FAQ

Who can I claim as a dependent?

Your significant other is probably many things to you—but is he or she also worth a deduction or credit? The question of who you can claim as a dependent has confused taxpayers for years.

The short answer: You can claim a “qualifying child” or “qualifying relative” if they meet specific requirements related to residence, relationship to you, age, financial support provided and income. So, yes, you may be able to claim your significant other or friend as a qualifying relative in some cases. You no longer get a dependent exemption for your dependent but being able to claim them can also make you eligible for other tax benefits like the New Other Dependent Credit (ODC) and the Earned Income Tax Credit (EITC).

You may be able to take New Other Dependent Credit worth $500 if:

· You are providing support for a non-child dependent like another family member, boyfriend, girlfriend, domestic partner, or friend.  You can also claim this credit for your kids 17 and over since you cannot claim the Child Tax Credit once they turn 17.

· They are a member of your household the entire year if they are a non-relative (relatives don’t need to live with you).

· The relationship between you and the dependent girlfriend/boyfriend does not violate the law, for example, you cannot still be married to someone else. (Also, check regarding your individual state law, as some states do not allow you to claim a boyfriend or girlfriend as a dependent even if your relationship doesn’t violate the law).

· You meet all the other criteria for “qualifying relatives” (gross income and support).

A dependent is a person you’re responsible for supporting. If you can claim a dependent, you can become eligible for certain tax breaks, including the child tax credit. You may also qualify for head-of-household status.

You may have a dependent if …

· You have a qualifying child younger than 19, or under 24 if they’re attending school full time. Your child must either live with you for more than half the year — or qualify for an exception — and must not provide more than half their own support. Your child also can’t file a joint tax return, except to claim a refund.

· You have a qualifying relative. Your qualifying relative either has to share a specific family relationship with you or must live with you all year long. You must provide more than half their support, they must earn very little, and they can’t be claimed as a dependent by anyone else.

The IRS provides an Interactive Tax Assistant Tool to help you determine if you have a dependent.

The Earned Income Tax Credit or EITC is a tax credit for low to middle income wage earners that has lifted millions of people out of poverty, however many people still miss it. Many think they don’t make enough to file their taxes so they don’t claim it or their income changed but they are not aware that they can qualify. You must file to get this tax credit, which may help a family with three children who qualify receive a credit worth up to $6,557 for 2019. Families without children may qualify for a credit up to $529.

With tax reform enacted at the end of 2017 there have been questions around the requirements to have health care coverage. Under tax reform, effective for tax year 2019 the tax penalty for not having health insurance is eliminated. How does the new tax law affect my health insurance?

Taxpayers will no longer be required to pay a tax penalty for not having health insurance. Individuals with income over the federal poverty level are still required to have 2018 health care coverage or they may be subject to a tax penalty when they file their 2018 taxes.  All the exemptions (based on income, religious beliefs, and citizenship) are still in place.

Whether you are required to file a tax return will depend on several factors, including your gross income, filing status, age, and whether you are a dependent on someone else’s federal income tax return. And you may have to file even if you do not owe any tax.  To get more specific information on who must file, check out IRS Publication 501. For most people, gross income is the main trigger for filing requirements. For example, in 2019, the filing threshold for single people younger than 65 was $12,200. For married couples filing jointly, it was $24,400 if both spouses were younger than 65.

If you were named as a dependent on someone else’s return and had income, you might also have to file, even if your income was much lower than the general threshold. Publication 501 has more detailed information on when dependents must file.

You will also need to file a return if you had at least $400 in self-employment earnings or meet other specific requirements, such as earning untaxed tips, receiving money from tax-exempt churches, or owing alternative minimum tax. IRS Publication 501 goes into details about these and other special situations.

Usually, unemployment income is taxable and should be included in your income for the year. Some states may also count unemployment benefits as taxable income. When it is time to file your taxes, you will receive Form 1099-G which will show the amount of unemployment income you received. Form 1099-G will also show any federal taxes you had withheld from your unemployment pay.

What are the tax implications of withdrawing money early from my 401K or IRA to pay bills?

Usually, withdrawing money early from a retirement account comes with a 10 percent tax penalty if you withdraw your money before the age of 59-1/2 in addition to the regular income tax on the amount withdrawn. There may be other consequences as well. The money from your retirement account may also bump you into a higher tax bracket, which can result in the taxation of other income, like social security that you may have not been taxed on otherwise.

If you were impacted by COVID-19, and need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty may be waived on up to $100K of retirement funds withdrawn.  You are a qualified individual if:

· You, your spouse, or dependent are diagnosed with COVID-19 

· You experience adverse financial consequences because of being quarantined, furloughed, or laid off

· You had work hours reduced due to COVID-19

· You are unable to work due to your childcare closing or reducing hours

In addition, there are also tax breaks for victims of natural disasters who have withdrawn from retirement accounts. 

What tax breaks are available to persons impacted by natural disasters in 2019?

