Eight Basic Rules to Qualify for the Earned Income Tax Credit

December 30, 2011 by Jan Roberg · 2 Comments
Filed under: Uncategorized 
Family Shoot 5

Photo by Stuart Richards on flickr.com

To qualify for Earned Income Tax Credit or EITC, you and your spouse (if you’re married and filing a joint return) must meet all of the following rules:

  1. You must have a valid Social Security Number. [If you are foreign born and have an ITIN number, you cannot get an earned income credit, but if you become a citizen and obtain a social security number, you may go back up to three years and amend your old returns using your social security number to qualify for EIC.]
  2. You must have earned income from employment, self-employment or another source. [Alimony counts as earned income, child support does not. Social security, pension payments, and veteran's benefits do not count as earned income.]
  3. You cannot use the married, filing separate status to file your return. [If you are separated and have been living apart for the last six months of the year, you may be able to use the head of household filing status and still qualify for EIC. Do not claim head of household status if you are still living with your spouse. That’s a form of EIC fraud and can get you into big trouble.]
  4. You must either be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien. [If you are in the US military and stationed out of the country on active duty, you still count as being in the United States for EIC purposes.]
  5. You cannot be the qualifying child of another person. [Let’s say you are a young mother still in school and living with your parents. If your parents can claim you as a dependent on their tax return, then you cannot claim an earned income credit for your child. You will be able to allow your parents to claim your baby as a dependent on their tax return though.]
  6. You cannot file a Form 2555 or 2555-EZ (related to foreign earned income). [Basically, if you’re using this tax form, you’re living and working outside the country so you wouldn’t qualify to claim EIC anyway.]
  7. Your Adjusted Gross Income and earned income must meet the limits shown for 2011:
    Earned Income and adjusted gross income (AGI) must each be less than:

    • $43,998 ($49,078 married filing jointly) with three or more qualifying children
    • $40,964 ($46,044 married filing jointly) with two qualifying children
    • $36,052 ($41,132 married filing jointly) with one qualifying child
    • $13,660 ($18,740 married filing jointly) with no qualifying children
  8. Your investment income must meet or be less than $3,150 for 2011. [Investment income is basically bank interest, capital gains or dividends from stocks. You might have a partnership interest or own a corporation and receive investment income there. These types of income can prevent you from claiming an Earned Income credit.]

Those are the basic rules that everyone must meet to qualify for an Earned Income Credit. If you have children or are self-employed, you have more hoops to jump through.

Other posts that might interest you are Tax Tips for Single Moms: http://robergtaxsolutions.com/2011/01/tax-tips-for-single-moms/

And also My Ex Claimed My Kid: http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

The Curmudgeon’s Guide to Year End Tax Tips for Real People

December 27, 2011 by Jan Roberg · Leave a Comment
Filed under: Tax Tips 
Happy New Year Flag 2012

Photo by Deborah Malec on flickr.com

If you Google “year end tax tips” you’ll get over 4 million entries. Granted, I’ve littered the field with a few of my own blog posts as well, but to be perfectly honest, most of those “tips” you find on the internet are pretty worthless to a “normal” taxpayer. I’m talking about regular people with W-2 type income or retirement money.

Now, forgive me if I sound a little cranky, but if you’ve waited until after Christmas to do any kind of tax planning, well, you’re a little late. Consider yourself scolded. And when you file your 2011 tax return, you’re going to plan ahead for 2012 like the intelligent person that you truly are. (I mean come on, you are reading my blog right? Obviously you’re attractive too!)

In the meantime, these are the top five last minute tax tips for non-business owners offered by the IRS. Note that the strategies are offered by the IRS, the commentary is from me. It’s not that the IRS suggestions are bad—they’re good suggestions, you just need to look with your eyes open.

