Category: Family

Posted on by Jan Roberg

Easiest Tax Quiz Ever!

Important tax quiz, who's your wife, who are your kids?

 

Here’s an easy Tax Quiz.

 

1. Are you married?  What’s your spouse’s name?

 

2. Do you have children?  What are their names?

 

I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?

 

You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.

 

It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born.

 

I’m not just giving you “what ifs”.  These are all real examples that happened to real people that I know.  The ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old when her father passed away.

 

We all like to think that if we died,  our family members would do the honorable thing and share accordingly. Hopefully they will, but it’s still better to put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.

 

Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.

 

You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?

 

So here’s your little Roberg Tax to do list.   Check your life insurance policy.  Check your retirement plan.  Check your investment and bank accounts.  And, check your will.  Make sure that the people you have listed as your beneficiaries are the people that you want to receive your money when you die.  If you’ve got the wrong people listed, you need to make some changes.

 

Your family loves you. They’d much rather have you be alive than be your beneficiary.  But, because you love them too, make sure you take care of that paperwork.

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

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

What Is a Dependent?

Dependents are usually your children, but they can be parents, siblings, or other relatives so long as they meet the requirements. A dog though, is never considered to be a dependent. Photo by Janice E. Roberg

Dependents are usually your children, but they can be parents, siblings, or other relatives so long as they meet the requirements. A dog though, is never considered to be a dependent.
Photo by Janice E. Roberg

 

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:  http://robergtaxsolutions.com/2012/05/eic-and-your-family-tree-what-counts-as-a-qualifying-child/

 

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 2017 is $4,050.  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.

 

IRS Interactive Tool for Claiming a Dependent

Posted on by Jan Roberg

Common Law Marriage and Your Tax Return

The married couple

Photo by Carrie Phisher on Flickr.com.

I often get contacted by people who are facing an audit based upon their “family relationship.” The IRS will send an inquiry about a person’s relationship to a child in an EIC claim and the person being audited will say that he or she is “common law” married to the child’s birth parent.

Here’s the thing: the rules for common law marriage are very specific. I know that a lot of people seem to think that a couple is common law married if they live together for seven years. That’s just not true. (I used to believe that too, it’s something I was told when I was a kid.)

But in reality, there are only certain states that recognize common law marriage. If a couple is deemed common law married in one of those states and then move to a non-common law marriage state, the new state still has to recognize the marriage.

In most common law states, you can’t just say you’re married, you have to “hold yourself out to be married”. For example: you call yourselves husband and wife, you file joint income tax returns, you use the same last name.

If you have a common law marriage, and you end your relationship, then you must get a divorce even though you never had a wedding.

If you’re going to argue to the IRS that you have a common law marriage, you need to know the facts. First, you need to know which states recognize common law marriage in the first place:

  • Alabama
  • Colorado
  • District of Columbia
  • Georgia (if created before January 1, 1997)
  • Idaho (if created before January 1, 1996)
  • Iowa
  • Kansas
  • Montana
  • New Hampshire (but only for inheritance purposes, this won’t work on your tax return)
  • New Mexico
  • Ohio (if created before October 10, 1991)
  • Oklahoma (but there’s conflict in the courts, marriages created before November 1, 1998 are recognized, common law marriages after that date may not be recognized)
  • Pennsylavania (if created before January 1, 2005)
  • Rhode Island
  • South Carolina
  • Texas
  • Utah

If you live in one of these common law states, you will need to check with your state to find out the rules that make you qualify as married. This link gives you an outline of some of the state requirements. http://www.uscis.gov/ilink/docView/AFM/HTML/AFM/0-0-0-1/0-0-0-26573/0-0-0-30679.html

Common law marriage is not to be taken lightly; it’s marriage. Before you use the common law marriage argument with the IRS, make sure you’re serioius about being married.

Posted on by Jan Roberg

Married Couples: Read Your Tax Return to Recognize Trouble

Happy couple

Photo by Ed Yourdon on flickr.com

About once a year, after preparing a tax return I’m asked, “Does my husband/wife have to see this?” Well, the answer is, “Yes, and he/she has to sign it too.”

