Three Myths About Income Tax in Retirement

Active retirement old people and seniors free time group of four elderly men having fun and playing cards game at park. Waist up



Do you still have to pay income tax after your retire?  The short answer is: YES!


I’m not sure why, but there seems to be a myth floating around about seniors not paying taxes. I’ve always had to deal with seniors in trouble for not filing tax returns when they needed to, or not paying tax on their IRAs, but lately I’ve been hearing the age myth. Three times in the past three weeks I’ve heard real people say the following things:


“Now that I’m 65 I don’t have to pay self employment taxes on my 1099 income.”

“What do you mean I need to be concerned about required minimum distributions, I won’t have to pay tax after I’m 70 anyway?

 “I won’t need you to do my taxes anymore now that I’ve turned 80. There’s no taxes after 80.”


The bad news is: those statements are all false!   The IRS doesn’t really care how old you are.  They still want your money.  So how do some of these myths get started in the first place?   Well, some states don’t tax your retirement income.  So if you live in one of those states, it’s easy to assume that the IRS doesn’t tax it either, but the IRS does tax retirement income, and they don’t care how old you are.


Myth 1, not paying Social Security tax after age 65:  Once you start receiving Social Security benefits, it’s easy to assume that you won’t be paying into Social Security anymore.  But–you do.  Actually, if you’re still working after your full retirement age you might even increase your Social Security benefits.  It all depends upon your circumstances, but you’ll want to check with Social Security to make sure that you’re being credited for your Social Security contributions.


Myth 2, no taxes after age 70:  After age 70 1/2 you are required to start taking money out of your IRAs.  It’s called Required Minimum Distributions (RMDs)- and that money is taxed.  The quick and dirty calculation to figure your first year RMD is to take the total dollar amount of the money you have in all of your IRAs and divide by 28.  Now, this is a quick and dirty calculation.  Different ages, and different situations can get you different results.   If you want to compute an RMD for a different age, try the Kiplinger calculator:


For many people over 70, you don’t stop paying taxes, you actually pay more in taxes.  If you don’t know about the RMDs and you need to be taking them, there can also be some pretty hefty penalties.


Myth 3, not paying taxes  after age 80:   I don’t know where that came from.   (Actually, I heard it from my mother-in-law who heard it at the senior center.  But I don’t know where it started.)   Many seniors don’t pay tax because their income is low enough not to pay, and they aren’t required to file.  But they’re not paying tax because of their low income, not because of their age.


And even if you’re not required to file, I still recommend submitting a return anyway to prevent identity theft.

How To Allocate Your Savings

Three Glass Jars On Wooden Shelf For Savings
I recently wrote a post about saving money and why you need to have an emergency fund saved up before you start saving for retirement. (See: How Much of My Income Should I be Saving? ( Well, a friend of mine recently asked me what I thought should be the next step in saving and this is what I told him.

I’m not a financial planner or money guru of any kind. If you have access to a professional in that field I recommend you hire one because I think everybody could use a plan tailored to their needs. But if you don’t have access to a personal planner, this is my opinion of how I think you should prioritize your savings.

First: Have at least three months worth of expenses saved up in a regular bank account. I like to see 6 months to a year’s worth in the bank, but the three months is crucial before you start putting money anywhere else.

Second: If your employer matches your 401(k) contribution- then put your money there up to the match. An employer match is a 100% return on your investment. You can’t get that anywhere in the marketplace. If you find a bank account that pays one half of one percent interest that’s considered good these days. A 100% match? That’s totally awesome! Do not miss out on that opportunity.

Third: If you have money left to save after contributing up to the match, then I would put money into a Roth IRA if you qualify. Generally you need to earn less than $129,000 a year if you’re single and $191,000 a year if you’re married. The reason I like the Roth IRA over the 401(k) or traditional IRA is that you get to take the money out tax free in retirement. It’s also a good source of funds for college, housing, or other emergencies if you should need it. There is no tax benefit now for putting money into the Roth, all the benefit comes when you take the money out. I cannot overstate how valuable that “tax-free” part of the retirement equation is.

Fourth: My next choice for savings would be back to your employer sponsored 401(k). This gives you a tax reduction benefit now.

Fifth: College savings. People with new babies always ask me about college savings programs. They will have no money in their own savings or retirement but they want to open a 529 plan. So why is college savings so far down on the list? Here’s the main reason: you can get a loan to go to college. You cannot get a loan to retire. We’re talking about priorites: savings, Roth IRA, 401(k), then college. (Remember, a Roth IRA can be used for college if needed.)