  1. Charitable contributions – I love charities, I want you to donate to charity, but as a tax strategy, this might totally suck. If you are not already claiming itemized deductions on your tax return, then donating to charity probably will not help your taxes. Every year – seriously, every single year that I have prepared tax returns – I meet someone who donated to charity thinking it was a tax deduction and got nothing from it. The absolute worst case was a guy who donated his car, thinking he’d get everything back on his tax return. Wrong! He got nothing. Zero, zip, zilch, nada. (Although I understand that the woman at the charity who talked him into it was really pretty, although he didn’t get a date out of it either.) Donating to charity is a very good thing, but use your brain when donating. http://robergtaxsolutions.com/2011/12/charitable-donations-how-much-should-you-tithe-why-do-it/
  2. Energy efficient home improvements — The first thing you need to know is that the maximum credit you can get for this in 2011 is $500. If you’re doing the work anyway, great, but I wouldn’t go out of my way now to try for a tax credit this late in the game. http://robergtaxsolutions.com/2011/11/what-you-need-to-know-about-the-2011-home-energy-tax-credit/
  3. Portfolio adjustment — This is where you call your financial advisor and see if you need to do any tweaking before the end of the year. With the stock market being kind of crazy, you could have big gains or big loses. But don’t just go selling off stock, it’s important that you make sound financial decisions. I often have clients tell me that they sold losing stocks and they should be able to claim huge losses on their returns. Problem is, there may have been a huge loss during the year, but they’ll have a huge gain because they’ve held the stock for several years. Having your tax and financial person coordinate together is your best strategy. http://robergtaxsolutions.com/2011/08/five-tax-issues-for-these-crazy-financial-times/
  4. Max out 401(k) contributions — For the vast majority of us, we set up our 401(k) last November and can’t change anything. Personally, I’ve never worked for a company where you could walk into the HR department and say, “Hey, I want an extra $3,000 plopped into my 401(k) this week.” For those of you who are able to make last minute adjustments, you’ve got about 3 days. Anything going into your 401(k) must be in by December 31. http://robergtaxsolutions.com/2011/11/how-much-can-i-contribute-to-my-401k/
  5. Qualified charitable contributions seniors — This is for seniors who must make required minimum distributions (RMD). If you’re one of those people who takes your RMD at the very last minute, you can have your RMD go to a charity instead. This makes your RMD not taxable to you, and you don’t need to itemize to make it work. If you’re a senior and you do not need your RMD, and you have a charity that you really like, this is a perfect way to deal with it. http://robergtaxsolutions.com/2010/12/last-minute-tax-tips-for-seniors-ira-charitable-rollover/

Okay here’s the preachy part, I’m giving you fair warning. If you plan ahead, you don’t have to worry about last minute tax strategies. You’ve already figured out your best 401(k) contribution, you’d have already sent your qualified charitable contribution, and you’d have already spoken with your financial advisor about what your best strategy for the year is. It says this on my business cards, but it’s true—if you don’t have a tax strategy, then you’re probably paying too much. You don’t have to be rich and you don’t have to be a business owner to benefit from a little planning ahead. If your tax person isn’t helping you plan ahead for next year, it’s time for a new tax person.

Santa Gets a Double Check

December 23, 2011 by Jan Roberg · Leave a Comment
Filed under: Holidays, Roberg Tax Solutions 

Reindeer at Santa's Reindeer Round-Up

Roberg Tax Solutions will be closed for business this Christmas. You know how Santa makes his list and checks it twice, don’t you? Well his list is really long this year and since we’re experts at double checking — guess who Santa called to help? Besides, the price was right – we work for Santa pro bono. (Besides, the cocoa is so good up here it’s worth it!)

May you have a very Merry Christmas and a Happy, Healthy and Profitable New Year!

Now if you’re familiar with my website, you know I hardly ever let anybody post links on my blog. But I’m putting these in just for some holiday fun.

If you want to learn about Snowy, a rare white reindeer, here’s that story:
http://www.dailymail.co.uk/news/article-2070791/Rare-snow-white-reindeer-puts-Whitby-garden-centre-visitors-mood-Christmas.html
The picture of the baby reindeer is just too cute.

If you’d like to track Santa through Norad on Christmas Eve, here’s a link to their website:
http://www.noradsanta.org/en/index.html

Switching holidays; for a fun Hannukah Music video listen to the Maccabeats sing “Miracle” here:
http://www.youtube.com/watch?v=oHwyTxxQHmQ&feature=related

Charitable Donations: How Much Should You Tithe? Why Do It?

