids with you overnight.  It’s estimated that 4 to 5 thousand fraudulent EIC returns were submitted from prisons last year.  Currently, the IRS does not have access to prison records so they can’t immediately identify those returns.

Do not submit a tax return claiming head of household status if you are in a nursing home.  Kind of like prison, the nurses don’t let you keep the grandkids overnight either.

Do not claim your live-in underage girlfriend as your “qualified child”.   (And please, there are just some things I don’t want to know.)

Head of Household status is a confusing designation.   According to IRS rules, a head of household is someone who is not married that is providing over half of the support for another person, usually a child, but it can be a parent, grandparent, or even a friend that lives with you.  You can’t claim head of household if someone else is supporting you.  Here’s a hint, if you only made $3,000 last year, you didn’t make enough money to support anybody.  Don’t claim head of household.  Its fine to claim single, and claim your child as a dependent and you’ll still qualify for EIC.  But if you claim head of household, it gets your tax return looked at even if it doesn’t change your refund.

Do not claim your neighbor’s child on your tax return no matter how often she sleeps over and eats at your house.  The child is not yours and she doesn’t really live with you—it just feels like it.

Do not make up a fake business to claim income for the EIC.  If you have a real business, bring your receipt books and your expense ledger with you to your appointment.  The IRS is on to that.  Professional preparers are now required to look at your books and see some type of evidence that your business is legitimate.

And finally, do not claim a child on your tax return just to make life difficult for your ex.  If you have a legitimate claim, that’s one thing, but if you don’t and you’re just trying to punish someone, don’t go there.  It will land you in a heap of trouble that’s not easy to crawl out of.

Tax Tips for Newlyweds

tax tips for newlyweds

Danielle and Jeremy

Updated for 2013

Congratulations on getting married!  It’s so fun to start out your new life together, but it’s a big adjustment too.  One of those really difficult adjustments is learning a new phrase, “Our money.”  You already know “your” money and “my” money, but the whole “our” money concept is a little difficult to grasp sometimes.  Hopefully, this will help with the tax side of that at least.

Pick the right filing status:   It doesn’t matter how long you’ve been married for, if you were married on December 31st you are considered married for tax filing purposes.  For most couples, your best bet is to choose the Married Filing Jointly tax status, it will usually give you the best tax rate.   There are times though, when it may make sense to use the married filing separately status.  For example:  if one of you has an income tax problem from before the marriage, it might make sense to file separately until the tax issue is cleared up.  Many accountants will tell you to just file jointly and file an injured spouse claim.  I often recommend that too.  But if filing separately isn’t going to hurt your taxes very much, I prefer keeping your tax matters completely separated until the old tax issues are erased.  It’s just a safety precaution.  When you file separately, you know exactly what money you’ll get back from the IRS, when you file as injured spouse, the IRS makes the determination.  I prefer keeping the control.

Now that you’re married, you cannot claim the Head of Household filing status. This is a common problem that I see with tax returns all the time.  Couples who have been together for years and have a couple of kids decide to get married.  They forget to change their filing status on their tax forms after they get married.  Oops.  Not only is it a mistake, but if you received benefits that you wouldn’t have gotten if you filed as married, then it’s considered income tax fraud.  Don’t fall into that trap.  Be sure to use one of the married filing statuses.  (If the marriage goes belly up and you separate for the last 6 months of the year, then you might be able to file as HH, but this is the newlywed page.)

The good, the bad, and the ugly:  The good part about married filing jointly is that you double your exemption and your standard deduction.  Also, your tax rate is lowered.  If you’re a newlywed and one of you is the wage earner and the other had little or no income, you’re going to have a great tax year.

The bad part is that with most young married couples today, both spouses are working.  Your deductions may go up but really you’re just combining your two incomes so you really get no major tax break at all for being married.

Now here’s the ugly:  For some couples getting married actually puts them in a worse tax situation than when they were single.  For example, let’s day that Danielle and Jeremy were both in the 15% tax bracket when they were single, but combining their incomes puts them in the 25% tax bracket.  If they didn’t make adjustments to their withholding, they could get hit with a nasty little tax bill in April.