Have you gotten this far and you still have money left to save? That’s great! That also implies that you’ve got enough money to hire a professional financial planner. There are cool things you can do with annuities, life insurance, and other investments that are way beyond the scope of anything I can tell you about. Find someone that you can really talk to.

What are your plans for the future? Where do you want to be when you retire? When will you retire? How will you get there? These are all things that need to be tailored just to you and can’t be answered in some blog post.

Why the Supreme Court Ruling Makes My Life Easier: A Tax Preparer’s Reaction to Obergefell v. Hodges

Supreme Court Ruling gay marriage


I was sitting out on the deck with my husband and he asked me what I wanted for my birthday. I ran down my usual answers, “world peace, ending world hunger, etc.” He gave his usual answer, “Probably not this year.” I told him, “That’s alright, the Supreme Court just passed marriage equality, that makes my life easier. I’m happy with that.” He gave me that raised eyebrow look and said, “Care to explain that one?”

I’ve been married to this man for over 30 years so you might not think Obergefell v. Hodges will have much of an affect on me personally, but as a tax professional, it does. Here’s a little history of how legislation and the Supreme Court decisions have affected taxes over the past 11 years.

Massachusetts legalized same sex marriage back in 2004. That was the beginning of the crazy tax returns. You see, while you could be legally married in Massachusetts, the federal government didn’t recognize the marriage. So, you had to file as married on your state return and single on your federal. As a tax preparer, you had to prepare three tax returns instead of one. Back in those days I was an instructor for H&R Block. I remember teaching how to prepare that return in one of my classes. It was pretty crazy and very complicated. Living and working in Missouri, I didn’t see many Massachusetts returns, but we still have to know how to do them.

More states adopted gay marriage, but it was still illegal in Missouri. Couples were getting married in Iowa and living in Missouri, but they still couldn’t legally file jointly here in Missouri. Some of my business colleagues and I worked on a tax strategy to help couples who were “married for all intents and purposes but just not legally recognized in the state”. It was a good tax plan while it lasted, and for some couples it was actually better tax-wise than married filing jointly. But of course it didn’t solve the issues of Social Security, healthcare, or pension benefits.

In 2012, the First Circuit Court of Appeals ruled that the Defense of Marriage Act (DOMA) was unconstitutional. This issue was headed to the Supreme Court, but hadn’t been settled yet. Which was another tax headache. You see, if the Supreme Court ruled that DOMA was unconstitutional, it would affect tax returns, but you can’t change your tax return based on the first circuit court of appeals. But–there’s a three year limit to amend a return for a refund. So, if you didn’t want to miss out on a potential refund for 2009, you had to file something called a “protective claim for refund.”

That meant, you were filing an amended return based upon something that hadn’t happened yet, hoping it would. The IRS would just stick those returns in a drawer until (or if) the issue ever came up. You had to write: “Protective claim for refund contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v. OPM.” If you didn’t work it just right, the IRS could just reject your claim.

In June of 2013, the Supreme Court held in United States v. Windsor that the federal government was required to recognized same sex marriages.(I know, I know, what happened to Gill? Windsor was heard first so that became the landmark decision and the Gill petition was turned down in light of the Windsor ruling. Your Amended return claiming Gill would still be good because of Windsor though.) This meant that if a couple were legally married in Iowa, for example, that they would not only be allowed to file a state return as married filing jointly, but they could also file their federal tax return as married filing jointly.

The Windsor case had a lot of consequences for preparers. In places like Massachusets where same sex marriage was legal, then the couple could just file as married filing jointly for both the state and federal returns. But in other states where same sex marriage wasn’t allowed, it was wait and see status while the legislatures battled it out. Here in Missouri, if you can file as married on your federal return, you filed as married on the state return. Next door, in Kansas, you filed as married on your federal return, and single on your state return. Those of us who prepare multiple state returns had to keep up on all of that. It was a headache keeping track of the state rules. Basically, in 2013, we had a flip flop of the tax rules–instead of filing a joint state return and separate federal returns like we did with Massachusetts in 2004, we were now preparing joint federal returns and separate state returns.

