Posted on October 4, 2015November 15, 2018 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 January 7, 2014May 31, 2016 by Jan Roberg

Why Is My Tax Preparer Asking Me Such Nosy Questions?

With all the questions the IRS requires tax preparers to ask, getting your taxes done can seem more like an interrogation than tax prep.

I took a phone call from a fellow awhile back who was absolutely furious about some of the questions his tax preparer had asked him. The preparer had asked a whole bunch of questions about his kids and even asked to see their report card from school. He said, “My daughters are 4 and 2 years old. They don’t even go to school yet!”

So what’s going on here?

It’s all related to an IRS form—# 8867. Form 8867 has to be filled out and sent in with every tax return that has the Earned Income Tax Credit. Now, this form has been around for awhile, but it used to be that a tax preparer was just supposed to ask some questions and you’d keep that information to yourself. Now, the IRS expects you to send the form in with the tax return. If a tax preparer doesn’t complete the form and send it in with an EIC return—the IRS charges a $500 penalty to the tax preparer.

That’s $500 per return. You miss too many of those and you could be out of business. For most preparers, that’s more than what we charge to prepare an EIC return.

Now if you prepare your own tax return, you don’t have to worry about form 8867, it’s only for paid tax preparers. But if you have your taxes done at H&R Block, or Jackson Hewitt, or even me—that form must be completed, and signed, and sent with your tax return. (If your tax return is e-filed, we are required to keep the signed copy in our files.)

And the form seems to ask for more and more information every year. Now there’s a whole section about documents: documents to prove your kids live with you, documents to prove a disability, and documents to prove self-employment income. Tax preparers are now expected to look at a taxpayer’s documents to verify the information on an EIC tax return. School records, like report cards, are usually the easiest thing to use for documentation. Of course, report cards aren’t very helpful when your children aren’t in school yet. No documents, no form 8867. No form 8867, no tax return. No tax return, no refund.

It’s like the IRS is trying to turn regular tax preparers into the EIC police. It’s not a job we asked for, but it’s a regulation that we’re required to enforce. The penalties are so stiff that we’ll all be out of work if we don’t go along.

So remember, if you tax preparer asks to see your child’s report card, he doesn’t care if your son got a D in math or is a straight A student; he’s just trying to help you get your refund.

Posted on November 1, 2013May 31, 2016 by Jan Roberg

Tax Refund for Christmas 2013

Photo by B Rosen at Flickr.com

If you normally use your income tax refund to pay for your Christmas presents, listen up. You’ve got a problem.

First, nobody is doing Christmas loans. Remember when H&R Block and Jackson Hewitt used to provide loans against your refund? Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans. A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between. Most people had to wait for two to three weeks to get their refund.

Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21^st like they had previously announced—they won’t accept returns until January 28^th, and maybe not until February 4^th.

What does this have to do with Christmas? Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest. If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.

So what other options do you have? For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck. If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents. If it’s already December by the time you see this—it’s probably too late.

Here’s something else you need to know. If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return. You might think that you’re filing on January 3 or 4^th, but you’re not. What they’re doing is “stockpiling” your return. They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.

Why is that important to know? Because people think that they need to file early to get their refunds. But those early returns are often wrong. They’re missing information, or the software’s not fully functional yet. The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies. If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back. It’s too late. And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.

There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts. But you know what? Christmas comes every year. Every year! Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash. Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas. Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.

Posted on February 19, 2013May 31, 2016 by Jan Roberg

Why Isn’t My Refund as Big as my Friends?

I get this question every year. Why did my friend, neighbor, co-worker, relative, etc. get a bigger refund than I did? And the honest answer to that question is: I don’t know, I didn’t prepare their taxes. But here are some common reasons why some people might get a bigger refund than you do.

1. They withheld more. That’s the simplest explanation. Technically, you only get back if you overpaid your taxes. So, people who withhold too much, get refunds. If you get less, that actually means you win because you didn’t over withhold. (But trust me, I know. It really doesn’t feel like winning.)

2. They qualified for the earned income tax credit. EItC is one of those tax credits that you can actually receive even if you didn’t pay anything into the system. But—there are many requirements—most notably you have to have earned income. The EIC can make a huge difference in someone’s refund.

3. College tax credits—the American Opportunity Credit can be worth up to $2,500 on someone’s tax return. If your friend was attending school while you stayed home—that could be part of the difference also.

4. Different filing statuses—if you’re single, you could be in a higher tax bracket than your married friend. Or, if you’re married and your wife is also working—then you could be in a higher tax bracket than your single friend. Even though two people have the same job and earn the same amount of money—their circumstances outside of work could have a huge impact on their tax refund.

