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***The above individual forms are for the use of our existing clients.  Please contact our office if you are a new client and we will provide you with the information and forms needed. 

 

Links to external sites are provided as a courtesy. They are not endorsed and their accuracy has not been verified by our firm or staff. 

Why use a tax professional when I can buy tax preparation software?

Tax software producers claim their products can prepare complex returns, but you may want to think twice before relying on software for all your tax and financial guidance. Although software may help you make choices on your tax return that result in the lowest tax this year, you should consider the long-term effect of your choices in order to pay the lowest tax over a number of years. 

With a professional tax preparer you get more than just a tax return. An established relationship with a tax professional who is familiar with your finances, your family, and your goals can prove to be invaluable. 

If you prepare your own returns, it's a good idea to let a professional preparer review your returns at least every three years. That's because you only have three years to amend a return to change any items of income, deductions, or credits that were reported in error or omitted on your original return.

Here is a check list of the most common items that we will need to complete your return:

New Clients:

  1. Copies of prior federal, state and local returns and depreciation schedules if applicable (at least one year, preferably three)
  2. Copies of both parties’ drivers’ license

All Clients:

  • Completed Client Questionnaire
  • All return packets or mailing labels sent to you by the various taxing agencies
  • All W-2's
  • All 1099 forms received confirming income from interest, dividends, retirement, social security, disability, unemployment, gambling winnings, 1009K for business credit card receipts, etc.
  • All income information for children if you want us to prepare their required returns
  • Year-end statement of mortgage interest (Form 1098), escrow activity and balance on mortgage or home equity loans and real estate taxes paid
  • Total of all receipted charitable contributions, and details for any non-cash contributions over $500
  • Copies of all Trust, Partnership or S-Corporation K-l's (send separately later if everything else is ready, and let us know it's coming)
  • If you bought, sold or refinanced real estate, then a closing statement for each transaction
  • If you sold any shares of mutual funds and basis information is not provided by the broker, detail all activity in the funds sold from original purchase date through date of sale date (year-end summary statements are ideal)
  • If you are claiming auto mileage as a deduction- for business or rental properties, we need to know: total miles, commuting miles, and business miles driven for the year.
  • If you lease your car or are deducting actual expenses, please also provide: original value of the car (what you could have bought it for) and date of lease, and all expenses for lease payments, gas, car washes, licenses, insurance, tires, repairs, etc.                  
  • Copies of any federal, state or local tax correspondence during the year, including all payments made or refunds received.
  • All legal documents for formation, sale or purchase of a business during the year, All legal documents for divorce decrees
  • Voided check for account where refunds should be direct deposited (optional)
  • Signed Engagement Letter
  • If you purchased energy efficient products that may qualify for a tax credit, please provide a copy of the manufacturers certification statement and the purchase invoice.

What factors can cause an IRS audit?

Matching programs. Information returns (such as Forms W-2 and 1099) are matched to your tax returns, using your social security and other identifying numbers. Discrepancies usually generate an IRS notice requesting you to explain the differences. Unclear or evasive answers can generate a tax assessment, or you may be summoned to the local IRS office to explain the differences to an auditor.

Occupation. According to the IRS, returns filed by certain taxpayers, such as self-employed individuals and farmers, understate taxable income at a higher than average rate. Therefore, higher percentages of these returns are audited.

Statistical analysis. The IRS uses computer software to analyze hundreds of variables to arrive at ratings (called DIF scores) for tax returns. The program compares actual returns filed to "typical" taxpayer profiles. Unusual features, such as higher than average deductions, result in higher DIF scores, which increase the likelihood of an audit.

You can reduce your chances of being audited by filing an accurately prepared return with appropriate supporting documentation.

Should I convert my IRA to a Roth IRA?

Roth IRAs are very attractive because once money is inside a Roth, it may never be taxed again. However, before you rush to convert your traditional IRA to a Roth, there are a number of factors you should consider.