A lot of people never really look at their tax returns, but it’s important that you do, even if you’re not the bread winner. Your tax return has a lot of information about you and your financial situation. If your spouse is in trouble, and you sign the return, then you’re in trouble too.

Here’s the number one thing to look at so you don’t get caught unaware: Adjusted gross income. That’s going to be the number at the top of page 2 of your 1040 tax return (line 38). (It’s also at the bottom on page 1, line 37.) That’s all the money you make, including wages, business income, interest, gains from stock – everything. This is the number that should match your lifestyle. It’s the single most important number on your tax return (and you thought it was the refund didn’t you?) If you live in a million dollar mansion and drive a Porsche, and the adjusted gross income is only $20,000, you’ve got yourself a serious problem. Flip side, if you’re living in a shack and subsisting off of peanut butter sandwiches but the adjusted gross income number is $300,000, you need to ask yourself where all the money is going. It’s quite possible that your income numbers and lifestyle don’t match up and there could be a very legitimate reason for that, but you need to know what that is.

Of course, I recommend that you look at everything, and ask questions about anything you don’t understand. Here are three issues for you to check where you don’t need to know any math:

  1. Look at the address on the return. If it’s not yours, you need to be asking questions.
  2. Look at the names of the dependents. Do all the kids live with you? If not, does your spouse have a legal right to claim any children that are listed? Earned Income Credit Tax fraud is a big deal, and if you sign the return, it’s your problem too.
  3. Also, look at the back of the return. Is the refund being direct deposited into your joint checking account? If not, where’s the money going and why?

One more thing that might give you pause to think would be on line 21: Other Income. This could be just about anything, but it’s where the gambling income goes. Most gamblers have a number on their Schedule A for the same amount to claim gambling losses, it would go on line 28. You can’t claim a bigger deduction than the amount of gambling money you win. If your lifestyle isn’t matching your adjusted gross income and you’ve got gambling on your tax return – your spouse’s losses could be much larger than what’s reported on your taxes.

In today’s economy, it’s important to be aware of your family’s full financial picture. For some couples, talking about money is difficult. You can use your tax return as a convenient way to open up the discussion. If there are money problems, you should come up with solutions as a team. That’s what marriage is supposed to be about anyway.

Posted on by Jan Roberg

Can I Claim My Indian Parents on My US Tax Return?

 

It's difficult to claim foreign parents on a US tax return.

Make sure you meet all of the requirements before you try to claim your parents as dependents on your U.S. income tax return.

 

Claiming parents is difficult, but it can be done if you pass the “Qualifying Relative” tests. But first, here are the two biggies that tend to get in the way:

  1. You cannot claim a married person who files a joint return with his or her spouse. So if your parents file a joint tax return in the United States, then you won’t be able to claim them. (I’m guessing they don’t, but I wanted to make sure that I told you about that.)
  2. To claim someone as a dependent, the person must be a US citizen, US resident alien, US national or resident of Canada or Mexico. Where my clients have had trouble before is when their parents visit the US, but their visas are only for 6 months, no longer. Then they don’t qualify as US residents. I just wanted to make sure you knew about the 6 month rule because that’s the issue most likely to cause Indian families trouble with claiming their parents.  After that, the rules are the same for anyone else in America who wants to claim their parents on their US income tax return.  You need to pass the qualifying relative test.

 

 

The Qualifying Relative Test has 4 parts:

  1. They cannot be considered a qualifying child of anyone else. No problem! As your parents, I’m guessing they’re both over the age of 24. Easy pass.
  2. Member of household or relationship test. As your parents, they do not have to live with you. Also, since they are your parents, they automatically pass the relationship test. Easy pass.
  3. Gross income test. This one is harder. They cannot have more than than $4,050 in gross income for the year. If they are retired, they might qualify, but if they are receiving a taxable pension, that could kick them out of being a dependent. In the US, for example, my mother in law receives Social Security income which isn’t taxable and it doesn’t count as gross income. Her other income is less than $4,050 so she would pass the gross income test for me to claim her as a dependent. Remember, once your parents become US residents, they will be taxed on their “world wide income.”
  4. Support Test. In order to claim your parents as dependents, you must provide more than 1/2 of their support. Let’s say that your parents each earn $3,000 a year in some type of pension. For you to be able to claim them as dependents, you would have to pay more than $3,000 for support for each of them. For example, if they live with you, then you would consider part of your rent or mortgage to be towards their support. Also food, clothing, medical expenses, etc. If they don’t live with you, who is paying for their rent, food, clothing, etc.? Using my mother-in-law as an example again: although I pay some of her bills, I definitely don’t pay over 1/2 of her support. She pays for her food and rent with her Social Security money so I don’t come close to the 50% of her support.