5. Different deductions—once again, it all has to do with things that happen outside of work. A person renting an apartment could be paying higher taxes than someone paying a mortgage because of the mortgage interest deduction—or any number of other deductions. There are just too many things to name.

6. Income—The more money you make, the more tax you pay. And people who make a lot of money have to pay the alternative minimum tax or AMT.

So, don’t waste your time worrying about your friend’s refund. The important thing is to think about what your goals are. Do you want a big refund? If so, how big of a refund do you want and what would you do with it?

Or would you rather take home more money with each paycheck? If so, what will you do with the extra take home pay?

But whether you choose a larger refund, choose larger take home pay, or maybe choose some middle ground; our job at Roberg Tax Solutions is to help you pay the least amount of tax while making smart decisions for yourself and your family. As long as you’re doing what’s best for you, it really doesn’t matter what your friends are doing anyway now does it?

Posted on January 25, 2013May 31, 2016 by Jan Roberg

How to Do the Split Exemption When Preparing Your Own Return

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 January 18, 2013August 13, 2017 by Jan Roberg

Filing Taxes While Going Through a Divorce

Divorce and taxes can be complicated

Going through a divorce is traumatic. It’s sad. And it’s a royal pain in the behind. On top of all the emotional stuff you’re going through, it can also really mess up your taxes.

Let’s say that right now you and your ex are still married but living apart. The divorce will be final this year, but you still need to file last year’s taxes. What do you do?

Scenario One: You’ve been apart and on your own with the children for over 6 months.

In this case, you are entitled to claim the head of household filing status, the children’s exemptions, EIC (if your income allows it) and the child care credit of your kids are in daycare. Basically you get everything.

Your ex would only be able to claim Married Filing Separately. That could really hurt him at tax time. That’s not your problem, just letting you know what his status is.

So—bottom line—if there’s a fight, you win. Be aware, that he’ll probably try to claim the kids anyway (I see that all the time.) Your refund could be delayed by 75 days. But, if he files first and you get rejected—don’t quit, you’re the winner.

Scenario 2: Couples who did not split apart until the second half of the year.

If you lived with your spouse at all during the last six months of the year, then you’re not allowed to claim the Head of Household filing status. Your only two options for your filing status are Married Filing Separate and Married Filing Jointly. Until your divorce is final, you cannot claim Single.

If you file separately, you lose the Earned Income Tax Credit. There are other deductions you can lose too, but the EIC is probably the most devastating to lower income taxpayers with children.

The incentive to file jointly in this scenario is much higher than if you’re allowed to claim head of household.

No matter which scenario you’re in, there’s another filing option: Married filing jointly.

First, if your ex is abusive or dangerous to you or your children in any way—don’t go there, stop here and file head of household or Married Filing Separate. Never risk physical danger.

But, if your ex has some redeeming characteristics—think about it, you’ve probably got adorable kids. He’s done something right somewhere along the line. Remember, you’re going to be dealing with your kids’ father for the rest of their lives even if you’ve divorced him. Mercy might be a good option for future family peace.

So, if you’re thinking about filing jointly, first, you prepare your own taxes, as HOH or MFS like above, claiming all of the exemptions you’re entitled to and figure out your refund.

Next, I recommend doing this at a tax place, not on your own—so that you give yourselves a “mediator”, figure what the refund, or tax situation would be if you two filed together.

Then you’re going to “split the refund”. That is, you set it up so that instead of getting one refund check to go into one bank account, you have the IRS send the refunds to your separate checking accounts (so you don’t have to rely on your ex to sign a check or give you money or anything like that.) You do that using the 8888 form. Here’s a link: http://www.irs.gov/pub/irs-pdf/f8888.pdf

BUT—and this is really important: OKAY, I’M CAPITALIZING AND WRITING IT SEPARATELY BECAUSE IT’S REALLY IMPORTANT: You don’t have to split the refund evenly. You make sure that you get the full amount of what you’d get if you filed separately. That’s only fair. If you were the one that supported the kids, paid the rent, etc, especially if you would be allowed to claim head of household, then you should get the whole of that much of your refund.

You make sure that the refund is split the way it should be and don’t leave the tax place until you see that the return has been e-filed. That way he can’t go back and change the dollar amounts.

Remember, you only file with the ex in order to keep him from totally tanking on his taxes because of the married filing separate classification. This might not help him at all—in which case you don’t file jointly.