  • How much after-tax money will you end up with for retirement? You’ll need to make some assumptions about your future tax rate, your retirement age, and your investment return. Then you’ll have to run the numbers to see whether you’d end up with more money, after taxes, if you left it in your traditional IRA or if you converted to a Roth.
  • Do you have enough cash to pay conversion taxes? When you convert, you'll owe regular income taxes on the amount you roll over to your Roth. If you have to sell outside investments to pay taxes on the rollover, you’ll owe taxes on any gains from those sales as well. If you have to cash out part of your IRA to pay taxes, you’ll be socked with a 10% penalty unless you are over 59½.
  • How soon will you need the money? Generally, you cannot withdraw the money within five years of the conversion without a penalty.
  • Will the conversion income push your adjusted gross income to the point where it will cost you valuable tax benefits, such as exemptions, deductions, and tax credits?
  • Will it push you into a higher tax bracket?

As you can see, deciding whether a Roth conversion is right for you involves careful planning.

How much do you charge for tax preparation?

There is no one size fits all fee unfortunately. We recommend a quick consultation to learn about your tax situation and to review your prior year return. After this initial meeting/review, we will provide you with a competitive quote. Our fees typically range between a minimum of $ 500 to $ 800 for individual income tax preparation. Our business tax returns have a much broader range of fees depending on the service provided. We can often find tax savings that far exceed our fees.

When is the divorce official (for tax purposes)?

A taxpayer is considered unmarried for the whole year if they have obtained a final decree of divorce OR separate maintenance or have obtained a decree of annulment by the last day of the tax year.

Links

Additional Resources

Links to external sites are provided as a courtesy. They are not endorsed and their accuracy has not been verified by our firm or staff.

Why should I choose Stephenson & Warner over one of the national tax preparation franchises?

We only hire degreed professionals and CPA’s for our tax preparation. We employ the vast majority of our tax preparers full-time so they live and breathe taxes year round. Each tax preparer receives continuing education throughout the year, not a training course. This is our livelihood, not a part-time job.

How long do I need to keep my tax records?

The IRS can audit your return for up to three years after you file a return. However, if you omit more than 25% of your income from a return, that period increases to six years. To be safe, keep tax records for seven years after the filing date. State regulations should be considered also.

How can my chances of audit be reduced?

If you want to reduce your chances of being audited, make sure your return is accurately prepared. Attach supporting documentation to your return for any extraordinary items.

Who owes the Net Investment Income Tax? (NIIT)

Basics of the Net Investment Income Tax

1. What is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code (IRC). The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

2. When did the Net Investment Income Tax take effect?

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts for their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.

Who Owes the Net Investment Income Tax

3. What individuals are subject to the Net Investment Income Tax?

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status

Threshold Amount

Married filing jointly

$250,000

Married filing separately

$125,000

Single

$200,000

Head of household (with qualifying person)

$200,000

Qualifying widow(er) with dependent child

$250,000

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

If you are an individual that is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

4. What individuals are not subject to the Net Investment Income Tax?

Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under IRC section 6013(g) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the proposed regulations provide these couples special rules and a corresponding IRC section 6013(g) election for the NIIT.

5. What Estates and Trusts are subject to the Net Investment Income Tax?

Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins which was as low as $12,500 for 2018, taxable year. Beware of special computational rules for certain unique types of trusts, such a Charitable Remainder Trusts and Electing Small Business Trusts.

6. What Trusts are not subject to the Net Investment Income Tax?

The following trusts are not subject to the Net Investment Income Tax:

  1. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under IRC section 501, and Charitable Remainder Trusts exempt from tax under IRC section 664).
  2. A trust in which all of the unexpired interests are devoted to one or more of the purposes described in IRC section 170(c)(2)(B).
  3. Trusts that are classified as “grantor trusts” under IRC sections 671-679.
  4. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).

What is Included in Net Investment Income

7. What is included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of IRC section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #12 below).

8. What are some common types of income that are not Net Investment Income?

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102),self-rental income, and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A, or 457(b)).

9. What kinds of gains are included in Net Investment Income?

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

  1. Gains from the sale of stocks, bonds, and mutual funds.
  2. Capital gain distributions from mutual funds.
  3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).

Gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner).

