TAX BENEFITS FOR PARENTS
If you are a parent, whether single, married or divorced, there are a significant number of tax benefits available to you, including deductions, credits, filing status and exemptions that can help put a dent in your tax liability.
Exemptions – Regardless of filing status, you receive a $4,050 income exemption for each of your qualifying children whom you claim as a dependent on your tax return. In the case of divorced or separated parents, the exemption is allowed to the custodial parent unless the custodial parent releases the exemption to the non-custodial parent. If you are the custodial parent, you can release the exemption on a year-by-year basis or for multiple years if you wish to do so. However, being unable to foresee the future means it is generally wiser to release the exemption annually. The exemption amount gradually decreases to zero once a certain income threshold is reached; this phase out generally applies to higher income taxpayers.
Child Tax Credit – If you have dependent children, you are also entitled to a nonrefundable tax credit of $1,000 for each child under the age of 17 at the close of the year. The term “nonrefundable” means the credit can only be used to offset any tax liability you may have, and the balance of the credit is lost. If you are not filing jointly with the child’s other parent and have released the exemption to that parent, then you will not qualify for the child tax credit for that child. In addition, this credit also phases out for higher income taxpayers. For lower income parents, a portion of the child tax credit, which is normally nonrefundable, can become refundable.
Earned Income Tax Credit – The earned income credit benefits lower income parents based upon your earned income, filing status (either married filing jointly or unmarried) and the number of qualifying children you have up to three. The credit for 2017 can be as much as $6,318, and better yet, the amount not used to offset your tax liability is fully refundable. This credit is phased out for higher income filers, and those with investment income of more than $3,450 for 2017 aren’t eligible.
Head of Household Filing Status – The tax code provides a special filing status – head of household – for unmarried and separated taxpayers. The benefit of head of household filing status is that it provides lower tax rates and a higher standard deduction than the single status ($9,350 as opposed to $6,350 for a single individual in 2017). If you are an unmarried parent and you pay more than one-half the cost of the household for yourself and your child, you qualify for this filing status. Even if you are married, if you lived apart from your spouse the last six months of the year and pay more than one-half the cost of the household for yourself and your child, you qualify for this filing status.
Childcare – Many parents who work or are looking for work must arrange for care of their children. If this is your situation, and your children requiring care are under 13 years of age, you may qualify for a nonrefundable tax credit that can reduce your federal income taxes.
The childcare credit is an income-based percentage of up to $3,000 of qualifying care expenses for one child and up to $6,000 of qualifying care expenses for two or more children. The allowable expenses are also limited to your earned income, and if you are married, both you and your spouse must work and the limit is based upon the earned income of the spouse with the lower earnings. The credit percentages range from a maximum of 35% if your adjusted gross income (AGI) is $15,000 or less to 20% for an AGI of over $43,000.
If your employer provides dependent care benefits under a qualified plan that pays your child care provider either directly or by reimbursing you for the expenses, or your employer provides a day care facility, you may be able to exclude these benefits from your income. Of course, the same expenses aren’t eligible for both tax-free income and the child care credit.
Education Savings Plans – The tax code provides two plans to save for your children’s future education. The first is the Coverdell Education Savings Account, which allows non-deductible contributions of up to $2,000 per year. The earnings on these accounts are tax-free provided the amounts withdrawn from the accounts are used to pay qualified expenses for kindergarten and above. Coverdell contributions will phase out for higher income taxpayers beginning at an AGI of $190,000 for married taxpayers filing jointly and half that amount for other taxpayers.
A second plan, called a Qualified Tuition Plan (sometimes referred to as a Sec 529 plan), allows individuals to gift large sums of money for a family member’s college education while continuing to maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for college tuition and related expenses.
Contributions to these plans are not limited to the child’s parents and can be made by virtually anyone, although if not the parents, then typically it is the grandparents who fund the accounts.
Education Credits – If you are a parent with a child or children in college, don’t overlook the American Opportunity Tax Credit (AOTC). It provides a tax credit equal to 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000 for each child who was enrolled at least half time. Better yet, 40% of the credit is refundable. This credit is good for the first four years of post-secondary education.
There is a second education credit called the Lifetime Learning Credit (LLC) that provides a nonrefundable tax credit equal to 20% of up to $10,000 of qualified tuition and related expenses. Unlike the AOTC, which is allowed per student, the LLC is calculated on a per-family basis with a maximum credit of $2,000 but is not limited to the first four years of post-secondary education.
You don’t even have to pay the expenses to get the credits. The credits are allowed to the person claiming the exemption for the child. So if the child’s grandparent, uncle, aunt or even an ex-spouse or the child’s other parent pays the tuition, you still get the credit as long you claim the child as your dependent.
