Tag: Child tax credit

Posted on by Jan Roberg

Tax Issues for Families of Children With Special Needs

Families of special needs children have tax issues that they may take advantage of.

 

 

I volunteer with an organization called The Arya Foundation  We help provide adaptive equipment for children with special needs.  Because of that, I had the opportunity to speak with a group of parents about tax issues for families of children with special needs.  I’ve written about tax issues and special needs before but with the new tax laws, and given some of the questions I was asked, I decided it was time to write about it again.

 

ABLE Accounts

First – let’s talk about ABLE accounts.  ABLE stands for the Achieving a Better Life Experience Act which was passed in 2014.  ABLE accounts are not tax deductible on your federal tax return.  But,iIn some states, like here in Missouri, they are deductible on your state tax return.  Contributions to the ABLE account can be made by anyone, mother, father, grandparent, even the beneficiary!  But the contributions are limited to $15,000.  ($14,000 in 2017.)  Now here in Missouri, you can only take a MO tax deduction for up to $8,000 or $16,000 for a married couple.

 

Wait!  You say.  You can only contribute $15,000 – how do you take a $16,000 tax deduction?  Good question!  Technically, each parent may contribute up to $15,000, so if you contribute over $8,000 you want to split the donation between the spouses.

 

What about grandma?  Does she get a deduction for contributing to the ABLE account?  In Missouri, only the account holder may claim the deduction, so that would be the person with the ABLE account, or the parent or legal guardian of the child.  That means, unless grandma is the guardian, she won’t be able to claim a deduction on her contributions to the account.

 

There’s a whole lot of good that goes with Missouri ABLE accounts, but there is one big disadvantage:  if your child dies, money in the ABLE account may be used to pay back the Missouri HealthNet program.  So if you have received HealthNet program benefits – you could forfeit the ABLE account funds in the event of your child’s death.  It’s a good idea to talk to a financial advisor about all of your investment options for your special needs child.  An ABLE is a wonderful tool, but it’s not the only option available in your tool box.

 

Child and Dependent Care Credit

Congress left the Child and Dependent Care Credit in tact.  Basically, you can receive a tax credit for money you paid for child care expenses for a non-disabled child up to age 13, or for any age disabled child or spouse.  The credit worth up to $1,050 for one child or up to $2,100 for two children.  (This is based on child care expenses of up to $3,000 per child.)

 

A similar benefit is a child care FSA which allows you to exempt up to $5,000 from your taxable income for child care.  You can’t claim a child tax credit on money that was placed in your FSA, but if you have two children and spent over $5,000 then you claim the Child Care credit on the excess over the $5,000 (up to the $6,000 mark.)

 

Using 529 Plan Funds for K-12 Education

This is great news for special needs families.  If you need to send you child to a special school, or need to hire a special tutor – now you can use 529 plan funds to cover those expenses – up to $10,000 a year.  And in Missouri, you can pretty much churn your deposit and turn around and spend it without penalty, taking advantage of that Missouri tax deduction  (Up to $8,000 per spouse.)

 

What About Transferring 529 Plan Money to the ABLE Account?  

Yes!  Now you can transfer money from a 529 account to the ABLE account.  Now the contribution limit of $15,000 still applies, so you could not transfer more than $15,000 in any given year.    But, if you are concerned about Missouri taking the ABLE money in the event of your child’s death, you could fund the 529 account, taking advantage of the tax deduction, and move the money to the ABLE as necessary.

 

Savers Tax Credit for ABLE Account Holders

This is new, and pretty cool.  Let’s say your special needs child is working and funding his or her own ABLE account.  (As opposed to an ABLE account funded by parents.)  Your child could qualify for the Retirement Savers Credit.  (Subject to Retirement Savers Credit rules.)

 

 

Increased Child Tax Credit

While we are losing the exemptions that we used to claim for children, the child tax credit is going up to $2,000 from $1,000.  And the phase out is increasing to $400,000 for married couples and $200,000 for single parents which will allow more families to claim the credit.  The child tax credit is limited to families with children that are under age 17.

 

New Threshold for Medical Expense Deduction set at 7.5%

This is one of the few tax provisions that is retroactive to 2017.  Originally, the threshold was set at 10% of adjusted gross income, but it was moved down to 7.5%.  What that means is that a family making $50,000 used to have to spend over $5,000 on medical expenses in order to qualify for a deduction.  With the new threshold, that same family would be able to claim a deduction on any expenses over $3,750.  Of course, with the new, higher standard deduction it will be more difficult to be able to claim medical expenses.

 

For a full list of expenses that you may be able to deduct, check out IRS Publication 502.

