Author: Jan Roberg

Posted on by Jan Roberg

Tax Tips for Single Parents

Kids can be a real advantage on your tax return

Having a baby really changes your taxes. Make sure you know the rules.

 

Updated November 15, 2018

Welcome to the world of parenthood.  Raising kids is hard enough with help but it’s even harder when you’re alone.  Here are some tips to help you navigate the changes that will happen to your tax return, because you deserve a little help once in awhile.

 

Claiming your baby for the child tax credit:  If you are earning income, then you’re going to want to file a tax return and claim your baby for the child tax credit.  I sometimes hear women say they didn’t claim their children because the child was born in December and they read the child is supposed to live with you for 7 months.  In the year of birth, you claim the child even if she was born on December 31st.  Let’s be honest.  If you’ve jut gone through a pregnancy, that child has been living with you for more than 7 months anyway.  Claim your baby!  We’ll talk a little more about possibly letting someone else claim the baby, but unless there are special circumstances, plan on it being you.

 

Changing your filing status:  If you’re on your own and supporting yourself, then once your baby is born you will change your filing status from Single to Head of Household.  It gets a little more complicated if you are living with your parents, the baby’s father or someone else.  The issue becomes, who is providing most of the support for the child?  If you’re using computer software, there are all sorts of questions you can ask to determine how much support is provided to the baby and by whom.  But here’s a quick and easy technique that’s pretty helpful.  If you prepare the tax return with Head of Household status, and then switch it to Single status and the refund amount is exactly the same, then claim Single as your filing status.  If your income is so low that your refund won’t change then you really don’t need Head of Household status.  The IRS often audits returns claiming HH status when the income is too low.   They never audit Single for the income being low.  Why not just avoid a headache that you don’t need? The Earned Income Credit amount is the same for Single as for Head of Household filers.

 

What about letting someone else claim the baby?  If you are living with the baby’s father and it would benefit you to have the child on his tax return instead of yours, then that’s fine.  If you are living with your parents and they are supporting you and the baby, you can let your parents claim the child.  Your parents would have to make more money than you do to be able to do this though.

 

Letting anyone outside of you, the father, or a grandparent claim your child on a tax return has the potential to get you into trouble and even land you in jail for tax fraud.  There are a few situations where it can be done, but for that you should go see a professional.  A new boyfriend who is not the baby’s father can NEVER claim your child for EIC. NEVER!  The rules regarding dependents change often.  Things that were allowed a few years ago aren’t allowed now.  Sometimes well meaning friends and relatives can give you bad advice which could get you into big trouble.  Protect yourself.

 

The Earned Income Credit:  Many single moms, especially when they’re just starting out, qualify for the Earned Income Tax Credit.  It’s a refundable credit, that means you get the money even if you didn’t pay any tax into the system.  EIC is a big deal and can make a huge difference on your refund.  That’s why people may want to try and claim your baby for you.  There’s billions of dollars a year of EIC fraud.  That’s also why you need to be careful, the IRS is very aggressive about pursuing EIC fraud.  Don’t let anyone else claim your child.

 

Protect your child’s social security card like it was gold.  It’s that valuable.  Infant identity theft happens all the time.  You won’t know it’s happened until you file your tax return and it gets rejected because someone else has claimed your child.  Do not carry the card around in your purse or wallet.  Store it someplace safe.

 

Congratulations on your new baby!

 

 

 

Posted on by Jan Roberg

Should Your LLC Be an S Corporation?

When should you be an S Corp?

If your small business has reached the point where your self employment taxes are really hurting you, choosing an S Corporation status might be the answer to your problem.

 

If you own a single member LLC, the IRS considers that to be a “disregarded entity.”  That basically means there’s no such thing as an LLC tax return.  So, if you don’t make an “election” to taxed some other way, you’re taxed as a sole proprietor on your 1040 personal tax return.  That means, you not only pay income tax on your LLC income, you also pay self employment tax on top of it.  Ouch!

 

But as a disregarded entity, you may make an election to be taxed as an S corporation (or even a C corporation if you want to) instead of being a sole proprietor.  So how do you know you might be ready to be an S Corp?   Here’s my top three criteria:

 

1.  Steady net income.  If you have a loss on your business, that business loss can offset your other income on your tax return.  One of the big benefits of an S corp is to reduce your self employment tax.  If your business has a loss, you’re not paying self employment tax anyway so the S corp status wouldn’t provide much benefit there.  A good rule of thumb, but certainly not a deal breaker, is to have a net income of about $50,000 to make the tax savings be greater than the additional cost of separate tax returns and payroll expenses.  I work with business that have losses and still are S Corps.  The $50K income isn’t a requirement, it’s just sort of a break even point on costs.