December 20, 2011 by Jan Roberg · 1 Comment
Filed under: Deductions 
collection plate

Photo by rubber bullets on flickr.com

This is one of the most difficult questions I get asked every year. I think most people have heard the 10% rule (donate 10% of your income to your church), but what they’re asking me is, “10% of gross, 10% of net after taxes, or 10% of net after my deductions?” And here’s my classic cop-out answer: “You should ask your religious leader.” I always thought that was safe, and different churches have different opinions. (Although I’ve never heard any religious organization say 10% after deductions – just to be clear.) I always thought that referring it back to the church was a good answer until one of my clients came back at me with, “I talked to my minister first and he told me to ask you.”

For a moment I was terrified. If I got this answer wrong, it’s not like a tax return mistake, it’s messing with God. Screw it up and you go to hell, go directly to hell, do not pass go, do not collect $200. And the reason it was so scary was because for this particular person, I felt that she could not even afford 10% of her net income to go to charity, much less 10% of her gross. (Hindsight being 20/20, I think her minister was pretty much thinking the same thing and didn’t want to make a rule that would harm his congregant.) If we used the 10% after deductions rule then nothing would be going to charity and that wasn’t an acceptable answer for my client. So we sat down and worked out a budget for her church donations. I figured that God wanted her to have a roof over her head and food on the table and we went from there. Her tithe didn’t work out to 10% of her income, but she was happy, I was happy, her minister was happy, and I didn’t get struck by lightning—a good sign.

So, how much should you tithe? If your church doesn’t have definitive rules on tithing, I think 10% of your take home pay is the best answer: ten percent into savings, ten percent into charity and the rest to handle your day to day living expenses. Now, if putting 10% into charity means you can’t put food on the table and maintain a roof over your head then we need to get you to a better financial place first. Donate what you can.

What if I don’t go to church? Even if you’re not donating to a religious institution, the idea of 10% going to charity is still a healthy one. There are thousands of worthwhile charitable organizations that need help. And, for many of us, we have friends or family members that need our charity just as much as the United Way or the ASPCA does. Remember, true charity isn’t always a “tax deductible” event.

If I tithe, what’s in it for me? For some people, charitable donations are tax deductible. That’s the obvious answer from a tax blog, right? But more importantly, I find that persons who regularly make charitable donations tend to weather the difficult economic times better. You could argue that’s because persons of faith have their faith to help them through hard times, and there’s certainly a lot of truth to that. But I also find that even people not associated with religious institutions who donate generously seem to fare better in difficult financial times than people who don’t contribute.

I heard someone suggest that it’s the discipline required to donate part of your income to charity that gives people the discipline to handle financial setbacks. I can’t say for sure. I do know that I prepare a lot of tax returns. I prepare a lot of tax returns for people going through bankruptcy and/or foreclosure. What I don’t see on those tax returns is charitable giving. Now you might say, “But, they’re going through bankruptcy, they have no money!” True, but the charitable giving isn’t there in the years before the bankruptcy either.

It’s only anecdotal evidence; I really don’t have hard numbers. I’ve talked with other tax people who’ve noticed the same thing. Perhaps the old adage is true, when you donate to charity, the person you’re helping the most may just be yourself.

Extreme Makeover Home Edition TV Show—Tax Issues

December 16, 2011 by Jan Roberg · Leave a Comment
Filed under: Individual Taxes 

Ever watch those reality TV shows and wonder how the winners pay their taxes? You’ve probably heard about Richard Hatch, the “Survivor” winner who wound up going to jail for not paying taxes on his winnings from that show. And what about the “Extreme Makeover Home Edition” people? They basically live in shacks that get remade into mansions. Those people are poor and they’re not getting cash money, so how do they pay the taxes on their new homes? I’ve got some answers for you.

Generally, if you win money or prizes on a game show, the money or the cash value of the prize is taxable to you on your personal income tax return. That’s why if you’re ever on a game show and your choice is the prize or the cash, my advice is to take the cash so that you can pay the tax.