Sometimes, you don’t want to file jointly with a soon to be ex. Here are some good reasons not to help the ex by filing jointly:

If he’s in some kind of tax trouble from before—keep away
If he owes on student loans or child support to a previous family—keep away
If he’s self employed—he’ll probably owe and is more likely to get audited—that’s a red flag, use your judgment. The EIC you’d get could be used to pay his self employment taxes and your refund probably wouldn’t be high enough to cover what you’d get by filing alone. But if he’s a decent person—and not crooked, the financial benefit to him could be amazing.
If he’s crooked. Seriously. If you suspect that he has cheated on his taxes in the past, don’t risk having your name tied to his tax return. Walk away.

Divorce isn’t easy on anybody. Make sure you know your rights and what you’re entitled to and don’t be bullied into doing something that’s not legal or in your best interests.

Posted on December 4, 2012January 14, 2017 by Jan Roberg

Can I Claim EIC if I Don’t Have a Job?

Raising a child is a big job, we just don’t get paid for it. In order to qualify for EIC, you need to have what the IRS considers to be “earned income” which comes from a paying job.

The short answer is no. But I’ve had about 10 phone calls or emails this week with this question, or something similar anyway, so I figured I should post something about it so people will understand it better.

First, EIC stands for the Earned Income Credit (or some people call it EITC for Earned Income Tax Credit, they’re the same thing.) The key phrase here is “Earned Income”. You earn income from a job—like working at Target, or you might be self employed like me. I own my business so I don’t get a W2 but I still earn income.

Social security, welfare, child support, food stamps, VA benefits, SSI, and gifts from friends or family—none of those count as earned income. Neither does bank interest, stock sales or dividends, or rental income. As far as the IRS is concerned, these things do not count as “earned income” for EIC. (I know those Smith Barney commercials say they “earn” their income, but if you’re making money in a Smith Barney account—it doesn’t get you anything for EIC either.)

Alimony—does not count as earned income for EIC, but it does count as taxable income and can affect how much EIC you can get. Don’t confuse child support with alimony. Child support ends when your kids grow up. Alimony lasts forever or has an end date that has nothing to do with children. Most people get child support, alimony is pretty rare these days.

So if you have a job that gives you a W2—you’re set because the W2 proves your income. But if you’re self employed—proving your income is harder.

The IRS is demanding that tax preparers have proof of your self-employment income before we can file your EIC tax return. We’ll be fined for not having proper information. So if you don’t have good records of your income, you might get turned away by your tax preparer.

So the obvious question is—what records do you need to prove your income? The IRS has a list that includes the following: a business license, 1099MISC forms, records of gross receipts, income summary, expense summary, and bank statements.

The 1099MISC is really the best proof of income if you receive those. 1099MISC is given to anyone performing work for a small business that got paid over $600 during the year. If you’re like me, you don’t get 1099MISC forms. Most of the work I do is for individual people, not businesses so I need to prove my income another way. But I’m an accountant—I have all the bank statements and business records and a license to back up my income. It’s what I do for a living. Not everyone is going to have my kind of records.

What do you do if you just clean Mrs. Jones’ house for $50 a week? Or, maybe you helped paint Mr. Anderson’s garage for $200 last spring. It’s all cash, you’re just helping out. Those don’t seem like they’re really jobs but they are. If Mrs. Jones gives you $50 a week for the whole year, then that’s $2,600. Add Mr. Anderson’s $200 and you’ve got $2800. It’s not much but it’s something.

If you’ve been doing odd jobs like that, you’ll need to get some kind of documentation. Put it in writing and have the people you worked for sign it. In the future, you should keep a log of every place you work: the date, the location, the person you worked for, and the type of work you did.

You can’t make stuff up! That’s illegal. And remember, EIC returns with self-employment are an audit target—if you lie about this stuff there’s a really good chance that you’ll get caught.

But, if you really did work and you really do deserve to claim EIC, then you should be claiming it. You just need to make sure that you’ve got your documentation in order so you can prove it.

The IRS has a website full of information about EIC. Check it out: EIC Home Page

Posted on November 27, 2012May 31, 2016 by Jan Roberg

What’s New with the Earned Income Tax Credit? You Need to Know This

If you usually claim the Earned Income Tax Credit (EIC) then you need to know about the new rules. Although the dollar amounts of the EIC have remained the same, the reporting requirements have changed dramatically. If you have your taxes done by a professional—then you need to be prepared for the additional paperwork.

So what’s different? It’s the new page 4 of Form 8867—Paid Preparer’s Earned Income Credit Checklist (http://www.irs.gov/pub/irs-pdf/f8867.pdf). That’s the form that tax preparers have to fill out and send in along with your tax return. The quick and dirty summary is: if a tax preparer doesn’t ask enough questions and fails to get enough information before submitting your EIC tax return, she’ll be subject to a $500 fine. Ouch. That’s $500 per tax return. A few bad tax returns can put your tax preparer out of business.