 

2.  Separate Employer Identification Number (EIN)  and bank account.  If your business is set up as an LLC, you should have a separate EIN and a bank account for your business already.  I’m always surprised by people who skip this step, but it’s important.  You can get an EIN number for free, online.  It takes about 5 minutes.

 Learn more here.

And you really need a separate bank account.  You don’t want to co-mingle your business funds with your personal money.

 

3.  Discipline to make monthly payroll deposits and quarterly reporting.  One of the requirements of an S Corporation is that the owner has to pay him or herself a reasonable wage.  That means, even if nobody else works for you, you still need to write yourself a paycheck and pay yourself like an employee.  If you’re already making your quarterly estimated tax payments–you’re probably able to handle doing a payroll.  If you’re scrambling every year, you can’t keep on schedule etc, then I say don’t do the S corp.  Not being up to date on your estimated payments can be a problem, but the IRS can get really nasty if you’re behind on payroll tax deposits.

 

If you have no discipline, and your business easily has enough revenue to handle the payments–and still want to do the S Corp, then pay the extra money to hire a payroll company to do it for you.

 

Setting a reasonable wage is usually the most difficult thing to determine.  You want to go by what a person in your line of work would get normally get paid, that’s not always easy to figure.  You should probably have your wage be at least 1/3 of your net income unless you can document that people in your line of work usually make less.

 

Now, these are just my guidelines.  There’s really no “set in stone” criteria for S Corp status.  And really, before you make any change to the status of your business, what you really should do is run the numbers.  Sit down with your tax professional and – using the most recent tax return – run the business numbers as if you were an S Corp, a C Corp, and as a sole proprietor.  Don’t forget to include the costs of your payroll taxes when running the numbers.

 

Everybody’s situation is a little different.  Compare your numbers side by see to see if changing to an S Corporation makes sense for your small business.  That’s really the best way to tell.

 

 

 

Posted on by Jan Roberg

How to Settle Your IRS Debt for Less: Taking the First Step

reduce your debt - financial concept - isolated text in vintage letterpress wood type

 

You’ve heard those commercials on the radio or seen them on late night television.  “Settle your debt with the IRS for pennies on the dollar!”  Those companies charge a lot of money for something called an “Offer in Compromise.”  I’ve dealt with a lot of people who’ve paid between $5,000 and $8,000 for those services and gotten nothing-NOTHING for their money.  That’s good money they could have used to pay off their debt!

So, before you spend that kind of money, you should see if you have a fighting chance at getting an Offer in Compromise (OIC) first.  And here’s the best part–you can test it out for free.  FREE!

The IRS has an Offer in Compromise Pre-Qualifier.  It’s a wonderful little tool that will let you know if you even have a shot at an OIC before you spend money trying to get one.  Here’s the link:  IRS Offer In Compromise Pre-Qualifier

 

The first page has some pretty basic questions.  Are you currently filing for bankruptcy?  The answer has to be no, you can’t have an OIC if you’re in bankruptcy.  If you’re in bankruptcy, you’ll have to wait until that’s over to file for an OIC.   The next question is have you filed all of your tax returns.  You have to say yes–otherwise the result will be no OIC.  You’ll have to file those returns before filing for OIC, but you’re just trying to figure out if you could qualify in the first place.

Same thing with making your tax payments.  Before you file for OIC, you’ll have to have your estimated payments caught up for the current year and self employed people must have their payroll deposits made.

 

So, just to get past the first page, you need to answer NO, YES, NA, NA.  If that’s not true, you’ll need to rectify the situation, but you need to answer that way just to get past that screen to get to the meat of the program.

 

The next page is about where you live and the amount of tax that you owe.  (This is one good reason why you need to file all of your returns before you make an offer–how can you settle your debt when you don’t know how much you owe?)  But this is just a pre-qualifier, it’s to see if you may be able to make an offer so make your best guess.

 

The reason they ask about where you live is because the cost of living is different in different areas.  A New Yorker will be able to claim more in housing expenses than someone from St. Louis because the cost of living is higher there.  On the flip side, New Yorkers don’t get an adjustment for their other expenses which can hurt them when trying to qualify for an OIC.  But that’s why the question about where you live is on the pre-qualifier.

 

This page also asks about your age.  If you’re over 65, they make a higher allowance for your out of pocket medical expenses.  That’s why that question is there.

 

From there, on the next page the IRS is looking at your equity–what are you worth financially?  How much money do you have in the bank?   What’s the value of your home?  How big is the loan on it?   How much is in your 401(k)?  Do you have any stocks?  How about the value of your car?  How much do you still owe on your car loan?   So where it asks for the equity in your car, it means what is the value right now minus how much you still owe on your car loan, that’s your car equity.