Prior to tax reform, you were able to deduct most losses for uninsured casualty, disaster, and theft losses. Under tax reform provisions, deductions for casualty and theft losses have changed for tax years 2018 through 2025. If you suffered a casualty or theft loss as a result of an unusual event like a flood, fire or some other unforeseen event, you can deduct the loss if the casualty is within a federally declared disaster area or the theft occurred as a result of a federally declared disaster.

The IRS may provide additional special tax provisions to help recover financially from the impact of a disaster when the federal government declares a certain location to be a major disaster area. Depending on the circumstances, relief may be additional time to file returns and pay taxes. 

The Taxpayer Certainty and Disaster Tax Relief Act of 2019 was also signed into law on December 20, 2019 and provides special tax relief for individuals and businesses in Presidentially declared disaster areas occurring between January 1, 2018, and January 20, 2020. Some of the relief includes special rules for qualified disaster-related personal casualty losses, eased access to retirement funds, special rules for determining Earned Income Tax Credit and Child Tax Credit.

Recently, in response to COVID-19, the Treasury, IRS, and federal government have announced several forms of relief to help those impacted by COVID-19. 

What are qualified education expenses?

College tuition is always on the rise, but the U.S. government provides incentives with education credits and deductions. The American Opportunity Tax Credit benefits full-time and part-time college students in their first four years of college with a maximum $2,500 credit per student, provided you meet modified adjusted gross income requirements. You may also be eligible for the Lifetime Learning Credit up to $2,000, even if you take one college course.

If I started my own business; can I deduct my home office expenses?

Many entrepreneurs are reluctant to write off the business use of their home for fear of being audited. But home office expenses are legitimate tax deductions you shouldn’t miss out on. Keep in mind the space you claim as a home office should be used exclusively and regularly for that purpose. Do not forget to include the square footage of your home office used for product storage or inventory.

Tax filers are treated differently based on household status. To inform the IRS of which rules apply to you, you will have to choose a filing status. There are five: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child.

Your filing status affects your tax rate, standard deduction, and eligibility for certain deductions and credits. The IRS provides an interactive tool to help taxpayers choose a filing status.

Deductions reduce taxable income. You have a choice between taking a standard deduction or itemizing your deductions. When you itemize, you reduce taxable income by the value of certain expenses deductible under U.S. tax law. For example, if you pay mortgage interest, you can deduct the interest paid — but only if you itemize.

To decide which deductions to take, compare the value of the standard deduction versus the total value of your itemized deductions. The standard deduction was raised for tax years 2018 to 2025. For 2019, the standard deduction amounts are:

· $12,200 if you file as single or married filing separately

· $18,350 if you file as head of household

· $24,400 if you file as married filing jointly

Because tax reform significantly increased the standard deduction, you may find your itemized deductions do not exceed the standard deduction amount for your filing status.

The decision to take the standard deduction vs. itemizing your deductions will depend on your personal situation. If your itemized total exceeds the standard deduction, you should claim the itemized total because it amounts to more savings. Otherwise, you should claim the standard deduction if your itemized total is smaller. 

This is a very common tax question. There are different types of tax write-offs, but each one works differently. For example, exemptions and deductions both work to lower your taxable income. Exemptions take into account your filing status (filing single or jointly) and the number of dependents (spouse or children) you can claim. Deductions represent expenses you have throughout the year. Some common deductions include business expenses like rent on your office space, operating costs like electricity, insurance, travel expenses, and professional fees.

Tax credits reduce your tax bill dollar for dollar. So, if you receive a $1,000 tax credit, you will owe a $1,000 less. Some examples of tax credits include childcare, retirement account contributions, or the R&D tax credit for innovation and developing new technology and procedures. 

Being tooliberal with your deductions can also wind you up in the hot seat. Deductions are a great thing but being excessive and stretching the truth when it comes to deductions can lead to tax problems. Utilize all deductions that are applicable to your business. 

· Contributions to individual retirement arrangements, including IRAs, SEP-IRAs, Simple IRAs and solo 401(k)s (these phase out at higher incomes)

· 50% of self-employment taxes

· Student loan interest up to $2,500

· Tuition and fees for higher education up to $4,000 if you fall within income limits

· Health savings account contributions made with personal funds

If you itemize:

· $10,000 maximum for the aggregate of state and local taxes paid (SALT taxes)

· Interest on up to $1 million of eligible home mortgage debt for loans taken out before Dec. 15, 2017, and up to $750,000 of eligible home mortgage debt for loans taken out after that

· A deduction for medical expenses, but only if they cost at least 7.5% of your income

· A deduction for charitable contributions that don’t exceed a set percentage of income

What’s the saver’s credit and are you eligible?

Additional credits you may qualify to take 

· The earned income tax credit provides a credit for lower-income Americans. The IRS EITC Assistantcan help you determine if you qualify.

· The child tax credit provides a credit of up to $2,000 per qualifying child for tax years 2018 to 2024. As much as $1,400 of this credit is refundable. Eligibility begins phasing out at $200,000 in income for single filers and $400,000 in income for married couples filing jointly.