So what’s on this page 4? Well the first item is proving that the child you’re claiming EIC for really lives with you. Here’s what you can use to prove your child lives with you:

School records or statement
Landlord or property management statement
Health care provider statement
Medical records
Child care provider records
Placement agency statement
Social service records or statement
Place of worship statement
Indian tribal official statement
Employer statement

You don’t need to have all of these things, but you’ll need at least one thing to show your child lives in your house. The school records are probably the easiest if your child is of school age. For me, as a tax preparer, I would accept your child’s last semester report card as evidence of residency as long as the report card has your home address on it.

If you are claiming a disabled child, you’ll need to prove the disability. Here are the documents for that:

Doctor statement
Other health care provider statement
Social services agency or program statement

So with a disability, you have a double issue—proving residence and the disability. Although to be quite honest, I suspect that these statements would also include a home address on them and serve a duel purpose.

And if you’re self-employed, you’re going to need to prove you really have some sort of business with the following records:

Business license
1099MISC forms
Records of gross receipts
Income summary
Expense summary
Bank statements

These records are pretty standard for anyone who is self employed anyway so this shouldn’t be a burden. Bottom line here is—if you have a business, you need to run it like a business and keep proper business records.

In addition to the new paperwork requirements, of course you’re still going to have to show you and your children’s social security cards. Also, if you’re getting a bank product (where you pay for your tax preparation out of your refund) you’ll need to have a driver’s license or state ID card with your correct current address on it.

The IRS has already announced that people can expect their refunds to be delayed this year. For the fastest possible refund, you want to make sure that you’ve got all of your paperwork together before you even head to the tax office.

Be sure to check out http://www.eitc.irs.gov/central/main/ to answer any EITC questions you may have. Or call us and we would love to help.

Posted on May 22, 2012January 14, 2017 by Jan Roberg

EIC and Your Family Tree: What Counts as a Qualifying Child?

Qualifying child is an IRS term for claiming a dependent.

Family consists of the people we love, but the IRS definition of family is very strict based upon relationship. When filling out your tax forms, remember you need to use the IRS definition of family to claim dependents.

Some people honestly don’t know who does and who does not count as a qualifying child for EIC and they mess it up. But one of the most common types of EIC fraud is someone claiming a child that does not belong on his income tax return. If you make an honest mistake, the IRS agent is probably going to assume you’re committing fraud anyway. So I’m here to keep you out of trouble.

I come from one of those families where we use phrases like, “first cousin once removed.” When I was a child I remember going to a wedding reception and playing all evening with my “cousin”, only to be told later that she wasn’t a cousin, she was my “father’s half-brother’s step daughter.” (Yeah, do the calculation, in any normal family your uncle’s kid is a cousin, right?)

I married into a family that is “we’re all one big happy”. We don’t have steps, or in-laws, or halfs, we’re all brother, sister, mom, cousin, etc. I think most people are somewhere in between. But what we’re dealing with today is the IRS version of family and the IRS version of family goes like this:

Let’s start with you. You are the center of the universe and all family members revolve around you. What we’re trying to figure out here is what counts as a Qualifying Child for you—this eliminates all parents and grandparents and members of their generation.

You may count your brothers and sisters. You must be older than your brother or sister to claim them (unless they are physically or mentally disabled.) You can also include step brothers and
sisters, and half brothers and sisters, and adopted brothers and sisters.

A step sibling means that your parent married somebody else who had kids. There is no blood relation, but there is a marriage license. If your parent did not marry the other person, even though you all live together and think of yourself as one family unit, there is no IRS relationship.

A half sibling means that one of your parents had a child with someone other than your birth mother or father. Let’s say your mom had you and then left your dad for someone else and had a child—that child is your half sibling—you two share half of a gene pool. The counts with the IRS.

Adopted siblings are just that—they’re adopted. There will be court records showing that they were adopted and part of your family. Adopted children are always treated like natural born children for IRS purposes.

These people are all on your even level of the family tree. Imagine you’re standing there with your arms straight out with your brothers and sisters side by side—this is your generation.

Down below your generation is your son, daughter, step child, foster child or a descendent of any of them, for example grandchildren or great grandchildren. Additionally, any descendents of your generation—those are your nieces and nephews (or great nieces and nephews.) So let’s say your half brother adopts a child and he dies and you’re raising that child—that counts as your qualifying child for EIC purposes because he is your nephew.