So now, with Obergefell v. Hodges I’m back to filing normal returns for everybody in every state. I get to ask normal questions like, “Are you single or married?” And I don’t have to ask, “Are you gay or are you straight?” Because quite frankly, whether you’re gay or straight should have absolutely nothing to do with your tax return.

How Much of My Income Should I Be Saving?

Saving Money


10%.  Ten percent of your income should go into savings.


Now people who see that tend to fall into three groups.  Group one says – “Okay, that seems right by me.”  Good, that was easy.  Group two says, “But I’d like to save more than that.”  I say to them, “Go ahead, save more.  That’s a good thing.”  Then there’s group three.  They’re saying, “You must be nuts, I can’t possibly save 10% of my income!”  This post is for you.


Seriously, if you’re living paycheck to paycheck, barely making ends meet, you’re the one who needs a savings cushion the most.  Think about it.  A rich person has some car trouble–it’s an inconvenience at most.  A poor person gets some car trouble and it can ruin your life.    Let’s say you have no savings and your car breaks down, it’s going to cost $1000 for fix.  You don’t have the money.  You can’t get to work without the car so you lose your job.  No job, you can’t pay the rent, you get evicted.  Crazy right?  But this stuff happens to real people all the time.


A little bit of savings cushion can prevent catastrophe.


But 10%, that almost seems impossible.  I know, but the lower your income, the more you need that cushion.  Let’s say you’re working and your take home pay is $300 a week, that’s $30 you need to save.  Now I’m talking about regular saving here, not sticking money into an IRA.  Before you start saving for retirement, you need to have your behind covered for emergencies first.

If you save $30 a week for a year, you’ll have over $1500 socked away.  It’s a lot easier to deal with car trouble with $1500 in the bank than it is with zero.  (Believe me, I speak from experience.  I’ve had car trouble when I’ve been broke, and car trouble when I’ve had money.  Having money is way better.  Way better.)


Now you might not have a problem, you may have that $1500 saved up and then save up another $1500 the next year and then you’ve got $3000 in the bank.  How awesome is that?


Or maybe you hit a rough patch and your savings goes back down to zero, but hopefully the rough patch was a little easier because you had some cash stashed away.


So how do you save 10% of your income?  You’ve got to pay yourself first.  I know, you’re thinking I’ll pay my bills and then save the rest.  I’ve tried that, I always wound up with no money at the end when I tried to save that way.  Pay yourself first.  I don’t care if you don’t have a fancy bank account.  You can stuff it in your mattress for all I care.  But stash it somewhere.  (Okay, I do like bank accounts, but if you really have no money, some banks won’t even look at you without $1000 or more so I understand if you don’t have a bank account at first.)


Set goals for yourself.  You can make up your own goals, but I got these from a financial seminar I took once.  I don’t think the speaker would mind if I shared them:


Goal 1:  save $100

Goal 2:  have  $1000 saved

Goal 3:  have $5000 saved

Goal 4:  start investing in a retirement account in addition to your savings.


If you’ve already reached all these goals then congratulations,  you’re already on the right track.  You want to keep saving 10% of your income, but you can be  putting some of that savings into retirement while still adding to your regular savings as well.  I like to see 6 months to a full year of income in your savings account.


You don’t get any tax breaks for saving.  It’s not sexy either.  But having some money set aside for emergencies is probably the smartest financial decision you’ll ever make.  (Well, and smart is sexy right?)



Tax Strategy for Exes that Get Along

Tax tips for ex spouses

Sometimes dealing with an ex is like butting heads. But if you can work together, it can be money in both of your pockets.



If you have a child with an ex-spouse, or even someone that you weren’t married to, you might already know how complicated the whole tax situation can get.  Who can claim what? And if you now hate each other, then it’s really a problem.


But—if you and your ex get along and you want to work together to make the best situation for your child—then I’ve got a tax strategy for you to help you maximize your refund.


This strategy only works for couples that get along, and basically share physical custody.  If this sounds like you and your ex, then you two are perfect candidates to work together on your taxes.  If your ex is an absentee parent stop, this isn’t for you.  If your ex is a nasty person, stop, this isn’t for you either.


If your ex is a decent, trustworthy human being, then you can continue.


The first step is for you and your ex to do your own taxes the way you normally should.  For example:  let’s say your divorce decree states that you are the custodial parent and your ex gets to claim the exemption for the child.  That’s how you prepare your taxes and set the baseline for what your refund or balance due should be.