Extreme Makeover Home Edition is a little different. The winners usually don’t get cash and the value of the makeover can be worth over a million dollars, so how do those people deal with the taxes? The answer: they don’t. You see, according to IRS regulations, if a tenant makes improvements to a landlord’s property, the landlord is not required to pay tax on the property improvement made by the tenant. When Extreme Makeover comes knocking at the door, they sign a lease that says they’re renting the property from the homeowner. That makes those crazy improvements they do tax free!

There’s also a whole lot of things that go on during that week that you don’t get to see. For example: when you watch the show, you see them putting up one home. In reality, they’re shooting two shows at once and Ty Pennington and the other stars are racing back and forth between two home building sites. Putting up one home in a week would make me dizzy, I can’t imagine working on two at a time.

Another issue that they have to settle before a family is selected is the mortgage. ABC actually works with the mortgage holders of the properties to make sure they won’t foreclose on the winners after the project is done. Sometimes on the show you’ll see a scene where the mortgage is forgiven by the bank. That too would create a tax situation for the winner, but once again, Extreme Home Makeover has done their tax homework. When a mortgage debt is for the purchase or improvement of a taxpayer’s main home, then when the debt is forgiven. That debt forgiveness is excluded from the income at tax time, so the Extreme Makeover winners don’t pay tax on their debt forgiveness either!

Another big win that you see a lot on Extreme Makeover is some local college will grant scholarships to the kids. Once again, college scholarships aren’t taxable, ka-ching! I love this show.

Now sometimes you’ll see a family get a car or something else—that is still taxable and when that happens, the winner will get a 1099MISC for the value of the prize.

When it comes to the best bang for the buck, Extreme Makeover Home Edition gets the prize for the best tax-advantaged reality show on TV.

Tiny Business Owners: When You Don’t Want to Reduce Your Income for Tax Purposes

December 13, 2011 by Jan Roberg · Leave a Comment
Filed under: Small Business 
Small restaurant in Forks

Photo by Derrick Coetzee on flickr.com

I know what you’re thinking: “Come again? You must be out of your head! Don’t I always want to reduce my income for tax purposes?” Sometimes, the answer is no. Actually, I got the idea for this post from Howard, one of my readers with an accounting background and an owner of a struggling restaurant.

I’m walking on a tight rope here so I want to make sure that I explain this carefully. Under tax law, a small business owner is required to report all of his income and expenses accurately. I’m always telling people “don’t make stuff up” – that’s my rule and I stand by it. That said, there’s some leeway, like prepaying expenses at the end of the year to reduce your business income and stuff like that.

Where I’m going with this is there are some people who don’t want to reduce their business income for the tax year. One category is people who are applying for a home loan—you want your net income to be as high as possible, even if you’re paying self-employment taxes because the bank will be looking at your net income. The other category of folks who might not want to reduce their business income is people who may qualify for an Earned Income Credit (EIC).

Since leaving the big box tax company, I haven’t filed a lot of EIC returns; most of my clients are small businesses owners and have incomes that are too high to qualify. But last year, I had 5 EIC returns for people who had never even heard of EIC before, basically small businesses that had hit a rough spot with this economy. (I do lots of returns for people who don’t own businesses too. But I’m on a business roll right now.)

So here’s the thing: as a small business owner, you’re taxed 13.3% for your self-employment tax for 2011. If you make a net profit of $10,000 your self-employment tax is about $1,330. (Not exactly, it’s a funky equation, but that’s pretty close.) If you’re single with no children, the Earned Income Credit would be about $278, so it would make sense for you to lower your net income if you can so that you reduced the self-employment tax. But, let’s say you’re filing as head of household with 2 children – in that case your Earned Income Credit would be around $4,010 so reducing your net might not be such a good idea.

Bottom line: the tax strategies for a business owner who is a parent may be different than the strategies of a business owner with no children.

The IRS website has an Earned Income Tax Credit Calculator to help you determine how much of an Earned Income Credit you can receive if you qualify for one. Here’s the website: http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en.

Remember, that’s just the EIC and it is an estimate. Remember that for your-self employment income, there’s also self-employment tax – the quick and dirty calculation for that is 13.3%. It will help you figure out where you stand with the EIC compared to self-employment taxes.

If you’re married and your spouse has income, that income will be included in the overall calculations, so EIC may not be a factor for you.