Here are some other issues that you might not have thought about yet.  First to the bride, did you change your name?  If so, did you make it official with social security yet?  If yes, then you’ll be able to file your tax return with your new name.  If not, make sure that you use your old name to e-file your tax return. If you don’t use the name that the social security office has on record for you, your tax return will be rejected.

The stupid question:  Whose name is going to go on the top of the form?  I warned you it was a stupid question.  Does it matter?  No.  What does matter is that the name that’s on the top of the form will stay there.  Some couples, especially if they have equal incomes, will change which name goes on top each year, seems fair doesn’t it?  What they don’t realize is that the IRS looks at that as an attempt to cover up fraudulent activity.  Generally, put the higher wage-earner’s name on top of the form and leave it there, even if your incomes change later.

Hopefully, you’re getting a refund.  Aside from those wedding gift checks, this will be the first “joint” money you receive.  That’s kind of cool.  Do you have a joint bank account yet?  The money will be in both of your names, so both of you should be named on the checking account for the money to be direct deposited.  One thing you should know, although the IRS will direct deposit your tax refund into a single account of a married couple, some states and financial institutions won’t allow it.  If your refund seems to have gotten held up, that could be the reason.

One last piece of advice:  If you are getting a refund this year, it’s a great way to start putting away some money into savings.  I know you’ve got bills to pay and things you want to buy, but saving now while you’re just starting out is the best thing you can possibly do for yourself.  Allocate some money for spending, but get that savings cushion started and keep adding to it.  You’ll be glad you did.

I just saw a news item on television:  Couples with $10,000 of debt and zero savings are twice as likely to get a divorce as couples with $10,000 in savings and zero debt.  The best thing you can do for your marriage is to have a little padding in that savings account.  (End of mom-style lecture.)

IRAs for Dummies

Writer

 

Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)

A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.

Missouri Health Insurance Deduction

Missouri has a tax deduction for health insurance premiums

 

When you live in a state that has an income tax, like Missouri, you need to be aware of the state’s little deductions that aren’t automatically on your federal tax return.  One of these is the Health Insurance deduction.

 

It’s very difficult to claim any medical deductions on your federal income tax return because you have to meet the requirement that your medical expenses exceed 10% of your adjusted gross income.  In Missouri, you don’t have that.  If your health insurance isn’t already exempt from taxes, you can claim your health insurance as a deduction on your Missouri State income tax return.

 

You’ll find the deduction on line 12 of the Missouri schedule A.  For most people, its just a straight, direct entry on the form.  If you happen to have been able to claim your health insurance on your federal schedule A, or had medicare payments withheld from your Social Security, there’s a worksheet to determine just how much of a deduction you’ll get to claim on your Missouri return.  (For some people, your computer software will automatically calculate the amount of medicare insurance you can deduct, but you need to watch out if you’re adding additional insurance payments that you don’t delete the medicare payments.)

 

The health insurance deduction is especially valuable to senior citizens who may qualify for the Missouri Property Tax Credit.  It not only reduces their taxable Missouri income, but by reducing the income, it can increase the amount of property tax credit they receive.  Many seniors who qualify for the property tax credit don’t have any Missouri taxable income so the preparers don’t bother to look for deductions and that’s a mistake.

 

If you’d like to take a look at the worksheet for the qualified health insurance deduction, click on this link:

Missouri Health Insurance Worksheet

 

Also, if you happen to be self employed, be sure to check my post about the Missouri Self-Employed Health Insurance Tax Credit.  If you qualify for that, it’s even better for your taxes than the deduction.

 

 

Tax Tips for Gay Couples

tax tips for gay couples

Even if you're legally married, federal tax law doesn't recognize your marriage.

There’ve been a lot a changes this past year with some states legalizing gay marriage, some authorizing civil unions, and of course the end to “Don’t Ask Don’t Tell” in the military.  But despite all these changes, US federal tax law still does not recognize gay relationships in tax law.  Even if you’re in a state where your marriage rights are fully recognized, you’ll still be considered unmarried for federal tax purposes and social security benefits.  These tips are for couples who are legally married, or would be legally married if they lived in a state that allows gay marriage. 