10. Does this tax apply to gain on the sale of a personal residence?

The Net Investment Income Tax will not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in IRC section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under IRC section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 IRC section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 IRC section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

11. Does Net Investment Income include interest, dividends and capital gains of my children that I report on my Form 1040 using Form 8814?

The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and (b) amounts attributable to Alaska Permanent Fund Dividends.

12. What investment expenses are deductible in computing NII?

In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.

13. Will I have to pay both the 3.8% Net Investment Income Tax and the additional .9% Medicare tax?

You may be subject to both taxes, but not on the same type of income.

The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income. See more information on the Additional Medicare Tax.

How the Net Investment Income Tax is Reported and Paid

14. If I am subject to the Net Investment Income Tax, how will I report and pay the tax?

For individuals, the tax will be reported on, and paid with, the Form 1040. For Estates and Trusts, the tax will be reported on, and paid with, the Form 1041.

15. Is the Net Investment Income Tax subject to the estimated tax provisions?

The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates, and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.

16. Does the tax have to be withheld from wages?

No, but you may request that additional income tax be withheld from your wages.

17. What form will I use to report the Net Investment Income Tax?

The IRS has released a draft of Form 8960, which been developed for the purpose of reporting the Net Investment Income Tax. Click here to see a draft of Form 8960 or go to www.irs.gov/draftforms.

Examples of the Calculation of the Net Investment Income Tax

18. How does a Single taxpayer with income less than the statutory threshold calculate the Net Investment Income Tax?

Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

19. How does a Single taxpayer with income greater than the statutory threshold calculate the Net Investment Income Tax?

Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.

Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000.

The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).

Additional Information

20. Other than these FAQs, where can I find additional information about the Net Investment Income Tax?

Find it in the full text of the proposed regulations, request for comments, and information on the public hearing.

21. The proposed regulations are effective for tax years beginning after Dec. 31, 2013, but the Net Investment Income Tax went into effect on Jan. 1, 2013. May I rely on the regulations for guidance on the Net Investment Income Tax during 2013?

Taxpayers may rely on the proposed regulations for purposes of compliance with section 1411 until the effective date of the final regulations. To the extent the proposed regulations provide taxpayers with the ability to make an election, taxpayers may make the election provided that the election is made in the manner described in the proposed regulation. Any election made in reliance on the proposed regulations will be in effect for the year of the election, and will remain in effect for subsequent taxable years. However, if final regulations provide for the same or a similar election, taxpayers who opt not to make an election in reliance on the proposed regulations will not be precluded from making that election pursuant to the final regulations.

Last Updated November 22, 2013

http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

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Hamilton

January 3rd- Filing due date

Monday- Thursday                           8:00 AM - 6:00 PM
Friday                                             8:00 AM - 5:00 PM
Saturday                                         8:30 AM - 3:00 PM


April 18th - December 31
Monday- Friday                                8:30 AM - 5:00 PM
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West Chester 

January 3rd- Filing due date

Monday- Thursday                           8:00 AM - 6:00 PM
Friday                                             8:00 AM - 5:00 PM
Saturday                                         By Appointment Only


April 18th - December 31
Monday- Friday                                8:30 AM - 5:00 PM
                    Closed from 12:00 - 1:00 PM for Lunch

 

Oxford

Tuesday's by Appointment Only

Are our divorce costs tax deductible?

Legal fees and court costs for getting a divorce are not deductible. However, under Section 212, attorney fees paid in divorce are deductible when:

  1. In connection with the determination, collection, or refund of any tax year, and
  2. For the production or collections of income, i.e. alimony.

Legal fees for tax advice in connection with divorce and legal fees to get alimony are deductible. A breakdown showing the amount charged for each service should be requested.

Payments

How can an accountant help me?

A good accountant can do more than just prepare your tax return. He or she can assist you with:

  • accounting and record keeping
  • income tax planning
  • business planning and problem solving
  • computer software selection and use
  • estate tax planning
  • bank loan assistance
  • your other tax, business, and financial concerns

An accountant can provide you with year-round planning for your tax, financial, and business affairs. Such planning is essential if you want to realize your financial goals. They can often find savings that far exceed their fee.

Is there anything wrong with getting a big income tax refund every year?