There are so many things to think about when you own your own business. It’s a good idea to get some professional help at least once every three years to make sure you’re on track and getting every deduction and tax credit you deserve. If you have made mistakes in the past, a professional can amend your prior year returns and get you refunds for what you’ve missed as long as you’re within that three year time limit.

Year End Tax Tips for Your Single Owner Sub-Chapter S Corporation

December 9, 2011 by Jan Roberg · 2 Comments
Filed under: Small Business 

Snow Blower 2 Updated for 2013

Your read a lot of news stories about year-end tax tips, but you don’t see a lot of things specifically targeted at Sub-S Corporations, and there’s nothing out there for the single owner S Corporation. It’s kind of sad because most people with Sub-S Corps are set up that way for the tax advantage of the Sub-S, but then they miss out on other tax benefits that they would have had if they remained a sole proprietor. If you own a Sub-Chapter S Corporation, then you need to make sure that you maximize your deductions just as much as any other type of business. These tips are especially for you:

First, and most importantly, if you’ve got a profit this year, you want to make sure that you are paying yourself some type of payroll. This is one of the most common mistakes that S Corps make. The point of having an S Corp is to protect some of your income from self employment taxes. In order to do that, you need to pay yourself a salary. In the early years of a business, there’s often a loss and the salary isn’t important, but once the business is in the profit side, the owner should be paying a wage that is commensurate with what he’d be earning if he worked the same job for someone else. If you don’t do this, the IRS can come back and assess self-employment tax on 100% of your S corp profit. So that’s the first thing you want to handle.

Reimburse yourself for your employee expenses: Write yourself an expense report and have the S Corp write you a check. For example: let’s say you took a business trip for a convention and your travel expenses cost $1000. You paid it out of your own pocket because it was easier at the time and you just figured that you’d write it off later. Because you are an employee of the S corp, you would put the $1000 on your schedule A as an employee business expense and it would be subject to the 2% limitation rules (you can only deduct as an employee business expense what you spend over 2% of your adjusted gross income). Putting the expense on your schedule A gives you a much smaller tax benefit than if it’s on your S Corp return. If you pay Alternative Minimum Tax, you could get zero benefit from putting it on your schedule A.

Pay your health insurance through your S Corp: This is not the big deduction you would want it to be, but it’s better than nothing. As an employee of the S Corp, you can’t claim the self-employed health insurance deduction like you could as a sole proprietor. Your health insurance would go on your schedule A subject to a 7.5% limitation before anything could be deducted (for most people that’s a zero deduction.) If your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit, but then you get to deduct the cost of your health insurance on page 1 of your tax return—a much better place to put a deduction. You do not pay FICA on your health insurance.    (Yes, I realize that this sounds like a cockamamie way to do the accounting for your health insurance–but those are the IRS rules.  ‘Nuf said, right? )

Reimburse yourself for your home office deduction: It’s hard to claim a home office deduction on a Sub-S corporation. Like other employee expenses, it would go on your Schedule A and be subject to the 2% limitation rules like any other employee business expense. Many accountants won’t even touch a home office for a Sub-S Corporation. Some people charge rent to their S Corps for their home office, but that’s just moving your income from one taxable entity to another so you don’t really save anything. What you want to do is reimburse yourself for your home office deduction in a fully accountable plan. That’s a phrase that you want to remember: fully accountable plan. Prepare a form 8829 Home Office form like you were doing it for a sole proprietorship. Use that report to determine how much you should reimburse yourself for your home office. Remember, it’s a reimbursement, not a rent payment. It reduces taxable income to the company, but it is not taxable to you because you have “accounted” for the expenses. For more information about home office deductions, you might want to read this post: http://robergtaxsolutions.com/2011/07/how-to-boost-your-home-office-deduction/

I’ve listed some other year end tax tips in my other blog post: 2011 Year End Tax Tips for Tiny Business Owners. Not all of the tips there work for Sub S corporations, but some of them do so it’s worth checking out.

Year End Tax Tips for Tiny Business Owners

December 6, 2011 by Jan Roberg · Leave a Comment
Filed under: Small Business 

Countdown clock Updated for 2013!