An example might help.  Let’s say that Barbie and Ken had a child named Penny and then got divorced.  Although Barbie and Ken basically share custody of Penny, if push comes to shove, in the divorce decree, Barbie is the custodial parent.  Per the decree, Ken is allowed to claim Penny’s exemption every other year.   So the way for them to file is for Barbie to claim the head of household filing status, but not claim Penny’s exemption.  Barbie also gets the Earned Income Tax Credit and the Child Care Credit for Penny’s daycare expenses.  Ken gets the exemption, and the Child Tax Credit.


That’s how you determine the baseline for Barbie and Ken.  Let’s say that in this example, Barbie would get a refund of $1500 and Ken would get a refund of $1000.  Together they get $2500.


There are FOUR Scenarios to this.  When preparing your taxes, you’re going to run all four scenarios:


  1. YOU claim no child, single, 1 exemption for yourself. EX claims:   2 exemptions; one for his/herself, one for child, AND claim EIC and head of household and child care credit


  1. YOU claim child for EIC and head of household filing status and child care credit, 1 exemption for yourself, no exemption for child, sign 8332 to other parent. EX claims:  2 exemptions; one for him/herself, one for child, no EIC, no head of household


  1. YOU claim 2 exemptions; one for yourself, one for child, no EIC, No head of household, EX claims:  child for EIC and head of household filing status, 1 exemption for him/herself, no exemption for child, sign 8332 to other parent.


  1. YOU claim 2 exemptions; one for yourself, one for child, AND claim EIC and head of household and child care credit. EX claims:  no child, single, 1 exemption for self.


Let’s plug the numbers for Barbie and Ken in here.  Scenario 1: Barbie owes $800 and Ken gets a refund of $4500.  The combined refund is $3700.


Scenario 2: this is our baseline. Barbie gets a $1500 refund, Ken gets a $1000 refund.  The combined refund is $2500.


Scenario 3:  Barbie gets $1000 refund, Ken gets $3100.  The combined refund is $4100.


Scenario 4:  Barbie gets $2600 refund and Ken owes $900.  The combined refund is $1400.


So in Barbie in Ken’s case, it makes send to let Ken claim EIC and head of household filing status and have Barbie claim the exemption.  It gives them back and extra $1600!


Now Barbie has a right to her $1500, and if she files using scenario #3, she’s losing $500.  So to make Barbie whole again, Ken would need to pay her back the $500 from his refund.  And they would also have to agree on how to use the extra refund money.

I always recommend that you put the extra money you get into a savings account or 529 plan for your child.  The only reason you can do this is because of your kid, so I think the money should go towards raising your child.  But it’s up to you.


Remember, only parents that get along can do this.  If you hate each other, then you strictly go by the IRS rules for divorced or separated parents.   Once you do this, you can’t go back to the IRS because you changed your mind.


Put proper safeguards in place.  If you’re the parent that will get a lower refund than you normally would have, make sure that your ex sets up the part of his/her refund that makes you whole will come as a direct deposit into your bank account.

Make sure the part of the refund that is supposed to go to your child goes into your child’s account as well.


Remember, this strategy is not for everyone.  But for some families, it can be worth a decent amount of money.

Helping Mom With Her Taxes: Tax Tips for Preparing Returns for Senior Citizens

Photo by marysia_ at


If you have elderly parents you may find yourself in the position of having to assist them with their tax returns.  If you have a parent showing any signs of dementia, it’s especially important for you to step in and offer assistance.  Believe me, I understand that there’s a big difference between “offering” assistance and being “allowed” to assist.  Parents can be stubborn, especially about money.  But if your parent is showing signs of Alzheimer’s disease or dementia, you really do need to step in and make sure that their paperwork is taken care of.  Here are some tips to help you make sure you’ve got your bases covered.


If your parent has been working with an Enrolled Agent or other tax professional, talk to them first.  They should be able to provide you with a list of all the documents that your parent has used on past returns.  An old return, preferably the most recent one but even one a few years old, will give you a good clue as to what documents your parent usually needs.  Here’s a list of the most common items found on senior tax returns:

1. You need to find the Social Security Statement.  The form is called a 1099SSA.  It should be mailed by January 31.  If you can’t find it after February 1st, you can order a replacement at this web address:  It looks like this:



This sample picture is not in color, but the most distinctive thing about this statement is that it has pink on it.  It comes in one of those envelopes that you have to tear off the sides to open up the paper—the envelope will be white.  It’s not a standard size.