Yes, it means you're giving the IRS an interest-free loan when you could have the use of that money during the year to invest for yourself. As early as possible each year, you should take the time to estimate your total tax bill for that year. Consider adjusting your withholding so that the amount your employer withholds comes closer to what you will actually owe on your tax return. You can change your withholding at any time during the year by giving a new Form W-4 to your employer.

Could my business be reclassified as a hobby if audited?

The IRS is suspicious of any business activity that looks like it provides personal enjoyment, such as antiques, photography, horse racing, etc. If you make a profit in any three out of five consecutive years (two out of seven years for horse activities), your activity is presumed to be a business, and any business losses are deductible. 

If you fail to show a profit, you may still qualify to deduct your losses if you are running your business with the intent of making a profit. For example, the way you keep records, the amount of time you spend in the business, and your financial risk in connection with the activity are some of the factors the IRS will consider.

Even if your hobby doesn’t qualify as a business, your hobby income must still be reported on your income tax return. If you itemize your deductions, you can write off your hobby expenses up to the amount of your hobby income.

What if my spouse no longer lives with me do I still have to file as married?

A married person living apart from their spouse is treated as an unmarried taxpayer if all the following apply:

  1. Files a separate return
  2. Maintains a household, which, for more than half of the taxable year, is the principal place of abode of a child for whom the taxpayer is entitled to a dependency deduction.
  3. Furnishes more than one-half of the cost of maintaining the household, and
  4. Does not have the other spouse living in the household during the last six months of the taxable year.

If all apply, the taxpayer may file as single or head of the household.

Refund Trackers

Can I get an extension of time to file my tax return?

April 15* is the tax filing deadline for most individual income tax returns. If you can't complete your tax return by then, file Form 4868 with the IRS to give yourself an automatic six additional months to complete your return.

Caution: Form 4868 only extends your filing deadline; it does not extend your tax payment deadline. If your tax is not paid in full by April 15, you'll face interest and penalties on the balance owed.

* When April 15 falls on a Sunday or legal holiday, the deadline for filing is moved to the next business day.

Who is Liable for the taxes?

Divorced taxpayers are still jointly and individually responsible for any tax, interest, and penalties on joint returns filed before the divorce. The divorce decree can’t remove this obligation and responsibility. The IRS does not care who agreed to pay per divorce decree.

What if I can not pay the entire amount due on my federal tax return?

The IRS offers several options to taxpayers who cannot pay their taxes in full when they file their return. 

  1. You can charge your taxes on a credit card. The IRS’s credit card service providers charge a "convenience fee" of about 2.5% in addition to the interest rate your credit card company charges on your balance.
  2. You can request to pay your taxes to the IRS in installments. If you owe less than $25,000 and agree to pay off the balance within a five-year period, the approval process is pretty straightforward. Larger balances can be set up on an installment plan too, but they won’t be automatically approved. The IRS will continue to add interest and penalties to your account until you pay off the balance.
  3. You can enter into an "offer-in-compromise" agreement with the IRS to settle your tax bill and get off to a fresh start. Under this arrangement, the IRS will settle your account for a portion of the tax you owe if you agree to file and pay your future taxes on time. You'll have to submit financial information to the IRS to prove that you don't have the money or ability to pay off the entire balance.

What are qualified alimony payments?

Alimony payments to or for a spouse under a divorce or separation instrument must be in cash. Transfers of services or property, including a debt instrument of a third party or an annuity contract, execution of a debt instrument, or the use of property do not qualify as alimony.

Payments to a third party under the terms of a divorce or separation instrument can qualify as a cash payment to the spouse. Common third party payments include medical expenses, rent, living expenses, mortgage payments, utility bills, education, and income taxes.

Please note that alimony payments will no longer be tax deductible, nor taxable to the recipient, for divorces entered into after 2018.

What kind of penalties will I be charged if I pay my taxes late?

If you fail to pay all your taxes by the April 15* deadline, you'll have to pay the IRS interest and penalties on your underpayment. The IRS charges interest at its prevailing rate, which it publishes quarterly. The late payment penalty is generally .5% for each month there is an unpaid balance, up to a maximum 25% penalty.