There are two main issues here that you have to deal with.  The first is working to reduce your current tax liability and the second is to ensure that you’ve got sufficient coverage for both of your retirements.  To that end, you need a tax professional and a financial advisor that can sit down with you and your partner to develop some long term and short term strategies.  Right now, if you’re thinking, “I’d never even tell my tax guy I’m gay,” then it’s time to hire a new advisor. 

Couples where both partners earn wages and have similar incomes:  are pretty straight forward for tax purposes.  You can both take advantage of IRA contributions, you’ll both receive equal social security benefits from your wage earning, you won’t lose any tax benefits from the married filing separately status, and your tax rates will be fairly comparable to folks filing as married.   In this situation, many couples just split everything evenly and that’s a pretty fair arrangement.  But, it may make sense to load all of the deductions onto one partner and let the other partner take the standard deduction. 

For example:  let’s say that Jen and Gina together would have itemized deductions of $13,000 a little more than the $11,400 they would claim as a standard deduction if they could file as married.  Filing as single they can each claim a standard deduction of $5,700.  If they’re splitting the itemized deductions, they can each claim a deduction of $6,500.  But, if we load all of the deductions onto Jen and have Gina claim the standard deduction, then together they’d have a combined deduction of $18,700 and that would save them a substantial amount of money.

Now, remember, it’s not that perfectly even.  In most cases, part of the $13,000 would be state income tax, you can’t load that onto your partner’s return, but with planning, you can put your mortgage, real estate tax, and charitable contribution deductions all on one person and enjoy a substantial tax savings.

Couples where there is self employment income:    The biggest tax issue facing sole proprietors is paying the self employment tax.  If you’re already in the 25% income tax bracket, and you add that 15% self employment tax to that, then you’re paying 40% tax on your income.  Anything you can do to reduce your self employment tax is a good thing. 

One possibility is to hire your partner as an employee.  This in itself doesn’t really eliminate your self employment tax as you’re just shifting it to your partner and paying the employer’s share.  But, hire your partner and provide health care benefits and now you’ve got something.  For example:  let’s say Jack and Dean have been together for 10 years.  Jack has modest income from a part time job but spends a lot of time helping Dean with his small business as a professional entertainer.  Dean is fairly successful and averages about $100,000 a year in income.  Jack books appointments for Dean and makes sure that Dean is where he needs to be at all times.   If Dean were to have to hire someone to do Jack’s job, he estimates that it would easily cost him $15,000 or more.  So instead, he hires Jack as an employee.  Instead of taking a salary of $15,000, Jack chooses a smaller wage but wants health insurance benefits.  Because Jack would be Dean’s only employee, Dean can afford to have his employee package include health insurance benefits.  And, more importantly, Dean could provide a health care plan that covered Jack’s partner (which happens to be Dean.)  Now Jack and Dean have just excluded all of their health care costs from self employment tax. 

Here’s why:  Health care benefits reduce the employer’s taxable income.  Health care benefits are not included in the employee’s taxable income.  It’s a win/win situation for both of them. 

Everyone’s tax situation is unique and the laws keep changing so you have to stay on top of things.  Right now though, with the tax laws as they are, doesn’t it make sense to take advantage of them instead of letting them take advantage of you?

Missouri Tax Credit for Self-Employed Health Insurance

MO self-employed health insurance tax credit

 

One of the really fun parts of my job is finding cool tax deductions or tax credits that most people don’t know about that can really benefit people.  Here’s a cool one:  The Missouri Self-Employed Health Insurance Tax Credit.

 

The thing about Missouri Tax Credits is that most of them won’t just pop up on your computer software.  You have to actually know about them and specifically request the forms to come up.  Major things, like the Missouri Property Tax Credit will usually have a pop-up reminding you to apply for it if you meet the criteria, but most other tax credits just hide in the corner.  The Self-Employed Health Insurance Tax Credit is one of the sneaky, hide in the corner credits.