Student Loan Interest – Generally, personal interest you pay, other than certain mortgage interest, isn’t deductible on your tax return. However, there is a special deduction, up to $2,500 per year, allowed for interest paid on a student loan (also known as an education loan) used for higher education. You don’t have to itemize deductions to take advantage of this deduction, but you must have paid the interest on a loan taken out for your own or your spouse’s education or that of a dependent. So if you were legally obligated to pay the loan for one of your children who was your dependent when the loan was taken out, you may be able to claim this deduction, even if the child is no longer your dependent.
The student must have been enrolled at least half-time, and the loan must have been taken out solely to pay qualified higher education expenses. The lender can’t be a related person. This deduction phases out if your AGI is more than $65,000 ($130,000 if filing a joint return) and isn’t allowed if you use the married filing separate status.
Child’s Medical Expenses – If you itemize deductions, the unreimbursed medical expenses you pay for your dependents are counted for figuring your total medical expenses. This is true for both parents even if they do not file together as long as one of them is able to claim the child as a dependent.
If you have questions related to any of these tax benefits, please give us a call at 850-725-5696
Taxes are confusing anyway, but when a filing season has some special considerations, the misinformation increases. And with the availability of social media, the tax myths multiply.
That's happening this year since refunds from some very specific tax returns are, by law, being held until the middle of February.
Here are five tax refund myths the Internal Revenue Service says are making the rounds, along with the truth about the situation.
Myth 1: All Refunds Are Delayed
Yes, some refunds are delayed, but not every single one.
The Protecting Americans from Tax Hikes, or PATH, Act has a provision that prohibits the IRS from issuing refunds connected to two refundable tax credits until Feb. 15. Refundable tax credits are those that, after you use them to offset any tax you owe, can get you a refund of the excess credit amount. The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) are two popular refundable credits, and claims of these tax breaks are the ones that PATH has mandated will put your refund on hold this filing season.
But that's where the truth stops and the refund myth starts.
The IRS says that more than 90 percent of federal tax refunds are issued in the normal time frame, which is less than 21 days. Some other returns might take a bit longer because, in many cases, they are getting additional attention for a variety of reasons, including new efforts by the IRS to crack down on fake tax returns and fraudulent refunds.
So if you don't claim the EITC or ACTC, then chances are good that you'll get your refund within three weeks after filing.
Myth 2: Calling the IRS or My Tax Professional Will Provide a Better Refund Date
There are lots of good reasons to use a tax professional rather than doing your taxes yourself. It is a myth, however, that bugging your tax preparer, or the IRS itself, will get your refund to you more quickly.
In reality, says the IRS, the best way to check the status of a refund is online at IRS.gov's "Where’s My Refund?" tool. If you're away from your laptop or PC, then use your digital device to check via the IRS2Go mobile app.
But don't go crazy with the checking. The IRS updates the status of refunds once a day, usually overnight. Checking either status option more than once a day will not produce new information.
And no, trying to connect with a real person at the IRS won't get you any additional info. Plus, at this time of year, you'll be on hold for a while. So leave those IRS reps alone to answer tax-filing phone questions from other folks. Only call for added help if the refund status tool or app instructs you to do so.
Myth 3: Ordering a Tax Transcript a "Secret Way" to Get a Refund Date
We all love special life hacks that help up do things more quickly or make tasks easier. The same is true when it comes to taxes.
But as far as your tax refund, ordering a tax transcript will not help you find out any sooner exactly when you'll get your refund. It's unclear how this myth got started since, notes the IRS, the information on a transcript does not necessarily reflect the amount or timing of a refund.
You, of course, can and should order a transcript to validate past income and tax filing status for mortgage, student and small business loan applications. You also might need a transcript's prior year tax data to help with your current tax return preparation.
But no, don't order a transcript to try find out when your refund will be issued.
Myth 4: "Where's My Refund?" Must be Wrong Because There's No Deposit Date Yet
If you claimed the EITC or ACTC (or both) on your return and now are checking (just once a day!) "Where's My Refund?" on both IRS.gov or the IRS2Go mobile app, the IRS says you're not going to get a projected refund date from either status option.
Those EITC and ACTC refunds that are on legislatively-mandated hold will not be updated with projected deposit dates until a few days after Feb. 15.
Neither will you see a refund date through your software package until then. And no, says the IRS, tax preparers won't have any additional information on refund dates before then either.
The good news is that Feb. 15 is next week.
The bad news is that when you take into account the full refund issuing process, including the upcoming President's Day three-day federal holiday, the delayed refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27. And that's a best-case scenario.