 

If you do find that you qualify to claim your parents, then you would complete the W7 forms for them, so that they have an ITIN number, and submit them with your next tax return.  I find that the best way to handle the W7 form is to take your tax return in to the nearest IRS office with your supporting documents (like passports) and submit them there.  Although it might be inconvenient making the trip, it will save you a lot of hassle in the long run.

 

 

Posted on by Jan Roberg

Split Exemption: Claiming One Child on Two Tax Returns — The Legal Way

IRS rules allow for divorced parents to split a child's exemption

Splitting an exemption is not illegal if you follow the proper rules. Learn how here.

 

 

Sometimes when I’m working with a divorced couple, it seems that the most beneficial way to prepare the tax return is to split the exemption for their child. When I say that, they always tell me, “But I heard that was against the law!” No—that’s not exactly true. But let me tell you, there is a right way and a wrong way to do it. If you follow the rules and do it correctly, it’s not only legal, it’s the right thing to do. Warning: if you don’t follow the rules, you could be breaking the law. I give a lot of advice to do-it-yourselfers, but if you’re planning to split an exemption, I recommend you go to a professional for it. (And if she tells you it can’t be done—hire somebody who knows what she’s talking about.)

 

With most divorced couples (I’m including here couples who were never married but have split apart and have lived apart for at least 6 months of the past tax year), one parent (usually the mother) has custody and the other parent (usually the father) has visitation rights. A lot of couples say that they have “joint” custody – for example, the kids stay with the dad every Wednesday night and every other weekend and with the mom the rest of the time. If you count the days, under IRS rules, the mother wins on the custody status. According to the IRS, wherever the child spends the most nights is where the child lives—if you’ve got one of those every other weekend and every Wednesday night agreements, the IRS doesn’t count that as being equal.

 

In my example, I’m saying the child lives with the mother. In IRS lingo, the mother in this example is the “custodial” parent and the father is the “non-custodial” parent.

 

In this case, the mom has all the power—she’s the custodial parent. The mom can claim all the benefits of having a child on the tax return. Those benefits include:

  • Head of Household filing status-a lower tax rate
  • Childcare tax credit-credit for money you spend on daycare
  • Childcare exclusion-so you don’t get taxed if your company pays for daycare
  • Earned Income Credit-this can be worth up to $3,094 for one child
  • Exemption for the child-a deduction of $3,600 off your income
  • Child Tax Credit-worth up to $1,000

 

When tax professionals tell you that you can’t split exemptions, what they’re reading is the section of Pub. 17 (that’s like our Bible for tax stuff) that says these things always go to the same person. What they’re not reading is page 31—the part that tells you about the special rules for divorced or separated parents. Under the special rules section, it says that the mom (our custodial parent) can release the exemption for the child to the father (the non-custodial parent). This lets him claim the exemption and the child tax credit on his return, while the mom keeps the head of household status, the dependent care credit, and the EIC on her return.

 

Why would anyone want to do this? Lots of reasons! Number one, of course, is to maximize the amount of money you get back from the government. A lot of times, after a divorce, the mom doesn’t have a very high taxable income. Remember, child support isn’t taxable. The dad has lost a lot of his deductions so his tax bill could be pretty high. He’d probably never qualify for an earned income credit anyway, but the $1000 child tax credit would really help him out. If the mom’s taxable income is really low, she wouldn’t even qualify for the $1000 child tax credit. In some cases she could give it away without it hurting her at all. Or maybe the father is behind on child support, she could negotiate: if he catches up on the child support by December 31st, she’ll sign the form to allow the father to claim the child’s exemption. Remember, when claiming the exemption for a child, the custodial parent has all the power. If the dad claims the child without permission, the mom can just file her own return fully claiming the child and sending the dad’s return to the IRS audit division. You don’t want that to happen.