 

How sneaky is it?  To tell you the truth, I called the Missouri Department of Revenue to ask a few questions and the person on the other end of the phone had never even heard of it.  She had to go hunt down someone who knew about the Self-Employed Health Insurance tax credit before she could answer my question.  I’ve never had that happen before.  The Missouri Department of Revenue front line folks are pretty knowledgeable and quick with answers.  While I tend to stump the IRS on a regular basis (I think if they had caller ID they’d never answer my phone calls,) I’ve never stumped a Missouri DOR employee before.

 

Here’s how it works:  Let’s say you own your own company and you also pay for your own health insurance.  Normally, on your federal tax return, you can claim a deduction for your health insurance up to the amount of your business profit.  But what if your business didn’t have a profit?  Or if your business profit was less than what you paid for your health insurance?  That’s where the Missouri Self-Employed Health Insurance Tax Credit kicks in.  Whatever tax savings you lost on your federal income tax return because you couldn’t claim your self-employed health insurance will become a tax credit to you in Missouri.

 

I know that sounds pretty confusing so here’s an example:  Let’s say your federal taxable income on your 1040 was $100,000 (I like to use round numbers.)  But you couldn’t claim your self-employed health insurance because your business actually had a loss (we’ll assume the $100,000 is from your spouse’s wages and other income.)  Your health insurance cost you $6,000 for the year.  If you could have claimed that as a deduction, it would have saved you $1,500 on your federal tax return.  With the Missouri Self-Employed Health Insurance Tax Credit, you get to take that $1,500 as a credit against your Missouri state income tax liability.  How cool is that?

 

Now that was a pretty drastic example, but even so, claiming a dollar for dollar tax credit against what you missed out on from your federal income tax return is a great deal.  Here’s a link to take a look at the form:

Missouri Self-Employed Health Insurance Tax Credit

 

So you want to know the best part?  Many of the Missouri tax credits have limitations that, if missed, you don’t get a second chance to claim them.  But with the Self-Employed Health Insurance Tax Credit, if you happened to miss out on claiming this credit last year, you can go back and amend your prior Missouri tax return and still get the refund.

 

 

IRS E-File Starts January 14th

The IRS will begin accepting e-filed individual income tax returns on January 14th.  Many people are anxious to file their returns, especially if they have big refunds coming to them.  But I’d like to issue a caution to those eager filers: don’t rush.  Here’s some common sense tips to help you hold out just a little.

1.  Do not try to file your tax return until you have all of your necessary paperwork–that means your W2s and 1099s.  It’s against the law for a professional preparer to file a return just using your check stub.  (Some companies will do a “loan” against your tax refund, that’s different, but you’ll pay a hefty fee for that.) 

2.  If you file your return without reporting all of your income, you will receive a letter from the IRS later.  It won’t be friendly either.  The headache of correcting a mistake like that is much worse than waiting a few weeks to have everything together and doing it right the first time.

3.  Your employer is required by law to send out your W2’s by January 31st.  You should have everything in your hands by February 5th.

4.  Even if you have all of your paperwork, some returns won’t be able to be filed until mid to late February because of delays.  When Congress changed the tax laws in December, it messed up the IRS’ ability to process some people’s returns.  If you itemize your deductions on a Schedule A frm, if you claim the teacher deduction, or if you claim the tuition and fees deduction; then you can’t file your return yet anyway.  (Other education credits weren’t affected.)

5.  If you’re doing direct deposit, there is no difference between whether you file on January 14th or filing on January 19th as far as how fast you get your refund.  It’s all related to the IRS cut off dates for issuing checks and direct deposits.  No difference.  It might make sense to hold off a day or two to make sure you’ve got everything you need.

For you FAFSA filers.  You want you tax return done as soon as possible so that you can include the information on your FAFSA application.  If you’re one of the many people whose return will be delayed because of itemizing, it’s okay to go ahead an prepare your return now and use the tax return information in your FAFSA and then file the actual return later once the IRS starts accepting them.

Tax Time Savings Bonds

Grandparents can buy US Savings bonds for their grandchildren.

Grandchildren are good reasons to buy US Savings bonds.

Did you know that you buy US Savings Bonds with your income tax refund?  You can buy savings bonds for yourself or for other people, like your grandchildren for example.  Last year, you could only purchase a bond for yourself. 