Tiny business owners, you know who you are: you’re a single member LLC or sole proprietor, or maybe you’re in business with your spouse. You might even have an employee or two, but that’s about it. When Congress passes laws to help “small business” they don’t mean us. This post is for you. If you are a Sub-chapter S corporation, I’ve got tips here:  http://robergtaxsolutions.com/2011/12/2011-year-end-tax-tips-for-your-single-owner-sub-chapter-s-corporation/

Number 1: If you’re going to be in the red for this year, you don’t really need to worry about reducing your business tax, right? Your negative business income will help offset your other income (if you’re lucky enough to have some). You can devote your energy to being profitable next year.

Number 2: If your business is in the black, congratulations! You’re going to want to look at cash flow and make sure you’re got enough cash to pay your upcoming expenses (like payroll and payroll tax if you’ve got it), but let’s look at some ways to reduce your excess income before the year is out.

Hire your kids: If you’ve got kids under the age of 18, you can hire then without having to pay FICA.  It used to be if you had an LLC, you paid FICA for your kids but that changed in 2011 so even if you have an LLC, you don’t pay FICA on your children’s wages.     There are rules that have to be followed, but if you could use a little help at work this time of year you’d at least be keeping the money in the family. For more information check this: http://robergtaxsolutions.com/2010/12/last-minute-tax-tip-hire-your-kids/

Pre-pay business expenses: Most tiny business owners use something called “cash basis accounting”, basically, you’re taxed on what comes in versus what goes out. If you are cash heavy, you can pre-pay some of your business expenses for up to twelve months. For example: I lease my office space, I’ve got a one year contract so I know that I’m going to have that monthly expense for the rest of the year. If I were cash heavy (in my dreams) I could prepay my rent for the entire 2012 year and write it off on my 2011 taxes. But you see how you can play with that? While I won’t be paying a full year of rent in advance, I did pay a few January bills early.

Delay invoices: Remember, this only works if you’re cash flush. Let’s say you did a job and a client owes you $1000 and you normally would send out the bill with a due date of December 30th. Change to due date to January 15th—you’re pushing that income ahead to next year. Besides, your client might just appreciate the break at Christmastime. I set up a billing schedule for a client that didn’t start until January and I used “I thought you could use a little Christmas break.” She was thrilled and I delayed the income—talk about a perfect win/win situation.

Credit card purchases:     According to IRS rules, if you buy something with a credit card, you’ve bought it now. So, let’s say you’re a little cash poor right now but you’ll have the revenues next month to cover your expenses. Pay expenses with your credit card and it will count as having been paid when charged.  I always like to be cautious about credit card spending–hate those bills, but it’s a good solution for some businesses.

This one I don’t like to say, but buy equipment: If you need it. I almost hate to list this as advice because it’s the standard that everybody says every year. One of my clients fired his old accountant for saying it. Like he said, “I know what I do need and don’t need to run my business and I don’t need any more equipment. What other ideas you got?” In this same category is the buy a new SUV that weighs over 6,000 pounds so you can use 100% bonus depreciation to write off the whole thing. Here’s my advice, “Don’t buy crap you don’t need.” If you do need equipment, and you’re profit heavy, it’s better to buy in December than in January. But buy what makes sense for the business.

Get your retirement plan in place: If you’re just investing in an IRA, you don’t need to worry about that yet, you’ve got until April. If you’ve been wanting to set up a SEP or a 401(k), you need to get that done by December 31st. Contact your financial advisor about setting up your retirement plan.

Last, because this isn’t really business: charitable contributions. If you’re a sole proprietor, your charitable contributions do not count as business expenses. So if you give money to the Salvation Army, that’s a personal deduction, not a business deduction. Every year, I see a lot of people trying to claim their charitable contributions as business expenses and it won’t fly with the IRS. Even if you pay a charity from your business bank account, it’s not allowed as a business expense. Charitable contributions won’t help reduce your self-employment taxes. Please give to charities and give generously, but know that it’s a personal deduction, not a business one.