The 1099SSA statement is important because for some seniors, their Social Security income is taxable—for others it is not.  It all depends upon how much money they make.


Tax Prep Tip:  Use tax software and always input the Social Security income even if it seems obvious that the SS income won’t be taxable.  Software will do the calculation about the tax for you.  And should something turn up later and the IRS contacts you about income that you missed, by reporting the Social Security income even though it wasn’t taxable—you’ve protected yourself from underreporting fines on that income.


2. Another statement many seniors receive is the 1099R – for pensions and annuities.  Some seniors won’t have any while others could have 10 or more.  Most seniors will have one or two each—a pension or 401(k) from a job and an IRA.


Tax Prep Tip:  Look at box 2 of this statement, often it is blank.  Usually, a blank box means zero, but on a 1099R-a blank box could mean that the company didn’t compute what was taxable.  Many tax software programs will automatically count everything in box 1 as taxable if you leave box 2 blank when inputting the 1099R.  You can test this by looking at line 16a and/or 16b of the 1040 to see if the number carried over there.  On the 1099R form there is a checkbox for “taxable amount not determined”.  If that’s checked, the default is to tax the whole amount.  There are formulas for determining a taxable amount on these types of 1099s.  If you’re dealing with a large pension, it would be worth consulting with an EA to figure the taxability.


3.  Investment Income:  Many seniors have investment income.  You’re going to want to look for something called a 1099B, 1099-DIV or a 1099-Combined from.  These come in all kinds of shapes, sizes and colors.  Many seniors have more than one investment firm; just because you find one statement doesn’t mean you have them all.  Many of these firms deliver their statements online.  If your senior parent used to be computer savvy, be sure to check online for these documents.


Also seniors, more so than younger investors, tend to hold individual stocks outside of the big investment firms.  Look for individual 1099-DIV statements from Met Life, Pfizer, Ameren and the like.  Many of these statements are still mailed, and they often come in smaller envelopes with the tear off sides.  They should say, “Important Tax Document” on the envelope, but the envelopes do sort of look like junk mail so you may be combing through the recycling bin for these.


Tax Prep Tip:  Investment documents aren’t due out until February 15th.  Be sure to allow enough time for all those statements to be delivered before you start your parent’s return.  Some of those brokerage house statements can be over 20 pages long.  While most of the information you need is all on page 2 or 3—there’s a reason they are sending you 20 pages of information.  If you have “gross proceeds from sales of investments” – you need the back 20 pages to determine the basis of that stock sale.  If you have non-taxable dividends from municipal bonds – you need the back 20 pages to determine if that money is taxable to your state.  Brokerage houses don’t send you all that stuff because they hate trees.  If you get a statement like that and you don’t understand it, it’s worth the money to get professional help at least once so you know where everything goes

4.  Bank interest statements.  These are called a 1099-INT.  Seniors are more likely to have CDs than younger taxpayers, and they shop around for the best interest rates.  Don’t be surprised to find multiple bank statements.


Tax Prep Tip:  Some banks put all of the CDs and their interest on one combined bank statement.  Other banks send separate statements for each CD—making it look like you’ve just got duplicates of the same statement.  If it looks like you’ve got duplicates—check the account number carefully to make sure you’re reporting everything (and not double counting the same one!)  List the interest earned on each statement as a single line item.  If the bank is sending you statements in separate envelopes, the IRS is also getting that information separately.  If you combine the amounts, it won’t match the IRS numbers and could cause you to get a letter.


5.  State programs:  many states have tax credits for senior citizens.  Here in Missouri, we have a property tax credit for low income seniors.  There are programs like that in many other states as well.  Even if your parent’s income is too low to require filing a federal return, be sure to check to see if he or she may qualify for some tax benefit in your state.   You’ll want to keep an eye out for real estate tax receipts or rental income statements.


It can be difficult helping a parent at tax time.  Half the battle is knowing what to look for and where to find it.  The harder part is often persuading your parent that she needs help!  But if your parent is confused, especially about financial matters, you need to step in and make sure that her taxes are taken care of now.  It’s much better than having to deal with the IRS on her behalf later.