How do you do it?  It’s really easy.  If you claim a refund on your 1040, you use form 8888.  It’s the Allocation of Refund form (it includes Savings Bond Purchases) to split your refund.   The bonds start at $50 and you can purchase more in increments of $25 up to $5,000 worth if you want to.  Any money that you don’t use for purchasing bonds will be direct deposited into your bank account.

For example:  let’s say that you will get an $800 refund.  You want $100 in bonds to go to each of your two grandchildren John Jones and Mary Smith.  You will fill out the paperwork with their names on the form (you don’t need their social security numbers) and the remaining $600 will be direct deposited into your bank account.  The US Savings Bonds will be mailed directly to your home in about 5 weeks. 

The bonds will earn interest for 30 years and are tied to inflation.  It’s a safe investment backed by the United States Government.  They’re not just for saving for college.  This could be a retirement savings vehicle if you want it to be. 

You can cash the bond in after one year at most banks or credit unions if you need to.  You will need to hold the bond for at least five years if you don’t want to lose the last three months of your interest though.  The current interest rate is .74% and it adjusts for inflation every six months.    

The best part, there’s no fee for investing in U.S. Savings Bonds. 

If you’ve been thinking that you need to start saving and you just haven’t done it yet, this is a great opportunity.

1099 Rules for Landlords and Small Businesses

1099 Rules for Landlords and Small Businesses

 

Are you confused about the rules for small businesses and landlords issuing 1099’s for anyone that they’ve paid over $600 to?  Has a company asked you to fill out a W9 form because you or your business is doing some kind of work for them?  It seems like everybody is a bit confused, even the IRS.  But here’s help.

 

UPDATED JANUARY 2016
The rules have changed several times since the original post. If you’re preparing 1099s or tax returns for tax year 2016–these are the updated rules.

 

The  1099 law is actually part of the Affordable Care Act although it has nothing to do with health care.  Is your head spinning yet?  Seriously, the 1099 law states that businesses will be required to issue 1099 forms to contractors that they have paid over $600 to.

 

So who gets a 1099 MISC?  Basically, if you own a business, or are a landlord, you need to issue a 1099-MISC to anyone  that you’ve paid over $600 to for labor.  So, let’s say you pay a computer programmer to set up your office system – you’d issue a 1099 MISC.  But if you buy a computer for $1000 – then you don’t.  Confused yet?

 

Okay, here’s another situation – you issue a 1099 MISC to individuals and LLCs, but not to corporations.  So, let’s say Roberg Tax Solutions prepares your business tax return for $800.  Roberg Tax Solutions is an LLC, so you think okay, I’ve got to issue a 1099 – BUT, Roberg Tax Solutions has elected to be taxed as an S Corporation.  Say what?  Now you don’t have to issue me a 1099.  How do you keep track of that?  By looking at the W9.  Make sure all contractors you work with complete a W9 form.  It will tell you if they are a corporation or not.

 

If you need to prepare 1099s, here’s a link that will give you information on how to do it: How to Prepare a 1099

 

If you’re a landlord or small business owner you should expect that you will need to file 1099 forms for your contract laborers this year.  Start collecting information from them now so that you’ll be prepared come January.  You’ll need a W9 form, here’s a link:  W9

 

Print it out and have all of your vendors sign one.  You can be hard-nosed about this too.  No W9, no payment.  It’s that easy.

 

If a business that you provide a product or service to asks you to complete a W9 form, it is a legitimate request.  If you’re a sole proprietor and don’t have an EIN number, you may want to apply for one so that you’re not giving out your social security number all over the place.  If you’d like more information on EIN numbers, read my other post:  Free EIN

 

You can get an EIN number directly from the IRS for free.

 

One question that I’m always asked is, “Is there any way to get out of having to issue a 1099?”  The answer is, “Yes.”  If you pay a vendor with a credit or debit card, you do not have to issue a 1099.  The reason is, when you use a credit card to pay a vendor, the credit card company will be issuing a 1099K statement showing the payment you made.  So, it you want to reduce the 1099s you have to issue, use your credit card more often.

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