Tax Tips for Daycare Providers

December 2, 2011 by Jan Roberg · Leave a Comment
Filed under: Self Employed, Small Business 
jungle gym dialogues

Photo by Angela Vincent on flickr.com

First things first, let’s tackle the big “problem” many daycare providers have – licensing. The IRS demands that you report all of your daycare income, but if you’re not licensed, you don’t qualify to claim any of the deductions. Now the whole licensing thing varies by state. Here in Missouri, you do not have to have a daycare license if you care for four or fewer children who are not related to you. If you’re exempt from licensing requirements for your state, then you’re qualified to claim all of the federal tax deductions relating to your daycare business. Different states have different rules. Just across the river in Illinois, the licensing requirements are much stricter. Be sure to look up the rules for your state before you claim daycare deductions.

Your daycare income will go on a form called Schedule C which will be part of your regular 1040 tax return. You are required to pay self-employment tax on your daycare income; that will be 13.3% for 2011, generally it’s 15.3%. Self employment tax is in addition to your regular income tax, so you can see why claiming your expense deductions can come in kind of handy.
The first, and probably the biggest, daycare deduction is for the business use of your home. That’s going to go on a Form 8829 and it’s going to be linked to your Schedule C. You won’t be able to deduct all of your rent, utilities, and expenses, but you’ll be able to deduct a portion of them as a percentage of how much of the home the kids have access to and how long you’re open. Kids put a lot of wear and tear on your home so definitely take advantage of this deduction.

Another big expense for many daycares is food. You can deduct as a business expense 100% of the cost of the actual food the kids you care for eat. If you’re doing your taxes yourself when you’re looking at the actual Schedule C form, there’s a section for “meals and entertainment” –you don’t want to use that line. That only gets counted as a 50% expense – that’s for sales people taking clients out to lunch and stuff like that. You’re going to want to put the food for kids on a separate line in the “other” expenses category. Call it “food for kids”. (Okay, that seems pretty “duh” but I didn’t have a better way to say it.)

If you get reimbursements under the Child and Adult Food Care Program of the Department of Agriculture, that’s not taxable unless you get more money than you actually pay out for food for the kids. Usually, you’ll get a 1099 showing you received a payment. If that’s the case, you must report it as income on your Schedule C, but then you’ll deduct the cost of food in the expense category. (If you get a 1099 and don’t show it as income, you’ll get a nasty IRS letter—that’s why you want to show it on the Schedule C even though it’s not supposed to be taxable.)
If you’re deducting food, keep separate receipts for your daycare food from your family food. (Right, I know, that’s not easy.) But remember, you can’t take a deduction for the food you feed to your own family. Now let’s get real: you just shop and buy groceries for your daycare kids and your family in one fell swoop don’t you? (Okay, that’s what I’d do, and I’m one of those anal retentive accountant types!)

Here’s how you solve that problem. The IRS has official “snack and meal rates”. Granted, they haven’t been updated since June of 2010 but I’ll work with what the IRS gives me. The rates are as follows:

  • Breakfast: $1.19
  • Lunch: $2.21
  • Dinner: $2.21
  • Snack: $0.66

Alaska and Hawaii have different rates:

  • Alaska: $1.89, $3.59, $3.59, $1.07
  • Hawaii: $1.38, $2.59, $2.59, $0.77

So let’s say you take care of Oliver 5 days a week. His parents take care of breakfast and dinner, but you do provide lunch and a snack every day. Oliver stayed home two weeks over Christmas and one week over Easter, other than that you’ve had him all the other days. You take $2.21 for lunch and add $0.66 for lunch and that makes $2.87. That’s what you spend on Oliver’s food on a daily basis. You multiply that by 5 days a week and get $14.35. You multiply that by 49 weeks (there’s 52 weeks in a year and you didn’t have him for 3 weeks) and you get $703 spent on Oliver’s food that you can deduct from your income.

Granted, you probably spend more than that on your daycare kids, but at least this gives you something to work with, especially if you haven’t been keeping good records.

Don’t forget the other deductible things either: money you spend on toys and games, and extra costs of laundry and cleaning supplies. If you take the kids on field trips, be sure to keep track of your mileage and the cost of admission to events. And remember that if you’re reading magazines to help you with taking care of the kids, those can be a business expense too: things like Family Fun Magazine that give you tips on things to do with kids, that’s work reading.

Taking care of other people’s children is hard work. You deserve every penny you earn. My job is to help you keep it.

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