Filing Your St. Louis County Personal Property Tax Declaration



41 South Central Avenue

St. Louis, Missouri 63105-1777



Do you own a small business in Missouri?  Are you filing a Schedule C with your 1040 tax return?  Or do you have a partnership or corporation?  If yes, then you’re supposed to pay personal property taxes on your equipment.


I keep getting asked:  Do I have to pay personal property taxes?  Do I have to fill out that form?  If you own a small business, the answer is yes.


I used to think that if you didn’t have any assets, you didn’t have to do a business personal property declaration.  But—even if you have absolutely no business assets at all, you’re going to have a minimum assessed value of business property for tax purposes of $200.  That’s not what the tax is, that’s an assessed value of your property.


So how does that assessment thing work?  I’ll use my own business as an example.  In 2013, I bought new computer equipment.  The total cost was around $3,000.  Computers count as “5-year” property, because that’s how long it takes to depreciate a computer on your tax return.  (Office furniture is an example of a 7-year property.)  Now I’m writing off the whole cost of the computer on my tax return (as a Section 179 expense)—but it’s still considered a 5 year property for depreciation purposes and for the personal property tax declaration.


In the personal property tax declaration form, I would put $3000 for year 2013 in schedule 9 for 5-year property.  (If your brain just exploded reading that, relax, I’m going to give you the easy cheater way to do the form in a little bit.)


Then that amount (in my case $3,000) is multiplied by .85 and then multiplied by .3333 so my assessed value is $849.92.   That’s not the tax I’m going to pay, that’s just the assessment of the value of what my business owns.  (3000 x .85 x .3333 = 849.915)


Last year, the tax rate was 8.052.  I only had $230 of assessed value so my bill was only $18.52 this past December.  Because of my new equipment, my bill will be higher this year.  But your bill is going to be close to 8% of what the assessed value of your equipment it.  As your equipment ages, the assessment will go down but the assessment will never go below $200.


So what’s the cheater trick for filling out the form?  Grab your tax return and pull out the Federal depreciation schedule.  It’s going to have a list of your company assets, what they cost, and whether they are a 5-year, 7-year, or a 10-year property, and what year you bought them.  If you have company assets like computers, equipment, or vehicles, then you should have a depreciation schedule to go with your tax return.  I know that some companies won’t give that list to their clients to force them to come back every year.  If you’re not getting that list—you have a right to ask for it.  (And move to a preparer that gives you all the information you need for your taxes.)


If you didn’t get your personal property tax declaration statement in the mail, here’s a link so you can have the form:


You need to have it signed and filed by March 31st.


St. Louis County has started a new Online Personal Property Declaration that will be available from February 1 – April 30th It’s a good option for people who missed the March 31 deadline and for people who are just more comfortable with on-line services.  If you start using the online service, you’ll be able to access your previously filed returns, making it a whole lot easier to fill out that form in the future!


If you’ve been forgetting to file your St Louis County personal property taxes, 2014 is a good year to come clean and start filing.

Planning Now for Next Year’s FAFSA Application

Photo by Federal Student Aid at


Parents of seniors are filling out FAFSA applications right now, but if you’ve got a sophomore or junior in high school, then it’s time for you to start planning now so that you get the best possible financial aid later.


Here’s the main thing:  if your child is a junior right now, then the income that you make this year will be the income reported on the FAFSA when she’s a senior.  If your child is a sophomore, it will be next year’s income.


Why does that matter?  Bottom line:  the higher your income, the less financial aid you’re going to receive.   If your child is already a senior, it’s too late to make any adjustments, the year is already over.


So if you’ve got a junior, you want to make your income look lower.  If you’ve got a sophomore, you might want to move up your income for this year, to reduce it for next year.


For example:  let’s say you’re a small business owner.  One of my favorite strategies is to prepay business expenses in December to reduce my taxable income for the year.  You can prepay up to a year’s worth of expenses.  This is a smart move when your child is a junior.  If you’ve got a sophomore, you might want to hold off on that to take the income hit sophomore year—when you’re not filing the FAFSA so that you can push more expenses into junior year which is the income year for the FAFSA.


Another example of future planning is when to take your capital gains on the sale of stocks.  Now you’re going to want to make good choices, sometimes you’ve just got to sell because you need to sell and the time is right.  But if you’ve got a choice, taking the gain is better in your child’s sophomore year than in the junior year.  Remember, if you’ve got capital losses that are more than your gains, you can deduct up to $3,000 to offset your regular income.  Anything more than a $3,000 loss will just be carried forward to your next year’s tax return.