When you file a late return with a balance due, another nasty penalty kicks in - the late filing penalty. This penalty amounts to 5% per month, for a maximum of five months. For example, if you owe $5,000 in taxes and failed to file a return or an extension by April 15, the failure-to-file penalty could build up to as much as 25% or $1,250.

* When April 15 falls on a Sunday or legal holiday, the deadline for filing is moved to the next business day.

Who is able to claim custody of our child on our tax return?

If child custody is not determined by decree of divorce, separate maintenance, or custody decree, then the parent who has physical custody of the child for the greater part of the year is considered the custodial parent.

Proposed Reg 1.152-4 ( c ) provides that if a child resides with each parent for an equal number of nights, the parent with the higher adjusted gross income is the custodial parent. (if not determined by any decree)

What's the best filing status?

It depends. The "best" filing status for you depends upon which status you can qualify for and your particular circumstances. Tax savings are only one consideration when selecting your filing status. For example, you might not want to file a joint return with your spouse for personal reasons. Here are the five filing statuses and the qualifications you must meet to use them. 

Single - You can use this status if you are unmarried at the end of the year.

Head of household - You can choose this status if you are single at the end of the year, and you have a dependent and meet certain requirements. In some cases, married, but separated individuals can also use this status. If you're eligible to claim head of household status, you'll probably pay less tax than filing as a single taxpayer.

Married filing joint - You can use this status if you are married at the end of the year. However, you cannot use this status if you are legally separated on the last day of the year.

Married filing separate - You can use this status if you are married, but choose not to file a joint return with your spouse or if you are legally separated on the last day of the year.

Qualifying widow(er) - You can choose this status if your spouse died in the last two years, you claim a dependent, and you meet certain other requirements. You then can use the more favorable tax rates for married filing jointly rather than the rates for single taxpayers.

I have child care expenses.  Can I claim them under the Child-Care Credit?

The custodial parent will qualify for the child-care tax credit even if the custodial parent cannot claim the dependency deduction for a child who is under age 13 or disabled. (i.e. because of a waiver Form 8332)

Who is eligible for head of household filing status?

Head of household is a very beneficial filing status. It is available for unmarried taxpayers and certain separated taxpayers who provide a home for a qualifying person, such as a child or a parent. If you qualify, you'll generally pay less tax as a head of household filer than as married filing separately or a single taxpayer.

Can I claim my child’s medical expenses if I am not the custodial parent?

A child of divorced parents is treated as dependent of both parents for the medical expense deduction. A parent can deduct medical expenses they paid for the child even if an exemption was not claimed.

Who can I claim as my dependent?

You must pass five tests in order to claim someone as a dependent, including the support test, the citizenship test, member of household/relationship test, the gross income test, and the joint return test. The rules are complicated so give us a call for assistance. Also, just because you can claim someone as your dependent, you may not find it beneficial to do so.

What happens to tax refunds if support payments are due?

If a taxpayer is due a refund, all or part of the refund may be used to pay the past due amounts. These debts include:

  1. Child support payments
  2. Spousal support payments
  3. Federal debts, such as student loans

U.S. Supreme Court held that the tax-intercept law applies to refundable income tax credits as well as to tax payments.

When would my child have to file a tax return?

Children claimed as a dependent will need to file a tax return if he or she has:

  1. Earned income from wages of more than $12,000.
  2. Earned net income from self-employment (from a paper route, for example) of $400 or more.
  3. Investment income only (such as interest and dividends) of more than $1,050, or if no one claims your child as a dependent, your child has the same filing requirements as any other taxpayer.

What about the property and things that we owned together? 

Property laws of each state vary. What is owned separately and what property is marital.  Ohio is an equitable distribution state.

Equitable Distribution States. Assets and earnings accumulated during marriage are divided equitably and fairly at divorce. Some equitable distribution states require the “guilty” spouse to receive less than a full share. Most states follow the equitable distribution rules.

All states permit a married person to treat certain earnings and assets as separate property. In the equitable distribution states, separate property includes:

  1. Property acquired by spouse before marriage
  2. Property received in exchange for separate property
  3. Compensation for personal injury
  4. Gifts made to one spouse only
  5. Inheritance obtained by only one spouse.  