 

Home owners with a lot of equity and people with retirement assets often lose out right here.  If you have assets, the IRS figures you can sell them or cash them in to pay your IRS debt.  Be honest when filling this out (remember, no one is going to see it but you.)  If you apply for an OIC, the IRS will be able to substantiate everything you say, so you may as well tell the truth to yourself on the pre-qualifier.

 

If your assets are too high to qualify for an OIC, the pre-qualifer will stop right here.  You may want to double check your figures before giving up completely, but most likely you’ll need to pursue a different route to get settled with the IRS.

 

If you do get to the next section it’s all about your income.  Wages, interest, dividends, child support, alimony, distributions from partnerships and S corporations.  Anything else?  The IRS doesn’t care if it’s taxable income or not.  They include social security, pension income and even Veterans benefits as being money that you can use to pay your tax debt with.

 

The IRS is looking for monthly figures here.  So, let’s say you get paid every two weeks.  That means 26 paychecks a year.  You’ll take the gross on your pay stub multiply that by 26, and divide by 12 to get your monthly pay.  Lots of people would just double their pay check, because for the most part, you’re getting 2 checks a month.  But the IRS doesn’t count that it way.  They multiply by 26 and divide by 12 it makes a difference.  You need to know how they’re calculating if you want to win this game.

 

The next page is all about your expenses.  How much is your rent or mortgage?  How much do you pay on your cars?  What do you spend on gas and groceries?  Child care?  Child support?  Alimony?  Utilties?

 

Life insurance is on the list too.  Now what they mean here is term life insurance.  A whole life policy where it’s like an investment isn’t considered to be a cost of living expense, but term life is.

 

So now you’ve input your income, your expenses, your debt and your equity and the IRS computer runs all these numbers together and either says you may or may not qualify for an Offer in Compromise.  It will also say what the IRS expects your offer to be given the information you put in.

 

Here’s the thing:  the IRS tool is only as good as the information you put in.  Most people do the IRS Pre-Qualifier the first time around just guessing at the answers.  (I think I’d get this much if I sold my house today, I’m guessing my loan balance is about $x.xx.)  This is just to get a ballpark.  To get a better picture, you’re going to want to really know what your home loan balance is.  Check out the fair market value of your house on Zillow.com.  Really look at what you spend for your utilities.   Get the actual numbers off your pay stub and do the pre-qualifier again with the actual figures.

 

Does it still look like you can do this?  Great.  Remember, page one?  Make sure all of your returns are filed first and you know how much debt you owe.  Don’t be in bankruptcy.  And most importantly, make sure that if you need to be making estimated tax payments, you’re caught up with making them.  Make sure these issues are taken care of before you submit an actual offer.  I suggest hiring a professional to do this, but if you’re going to do it yourself, start with the Offer in Compromise Booklet, here’s the link to that:  Offer in Compromise Booklet

 

And if you don’t qualify for an Offer in Compromise?  That’s still not the end of the world.  If you have exceptional circumstances, like huge medical expenses, you may still be able to make an OIC.  Be aware that your chances are significantly lower for getting accepted, but you can still make the offer.   But you’re going to have to demonstrate that your circumstances are exceptional and that paying the tax would create an undue hardship.  This seems silly, but I cannot stress this enough–simply not wanting to pay your tax is not considered an undue hardship.  (I get asked that question all the time.)  Paying for chemotherapy treatment for a cancer patient, that might get you somewhere.

 

Even if you cannot qualify for an OIC, you can still work out a payment arrangement with the IRS to get the debt handled.   You’re just going to have to pay the full amount of your debt.

 

If you have the time, please answer a question about this blog post.  The following link will take you to my little two question survey.  Thanks.  Survey

 

Posted on by Jan Roberg

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:  http://www.kiplinger.com/tool/retirement/T032-S000-minimum-ira-distribution-calculator-what-is-my-min/index.php

 

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.

Posted on by Jan Roberg

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? (http://robergtaxsolutions.com/2015/06/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.

Posted on by Jan Roberg

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.

Posted on by Jan Roberg

How Much of My Income Should I Be Saving?

How much money should you save?

How much money should you save?

 

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?)

 

 

Posted on by Jan Roberg

Tax Strategy for Exes that Get Along

Rear view of young couple consulting financial advisor at office desk

Exes who work together with their tax professional can often reduce their overall taxes or increase their refund, leaving them more money to spend on their children.

 

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.

Posted on by Jan Roberg

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

If you have an aging parent who is beginning to show signs of Alzheimer's or dementia, it's important to step in and assist with taxes so they don't wind up in trouble with the IRS.

If you have an aging parent who is beginning to show signs of Alzheimer’s or dementia, it’s important to step in and assist with taxes so they don’t wind up in trouble with the IRS.

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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:  https://secure.ssa.gov/apps6z/i1099/main.html.  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.