One of the things that can really mess up your income during FAFSA time is taking a distribution from your retirement account.  Sometimes things happen and you just don’t have a choice, but if you’ve got an option to take a distribution like that during the sophomore year instead of the junior year it will help to keep your income down for the FAFSA filing.


Now you need to realize that you’re going to be filing FAFSA applications for four years, so you can’t artificially reduce your income for four whole years.  But getting that first year aid package off to a good start can help set the tone for the next four years.

What Is a Dependent?

Dependents are often your child. Your dog is never a dependent on your taxes.

If you’re doing your taxes this year, one of the questions you’ll be asked is, “Do you have any dependents?”  What exactly is a dependent anyway?


Most often, but not always, a dependent is your kid.  Sometimes, a dependent can be a parent, a sibling, and even in some cases a friend that lives with you.   There are many requirements that you’ve got to meet for a person to qualify as a dependent.  In general though, a dependent is someone that you support.


There are two types of dependents:

  1. Qualifying child:  that’s going to be a child or a disabled relative that will qualify you for the Earned Income Tax Credit (EIC)
  2. Qualifying relative:  a qualifying relative will get you an exemption for your taxes, but won’t qualify you to get EIC

Let’s look at the Qualifying child first.  How does the IRS define what a qualifying child is?  Remember, the IRS has weird rules, and it’s not the same as how your family decides who’s related or not.


A Qualifying Child must have a valid social security number to qualify for EIC.  If your child doesn’t have a social security number, but she gets one later, you can go back for up to three years to amend the returns.  In addition to a social security number, for EIC a Qualifying Child must also meet the following tests:

Relationship:  Son, daughter, adopted child, stepchild, foster child or a descendent of any of them such as a grandchild, or, a brother, sister, half brother, half sister, step brother, step sister or a descendant of any of them such as a niece or nephew.  Please note that an adopted child or foster child must be placed by the courts.  You’ve got to have legal documentation to support your claim; you can’t just take in your neighbor’s child and call her a foster child.

Age:  At the end of the filing year, your child has to be younger than you (or your spouse if you file a joint return) and younger than 19; or younger than 24 and a full-time student; or permanently and totally disabled.

Residency:  The child must live with you (or your spouse if you file a joint return) in the United States for more than half of the year.

Joint Return:  The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.


For more details on what is a Qualifying child for EIC purposes, check out this link:


Now one of the most common questions I hear about EIC is, “My boyfriend lives with me and my child, but he’s not her biological father, can he claim my daughter for EIC?”  The answer is “NO” because the child doesn’t meet the relationship test to the boyfriend.


But, the boyfriend might be able to claim the child as a dependent for an exemption—just not claim EIC for her, because she may be a Qualifying Relative to the boyfriend instead of a Qualifying Child.


Rules for claiming a Qualifying Relative:

In order to be a Qualifying Relative the person can’t be a qualifying child.

The second is to pass the member of household or qualifying relative test.  Either the person lives with you for the entire 12 months of the year, or is related to you in your immediate blood line:  your brothers and sisters, and their direct descendants, and their direct ancestors (but not foster parents.)  Also, your in-laws are included here—even if you divorce, as far as the IRS is concerned, your mother-in-law is your mother-in-law forever.  (Heaven help us all!)  If, however, a person was at any time during the year your spouse, he or she can’t be your qualifying relative.  (I know, that looks like a typo—once you marry ‘em, you can’t be related to ‘em.)


With the qualifying relative rule there is a gross income test: a qualifying relative can’t make more than the standard exemption in income, which for 2013 is $3,900.  This means taxable income.  If your mother’s only income was $6000 a year from Social Security, that’s not taxable so she’d meet the gross income test.


The last requirement is support:  you have to provide your qualifying relative with more than 50% of his or her support.  So, back to your mom on Social Security, if she makes $6,000 a year, and spent it all on food and rent, then you’d have to pay at least $6,000 more towards her support.


The rules for Qualifying Relative and Qualifying child can get pretty confusing, especially if you’ve got a unique situation.  The IRS website has a tool to help you decide if you can claim a dependent or not.  As you go through the questions, remember to answer them honestly and you’ll get a reliable answer.  Sometimes people change their answers to get the result they want—that’s how you get into IRS trouble.  Answer honestly and claim what you can, don’t claim what you can’t and you won’t have any problems.