How can I qualify for a home office deduction?

If you run a business from home, you may be entitled to a home office deduction. Your business space doesn't have to take up an entire room, but you have to use that space exclusively for business purposes.

You must also meet at least one of the following conditions:

  1. Your home must be your “principal place of business." In other words, it's the only place you have to conduct administrative and management activities, such as billing customers, keeping the books, setting up appointments, or placing orders.
  2. You use the space to meet with your customers, clients, or patients.
  3. You use a space in a separate structure not attached to your home; for example, a detached garage.
  4. You use the space to store inventory or product samples, and your home is the only fixed location of your business. For example, you are an outside salesman, and you store product samples in your basement.
  5. You use the space as a licensed day-care facility.

Caution: Taking the home office deduction will limit the tax-free gain on the future sale of your home.

What should we do with the house?  What do the tax laws say about purchases between spouses?

Should a spouse purchase the marital residence from the other spouse and borrow funds to do so?  If one spouse issues a note to the selling spouse, the interest on a note is not deductible unless the note is secured by the residence. The selling spouse does not report any gain or loss on the sale under Section 1041. However, the deferred gain is transferred to the purchasing spouse, since the basis carried over to the buyer. Receiving low basis property, without a basis increase when the residence is purchased from a spouse creates a deferred tax liability. However, the Section 121 exclusion is available if the property is a primary residence and applicable requirements apply. (the current $500,000/$250,000 exclusion on sale of primary residence)

If the transferee spouse or former spouse purchases an interest in tangible personal property or real property used in a trade or business or held for investment:

  1. The purchasing spouse will not acquire any additional basis for any amounts paid for the property.
  2. The transferred property may be subject to depreciation or investment credit recapture on later disposition, and
  3. If the property is subject to a mortgage, it can be subject to mortgage in excess of basis rules on later disposition.

Like kind exchanges are available to the purchasing spouse at a later date. 

What is a capital gain?

A capital gain results when you sell certain property at a profit. In general, everything you own for investment or personal purposes is a capital asset, including your, stocks, bonds, collectibles, and home. Capital assets do not include business property, such as accounts receivable, inventories, and notes.

Long-term capital gains (generally gains on assets held more than one year) receive more favorable tax treatment than ordinary income. For example, the maximum long-term capital gain rate is currently 20%, whereas most ordinary income tax rates are much higher.

Who claims the house interest and taxes?  What about the mortgage for the family residence?

The tax treatment of housing costs depends on how the home is owned. If the non-occupying spouse owns the entire home, all housing payments made by the non-occupying spouse under the terms of divorce are made for the non-occupying spouse’s benefit and are not alimony.The non-occupying spouse is entitled to deduct mortgage interest and real estate taxes.

If the occupying spouse owns the entire home, all housing payments required to be made under the terms of a divorce are made for the occupying spouse’s benefit and are alimony. The occupying spouse includes the payments in income and can claim the interest and real estate taxes as itemized deductions.

If the property is jointly owned and the divorce decree states that a taxpayer must pay all expenses, some of the payment may be alimony. The taxpayer can deduct one-half of the total payments as alimony if both spouses are liable for the mortgage. One-half of the interest is also deductible. If the taxpayer’s spouse is not liable on the mortgage, none of the mortgage payment paid is alimony. The taxpayer may also claim the interest and taxes.

What is the AMT or alternative minimum tax?

Many years ago, the alternative minimum tax (or AMT) was created to insure that higher-income taxpayers with lots of deductions and credits pay at least a minimum amount of tax. Recently the AMT was indexed for inflation, so not as many taxpayers  face this tax.

The AMT is a separate tax calculation that disallows many of the deductions and credits used to calculate regular income tax. It also adds back certain income that is not normally taxed. The most common AMT adjustments are for personal and dependent exemptions and for certain itemized deductions, such as state and local taxes. Also, if you exercise incentive stock options, sell investments with large long-term capital gains, or take depreciation on business property, you may be hit with the AMT. You're required to calculate your tax under both the regular and AMT method. You then pay whichever tax is higher.