A foster child is a child who has been placed by an authorized placement agency in your home or by a judgment or decree or court order. No matter what, a foster child has some legal paperwork involved. If your neighbor runs off and leaves her kid behind and you wind up raising her, she doesn’t count as a foster child until the courts come in and say she’s a foster child. This is one of the most common mistakes people make—claiming children they’re taking care of as foster children without the court documents to back it up. Without that legal piece of paper, the child is not a foster child.

Cousins are never qualifying children for EIC purposes.

Posted on May 15, 2012January 14, 2017 by Jan Roberg

Small Business: Proving You Have Income Without a 1099-MISC

Good records will prove your income to the IRS.

For some small businesses a simple wire bound receipt book is all you need to substantiate your income.

Now some people may be wondering, “Why would I want to prove I have more income than I have to?” But for many small business owners, that’s exactly the problem—you have income, you want to report it to the IRS, and you’re having a hard time proving it. This post is for you.

The number two reason for reporting your non-1099 income (number one of course being basic honesty) is qualifying for the Earned Income Tax Credit. 2011 sort of hit small business owners who normally qualify for EIC with a one-two punch. We had the new 1099 reporting requirements that upped the ante for so many businesses, and we had the new EIC tax preparer due diligence rules with one of the questions being “Do you have forms 1099-MISC to support the income?” With the next question being, “If not, is it reasonable that the business type would not receive Form 1099-MISC?” Here’s a clue: if you answered NO to the first one, you have to answer YES to the second.

So what types of businesses wouldn’t normally receive a 1099? Bunches of them! Face it, if you’re reading this—I’m guessing that your business doesn’t receive 1099s. Generally, it’s reasonable to expect that anybody who works for other people, as opposed to other businesses, would not receive a 1099. House cleaners, dog walkers, handymen, lawn mowing services, daycare providers, interior decorators, and even income tax preparers are all types of business that could easily never see a 1099. (Yeah, me too! Although I’m now getting 1099k forms because I take credit cards, I don’t get 1099-MISC for preparing personal tax returns. Maybe I’ll see some 1099-MISC forms from some of my business clients this year, but I never used to get them in the past.)

So, how does a small time personal service provider prove his or her income to the IRS? There are a couple of things you can do. I’m going to start with my favorite: the business bank account. This is what I do and several of my clients do it too. (Okay, because I’m their accountant and this is what I tell them to do.) Get an Employer Identification Number (EIN) for your business and set up a separate bank account for your business in your business name. Only business income goes in, only business expenses go out. You may have to put some of your own money in for a start up, and once you’re making money you’ll take out a draw, but you’ll label those as such. Other than those two items, your business checking account is pretty much your profit and loss statement as well. Now for a bigger company that would be over simplifying things, but for us little folks–I’m spot on. See this post for more information about getting an EIN number: Free EIN

Why does this make good proof? Because you’ve got a monthly record of your income and expenses. I also have deposit slips to back it up: Mary Jones paid me $200, Fred Smith paid $250. It’s a good solid audit trail. Here’s another post about bookkeeping and your business bank account: Banking and Bookkeeping

But what if you don’t have a separate account? Maybe your business is just too small to bother with the expense of an extra account. What if you’ve just got something really simple like watching the little neighbor kid for a couple of hours after school every day. There’s no contract, no business cards, no advertising. You get $100 a week from your neighbor friend. She pays you in cash—it never sees the inside of a bank because that’s your grocery money. It’s not much but it supplements your child support. How do you prove that kind of income?

The easiest way to prove your income if you provided child care is to have the person you provided it for claim your services on their tax return. You make them a daycare receipt, just like the ones regular day cares do showing the name of the child, how much they paid you and your EIN number. (You can use your social security number but I never recommend that. You can get an EIN number for free. Protect yourself.) This is doubly good because the IRS will get confirmation of your income from an outside source. You prove income, your customer gets a tax deduction, it’s a win/win situation.

But what if your business isn’t day care? What if you did something like mow lawns around the neighborhood and shoveled snow in the winter? Nobody’s going to be claiming you on their tax return, what can you do? In your case, I like receipt books. You can find different kinds at Office Max or any office supply store. I like the ones with a carbon copy—one for you, one for your customer.

Now if you have just one customer and you’re always going to the same place—you can just use the little one that just has a couple of lines and the amount on it. You might write, “Mowing, Mr. Jones, $30, 5/15/2012” on it. You know what you did, who you did it for, how much you got paid, and when. If you have multiple customers you’ll want the larger receipt books that include the address and phone number of the customer. If you do different types of jobs for different people, you might need the bigger ones so you can write down the type of work that you did for them as well.

You don’t have to have a 1099-MISC to prove your income to the IRS. You just need to have a system in place to document your income and you’ll be fine.