 

 

 

Posted on by Jan Roberg

How to Do the Split Exemption When Preparing Your Own Return

Kids on the bus

Photo by roarpett on Flickr.com

I have another blog post about split exemptions.  If you’d like more information about that, or if you’d like to know if you should even be doing a split exemption, then you should read that first.  Here’s a link to that page:  http://robergtaxsolutions.com/2011/11/split-exemption-claiming-one-child-on-two-tax-returns-%E2%80%94-the-legal-way/

 

This page is about the nuts and bolts of how to actually prepare a return with a split exemption.  I’ve gotten a lot of calls and emails asking me how it‘s done.  I’m using the 1040.com software package that’s on this website for the example.  If you’re using Turbo Tax and have questions, call the 800 number on the box.  They have trained experts to talk you through it.  (Sorry, Turbo Tax doesn’t pay me so I can’t tell you how to use their product.)  If you need Turbo Tax help but don‘t have the box, go to this site and send them an email, they’ll contact you: https://turbotax.intuit.com/support/contact/index.jsp?_requestid=15543

 

This is how it works in 1040.com

If you are the custodial parent, claiming the head of household status and the EIC, this is what you do:

 

1.  First thing:  Once you log into the software, the very first question you get is what is your filing status.  You’re going to say Head of Household.

 

Then you’ll complete the rest of the form with your name and address information.

 

The next section is the dependents screen.  First it asks if someone can claim you as a dependent.  If you’re splitting an exemption, then the answer to this had better be “No.”

 

Do you have any dependents to claim:  Yes

 

Did you pay for the care of a child, etc:  Yes if you did, no if you didn’t.  When splitting an exemption, the custodial parent is the one who gets to claim the child care credit if your child is in daycare.

 

Go to the next page.

 

Now you’re on the forms review page.  Under dependents it says “add a form.”  Click on that.

 

On the dependent screen, you are going to fill out all the information about your child; the name, social security number, etc.  But in the check boxes below you are going to check the box that says:  “Child is not your dependent but does qualify you to file as Head of Household”.

 

The next section is for Child and Dependent Care Expenses—If you have those complete that section.

 

The next section is about EIC.  Answer those questions.  Generally the answers should be NO, NO, NO.  Question 13a—where it asks is someone else qualifies to claim this child?  Your ex cannot claim EIC—your ex is claiming the dependency exemption, so you should answer NO.

 

When you finish the screen, it will send you back to the dependents screen again.  If you have another child, you’ll add another form.  If you’re done, click next.

 

Then you’ll complete the rest of the program by inputting your wages and other income.

 

After you’ve input your income information, you’ll be inputting your deductions.

 

Then you’ll have the state information for your state return.

 

You’re almost done.  There are more questions you’ll need to answer before you finish.

 

When you get to the part where you “Review Your Return” you want to click on the “Preview Your Return” section.  This is where you check to make sure it’s right.  This is what to look for:

1.  Your filing status will be Head of Household, box 4

2.  In the line below it, it will have your child’s name and social security number

3.  In the exemptions section, it will show that you have claimed yourself; it will not show your        child’s name in that box at all

4.  On page 2 of your 1040 form there will be nothing on line 33, or line 39 (the child tax credits).

5.  On page 2, if you do qualify for EIC, then there will be something on line 38a.

 

If that’s how your return comes out, then you’ve done the split exemption correctly.

 

Note:  if you have other children that will not have split exemptions, then you will have names in the dependents screen and probably numbers in the child tax credits line.  You might want to do the split child first and check the return, then go back and add the other children.

 

If you are the parent claiming the exemption and the child tax credit, but not the head of household status and EIC—then here are your instructions.

 

1.  Starting from the beginning, you will first choose your filing status.  The split child cannot make your Head of Household so unless you have another child that lives with you; this is not your status.  You’ve going to be married or single.

2.  When you get into the dependents – dependents information, you will answer the questions,

Can someone else can claim you as a dependent?  No.

Do you have any dependents to claim:  Yes

Did you pay for the care of a child, etc:  No—even if you paid for the child care expenses, since you are not the custodial parent, you are not entitled to this tax credit?

3.  In the dependent screen, you will fill out all the information about your child, but the box you are going to check is “Child did NOT live with you due to divorce or separation.”  In the section that says “months lived with you” you will answer “zero.”  Even if your child did live with you for a few months, check zero here to make the program work.

4.  You will check NO under the child care expenses.

5.  In the EIC section you will check the box that says, “Dependent is not eligible for EIC.”

6.  Next you’ll complete the rest of the tax return like you would any other.

7.  When you get to the finish, you’ll want to check your return to make sure your child is listed correctly.

When you review your return, your filing status will be single (or married if you’ve remarried) but it will not be head of household.

You child’s name will be listed in the exemptions section.

You will have a number on one or both of the child tax credit lines.

You will not have anything listed on the EIC line.

If both parents file the split exemption correctly, you should have no problem with the IRS over claiming your child.

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.

 

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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