 

Splitting an exemption isn’t the best choice for everybody. You have to look at both returns and see if it’s going to work. It also helps to be on good terms with the ex—this certainly doesn’t work well with people who are fighting.

 

There are a lot of other rules that I haven’t even touched. (That Pub. 17 book is 295 pages long!) But if you are divorced or separated, you need to know that splitting an exemption might be an option for you to use on your income tax return.

 

_____________________________________________________________________________________

Here are some links that might help:

EIC questions of any kind:  EITC Assistant

 

How to find free tax preparers:  Free Tax Help

 

How to find your local IRS office:  Find an IRS Office

 

Posted on by Jan Roberg

Father’s Day Quiz

dad's day!

Photo by Etsy Ketsy on Flickr.com

Here’s an easy Father’s Day Quiz for Dads. 1. What’s your wife’s name? 2. What are your children’s names? I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?
You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.
It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born. These are all true stories: the ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old.
We all like to think that our family members would do the honorable thing. Think that all you want. But put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.
Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.
You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?
So here’s your Father’s Day to do list: check your life insurance policy, your retirement plans, your investment and bank accounts, and your will to make sure that you have the people you want to receive that money listed as your beneficiaries. If you don’t, then that’s the first call you need to make Monday morning.
Your family loves you, and they’ll probably show it Sunday morning by giving you a new tie or maybe breakfast in bed. Let me tell you, you’ll get no glory by walking into the kitchen and announcing that you’ve “changed the beneficiaries” in your 401(k) or rewritten your will. That’s okay, you’ll know you did the right thing and that’s good enough for you strong, silent, Dad types. Happy Father’s Day.

Posted on by Jan Roberg

Hiring Grandma to be a Nanny

Hiring grandparents.

Usually you must withhold Social Security and Medicare taxes for household employees. But if you hire your parent to watch your kids, they may be exempt.

 

 

I was recently asked, “How do I go about hiring my Mom to be a nanny?”  Unlike me, who would just try to pawn my kids off on my Mom whenever I got the chance, this person wanted to make it official: 1. She wanted to pay her mother for the work, and 2. She wanted to make sure all the tax stuff was handled properly.  If you’re thinking about hiring your Mom (or your Dad) here’s what you should know.

First, when you hire your parent for domestic work (including child care, housekeeping, etc.) your parent is exempt from social security and medicare withholding.  This makes the whole “hiring your parent” thing a lot easier.  There is an exception though, and I think a lot of families might fall into this category:

If you meet both of these conditions:  1. Your parent cares for your child who is under 18 or is disabled and 2. You are either divorced or widowed and not remarried, or your spouse is permanently disabled.  Note:  the rules don’t say anything about if you were never married, just divorced or widowed.  So, if you meet these conditions, then you do pay the payroll taxes.  Otherwise, just pay your mom every week.  She can report the income on her tax return and you can report that you paid her and claim the child care credit. Super easy, right?

If you do have to do the payroll withholding, it’s not that hard.  For 2011, you’ll want to withhold 5.65% to cover the employee’s share of payroll taxes.  You’ll wind up matching that amount when you file the Schedule H with your tax return (the household employee tax.)  You have the option of paying your Mom’s share of the employee tax and not withholding it from her pay. (You just don’t withhold and you pay double the employer’s tax, still pretty easy.)

You do not pay FUTA (federal unemployment taxes) on your parent no matter what the circumstance.

You may be required to pay state unemployment insurance, you’ll have to check with your state.  Here in Missouri, you’ll pay unemployment insurance if you pay your parent over $1,000 per quarter.

You will need to provide your parent with a W2 after the year is over showing the income paid, whether you withhold the payroll taxes or not.

For more information of household employees, check out IRS publication 926.

To check out the Schedule H, click on this link:    Schedule H.

Addendum:  shortly after I posted this blog, I read an article about nanny’s that get paid over $150,000 a year.  If you pay your nanny over $106,800, then you don’t need to withhold the social security tax on any amount over that.  (You still withhold the medicare.)  If you do pay your nanny that amount, I’d just like to point out that not only am I really good with children, but I can also prepare my own payroll and do all the associated tax forms that go with it.  (Just saying.)