Myth 5: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15
Really? Someone started a story that the IRS was going to get all of the refunds it has to hold out on the very first day it can issue them?
I want to meet the people who have such confidence in the tax agency's efficiency.
Now I'm not picking on the IRS. It's got a tough job, dealing with 150 million or more taxpayers every filing season, while also making sure its computer systems are updated with the latest tax code provisions. This must be done during a time of decreasing funds and fewer employees.
Adding a new hurdle, like a delay of refunds for those who claim certain tax credits, makes the IRS' usual job even harder.
Anyone who thinks the agency will be able to get all the EITC and ACTC related refunds out on the very first day it can is, at best, delusional overly optimistic.
The IRS understands that folks who claim these two tax credits tend to be lower income taxpayers who rely on the refunds the tax credits create. And it will do its best to get them out as quickly after Feb. 15 as it can.
But for most affected filers, that is not going to happen on Feb. 15.
I (and the IRS) wish we had better news for all y'all expecting refunds, whether from claiming the EITC, ACTC or other tax provisions that helped you get your withheld money back from Uncle Sam.
But at least now you know the real deal with refunds, rather than these myths that have been circulating. And with each new day, you're closer to getting your refund.
Mike McVay, Tax Accountant - 850-725-5696 - www.PensacolaFLTax.com
Quickbooks Online Review: FREE Simplified Accounting
The Quickbooks array of accounting software is the most widely used small business accounting software. With hundreds of thousands of users, Quickbooks online is also the most used web-based accounting system by small businesses. The online versions have come a long way in a few short years, adding a robust set of accounting features that are easy to set up and use.
Who Is Quickbooks Online Ideal For?Quickbooks online is a good fit for small businesses with only a few employees, that are primarily service-based and that want access to their books from anywhere with an internet connection.
Simple, Seamless, Online SetupWith no software to install and configure, wew users will be surprised how quickly they can get up and running. The initial setup guide walks new administrators through the process of setting up the company account and importing banking information.
Quickbooks Online is Easy to UseQuickbooks Online works with both Mac and PC computers and in all major internet browsers. The software was designed with the small business owner in mind and does not require a knowledge of accounting or bookkeeping jargon. Navigation is simple and logical. After logging in, users are taken to a company dashboard with tabs and a graphical interface for accessing the primary accounting functions. The system’s customer and vendor management functions are easy to use, with quick access to master lists that offer search and filter capabilities. Menus provide links to common tasks such as invoicing, receiving payments, entering and paying bills, creating purchase orders, and generating receipts. Customer invoices can be printed or emailed from within the program.
Access Your Information Anywhere – Even on the Go!As a fully web-based program, you can access your business data from any device with an internet connection, including smart phones and tablets. Apps are also available for the iPhone, Blackberry and Android devices, but mobile access is limited to viewing data only. This means that your days of being stuck at the office to check on an invoice, look up an expense or run revenue reports are over.
Easy Collaboration Makes Working Together PainlessQuickbooks Online allows the administrator to create users and to set role-based restrictions on access to clients, sales, vendors, purchases and financial accounts for those users. This means that you, as the business owner, can control what your bookkeeper, accountant or employees are able to do within your Quickbooks Online account. The Essentials and Plus versions of Quickbooks Online also give you the opportunity to setup time-tracking users, so remote employees can track hours easily.
Simple Importing/Exporting of DataThe Online Essentials and Plus versions automatically import financial account information and attempt to automatically reconcile it. You can also import your financial and accounting data from Quicken, Peachtree and desktop Quickbooks versions. Online Essentials and Plus give you the ability to also import customer information from Excel, Outlook and Gmail.
All versions of Quickbooks Online offer dozens of ways to create financial, sales and tax reports with your data, including the ability to produce custom reports by editing the standard templates. This means you will have access to all of your customers, vendors, products, employees and financial data, whenever and wherever you need it to make an important business decision.
Pricing starts at $12.95 per month for the Online Simple Start version; Essentials (recommended) is $24.95 per month for up to three users; and Plus is $39.95 per month for up to five users. Payroll add-on options are available for the Essentials and Plus versions. FREE with any service from McVay Business Services in Pensacola, FL.
SummaryQuickBooks Online is a good fit for small businesses that are either service-based or offer simple goods. The program provides an easy-to-use, but robust, business management system that ensures your important financial information is always right at your fingertips.
All McVay Business Services clients receive a full QuickBooks Online Subscription with any daily, weekly or monthly service. www.PensacolaFLTax.com. 850-725-5696
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Mike McVay, Tax Accountant Blog
Certified QuickBooks ProAdvisor & Licensed Tax Accountant Pensacola, FL
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