· The child and dependent care tax credit is valued at 20%–35% of the costs of allowable care expenses, up to $3,000 in expenses for the care of one qualifying person. A taxpayer caring for two or more dependents could claim a maximum credit of $6,000.

· The American Opportunity Tax Credit provides a maximum credit of $2,500 for qualifying educational expenses paid for eligible students. The credit is available only for tuition paid for the first four years of post-secondary education and there are income limits.

· The Lifetime Learning Credit provides a maximum credit of $2,000 per year for postsecondary educational costs. There are also income limits, and the credit is worth only 20% of qualifying expenses, up to a $10,000 maximum.

Depending on your situation, there are probably other deductions and credits you may be able to claim.

The answer this year might be “longer than usual.” To combat tax fraud, the IRS is taking extra time checking filers’ tax information if they claimed either the Earned Income Tax Credit or the Additional Child Tax Credit. Under a new law, the agency is holding back refunds claiming those credits until at least Feb. 15, and people aren’t likely to see those refunds until the end of February at the earliest. On top of that, “New identity theft and refund fraud safeguards put in place by the IRS and the states may mean some tax returns and refunds face additional review,” the agency warns. For everybody else, the IRS says refunds should be issued in its standard window of 21 days from the time it gets your return.

Call us right away.  If you cannot afford to pay your taxes, it’s imperative you still file tax a return and make arrangements to pay what you owe. Failing to file and/or pay your taxes on time will result in interest and penalties.

If you can’t afford to pay the full amount you owe by the deadline, the IRS has multiple payment options that could help, including installment agreements. Keep in mind that you will still owe interest, and possibly penalties, even if you enter into a payment arrangement.

Costs and fees of payment plans vary depending upon the duration of your plan and whether you apply by mail or online.

How do I file a tax extension?

If you procrastinated and April 18 is looking like a long shot, experts say you should file for an extension. This does not get you out of paying any taxes you owe by the deadline, but it gives you an extra six months to file. An extension will keep you from getting hit with a late-filing penalty of 5% of the unpaid taxes for each month or part of a month you are late, up to 25%.

That is in addition to a late-payment penalty of 0.5% of the unpaid taxes for each month or part of a month—plus interest at a rate of the federal short-term interest rate plus 3%.

If you expect a refund, you obviously have an incentive to get your return in as soon as possible to get those dollars in your pocket. If you file for an extension thinking you will get a refund and instead find that you owe, you’ll have to tack on the late-payment charges.

Don’t forget about state taxes. Only a handful of states will automatically give you an extension if you request one through the IRS, the others require a separate request to that state’s tax department. Sometimes, the rules are different depending on whether you owe money or are due a refund.

How long should I keep tax records?

The IRS says you should hang onto your tax documents for three years; if you get audited, that’s generally the look-back period they’re allowed to cover. However, if they suspect fraud or underpayment of income tax, or if you’ve written off worthless securities, they can request up to seven years’ worth of tax records. Hang onto documents like receipts that justify deductions like business expenses, charitable donations and so on.

Can Social Security be taxed?

It’s possible. Depending on your income, up to 85% of Social Security benefits may be taxable. If you’re a single filer and your combined income—that is, adjusted gross income, nontaxable interest from municipal bonds and half of your Social Security benefits—is more than $25,000, you will have to pay taxes. If you’re married and file jointly, the threshold is $32,000.

Hiring a tax professional is always a smart choice. Especially if you have a complicated tax situation. Do you own your own business? Did you receive multiple streams of income during the tax year? Do you conduct business in other states? These are just some of the scenarios that can get a little complicated. 

Tax advisors are educated in the tax code, which saves you time from learning it. And since they do taxes for a living, they are also more efficient at it, plus the peace of mind you get is well worth the cost. In addition, a tax advisor can be a lot more than just a tax preparer. They can help you strategize throughout the year so that you are in the best possible situation when it comes to tax season. They can assist with financial planning, business planning, help you stay compliant, and even streamline your accounting process.

Yes, the IRS wants its cut of every dollar you earn. Freelancers and self-employed workers will probably receive 1099 forms from their clients. Sharing Economy entrepreneurs could receive 1099K forms, but most platforms only issue them if you earn $20,000 and complete over 200 transactions within the tax year. Even if you do not receive a 1099 or 1099K form, you must report this income to avoid costly IRS penalties and interest. To ensure that you are able to meet your tax obligations, you should set aside 20-30% of your income in a tax savings account. 

If you expect to owe more than $1,000 in taxes, you are required to make quarterly tax payments. If you do not have an employer no one is withholding social security and Medicare taxes from your check. Therefore, you are responsible for sending these payments to the IRS. Quarterly payments are due four times a year: April 15, June 15, Sept. 15, and Jan. 15.

The IRS wants all income reported, even the income you earned on the side. If you are earning 1099 income, you must report it, and the total must match the figures reported by Form 1099-NEC. For example, you are an Uber and/or Lyft driver part-time, and you make over $15K on more than 200 transactions. Uber and/or Lyft sends you a 1099-NEC form, and they send a second copy to the IRS. That’s why it’s important to make sure your numbers are accurate.