Posts Tagged ‘Tax Credit’

Child and Dependent Care Tax Credit

Sunday, March 13th, 2011

Ten Things to Know About the Child and Dependent Care Credit 

If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your federal income tax return. Below are 10 things the IRS wants you to know about claiming a credit for child and dependent care expenses.

  1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
  2. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
  3. You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.
  4. The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
  5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
  6. The qualifying person must have lived with you for more than half of 2010. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents. See Publication 503, Child and Dependent Care Expenses.
  7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
  8. For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
  9. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
  10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer’s Tax Guide.

For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses. You may download these free publications from http://www.irs.gov or order them by calling 800-TAX-FORM (800-829-3676).

Links:

  • Publication 503, Child and Dependent Care Expenses (PDF 167K)
  • Form W-10, Dependent Care Provider’s Identification and Certification (PDF 31K)
  • Form 2441, Child and Dependent Care Expenses (PDF)
  • Form 2441 Instructions (PDF 32K)
  • Publication 17, Your Federal Income Tax (PDF 2,075K)
  • Tax Topic 602
  • Publication 926, Household Employer’s Tax Guide

“Dependents”, “Exemptions” and Tax Benefits

Wednesday, January 26th, 2011

This area of the tax laws can become very complex, very quickly, principally due to the myriad of actual personal life situations that exist in the world today.  For example, married, single, head of household, domestic partners, taxpayers who are living together but are not married, or children, married older children living at home while attending college, divorced, separated, foster parents, adopted children, relatives, etc, etc.

Two important terms that are being presented in this article are “dependents” and “exemptions.”  A “dependent” is someone who is dependent upon you for some or all of their support.  Support in this context may be financial (money) or in-kind (food, shelter, expenses etc). An “exemption” reduces your “Taxable Income” on your tax return. Each ”exemption” that you claim on your tax return is the equivalent of a $3,650 tax deduction.  Generally speaking, you are allowed one tax “exemption” for yourself, one for your spouse (married taxpayers), and one for each of your qualified ”dependents” on your tax return.

Generally, you must provide more than half of the total annual support each year for a qualified person(s) before you are entitled to claim that person(s) as a dependent.  However, suppose that you and your three sisters are each providing one fourth of the total annual support for both of your elderly parents?  In this situation you should review ”Multiple Support Agreements” on page 19.  

One of the best references to explain the applicable provisions fo the tax laws for these two subjects is IRS Publication 501 (“Exemptions, Standard Deduction, and Filing Information”)  Here is the link:  http://www.irs.gov/pub/irs-pdf/p501.pdf     Specifically, read pages 3-21.  You also may need to consult with your tax preparer or tax advisor.  There are three tests that must be met for “exemptions” (page 10) and five tests for a qualifying child (pages 11-21)  There are provisions in the tax laws for many (if not most) of the actual real-life situations.  You will find a section for a child who was born alive but later died, stillborn children, foster care parents, students, and either divorced or separated parents.

There are also other tax law provisions, if you are the parent of a qualifying child:  (more…)

The American Recovery and Reinvestment Act (ARRA) of 2009

Friday, January 21st, 2011

This post is providing factual information from the Internal Revenue Service regarding the tax benefits for individuals and businesses through the provisions of “The American Recovery and Reinvestment Act (ARRA) of 2009″.  Although the law was signed by President Obama on February 17, 2009 there are still tax benefits available for tax year 2010.  There are two major sections for this post: 1) the “Making Work Pay Credit”, and 2) the other seventeen major tax benefit areas. 

“The bill is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn. The bill includes federal tax cuts, expansion of unemployment benefits and other social provisions, including domestic spending in education, health care, and infrastructure, including the energy sector.” (IRS website)

  • The “Making Work Pay Credit” (please note that this is a “refundable” tax credit) 

Many working taxpayers are eligible for the Making Work Pay Tax Credit in 2010. The credit is based on earned income and is claimed on your 2010 tax return when you file your taxes in 2011.

Here are five things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible.

  1. The Making Work Pay Credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.
  2. Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010.
  3. Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit.
  4. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.
  5. You cannot take the credit if your modified adjusted gross income is $95,000 for individuals or $190,000 if married filing jointly or more, you can be claimed as a dependent on someone else return, you do not have a valid social security number or you are a nonresident alien.

Visit http://www.irs.gov/recovery for more information about the Making Work Pay Credit. 
  
 Links:

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Tax Credits for Higher Education

Tuesday, January 18th, 2011

There are two important “tax credits” that may be available to you, if you meet all of the prerequisites.  They are the “American Opportunity Credit” and the “Lifetime Learning Credit.”  “Credits” are important tax considerations as they reduce your tax liability dollar-for-dollar, i.e. a “tax credit” of $1,000.00 will reduce your income taxes by exactly the same amount.  In contrast, a deduction that is an addition to your “itemized deductions” will increase your itemized deductions, but it will not reduce your total taxes by the same exact amount.  From page 2 of your tax return,  Total Adjusted Gross Income” less “Deductions” (Itemized or the Standard) less “Exemptions” equals “Taxable Income.”  “Taxable Income” x your marginal tax bracket rate (i.e. 10%, 15%, 25%, 28%, 33%  or 35%) will equal your “Tax.”  For example, if I am in the 25% tax bracket with the same $1,000.00 in education expenses my taxes are now only reduced by $250.00 ($1,000 x 25%). 

Finally, with the exception of part of the “American Opportunity Credit”, higher education tax credits are usually “non-refundable tax credits.”  Taxpayers with no tax liability (before the tax credit) and a $1,000.00 higher education tax credit will receive no tax refund since this is a ”non refundable tax credit.”  If the same $1,000.00 tax credit was  ”refundable” (which is the case for the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit, the Retirement Savings Contributions Credit, and the Health Coverage Tax Credit) the taxpayers would receive a $1,000.00 income tax refund.

Important facts to note:

1.  Unless it is extended by Congress, 2010 is the last year to use the “American Opportunity Credit”;

2.  The credit may be claimed by either the parents or the student, but not both;

3.  Only one of the two credits may be claimed in a tax return year;

4.  The maximum American Opportunity Credit is limited to $2,500.00/year while the maximum Lifetime Learning Credit is $2,000.00/year;

5.  40% of the American Opportunity Credit is “refundable” .

Addiitonal information from the IRS for these two education expense credits follows: (more…)

IRS Provides Guidance & Procedures for New Homebuyer Credit

Friday, January 15th, 2010

The requirements to qualify for and receive the new homebuyer credit has been a “work-in-progress” provision of the Federal tax regulations for many months.  Initially promulgated via the  Housing and Economic Recovery Act of 2008 the law provided for a new refundable tax credit for individuals who were qualified first-time homebuyers of a principal residence in the United States. For 2008, the credit applied to the purchase of a principal residence which was purchased after April 8, 2008, and on or before December 31, 2008.  It provided qualified taxpayers with a one-time tax credit in the year of purchase.   However, the law required that the credit be repaid over a 15-year period.  It was in essence an interest free loan.

In 2009 the law was changed to provide for the tax credit with no re-payment requirement.  However, it was still limited to first time homebuyers.  It was due to expire on November 30, 2009.  Then on November 6th Congress and the President extended the provisions of the law  in to 2010 to include a home purchased after November 6th and on contract on or before April 30, 2010.  The actual closing must occur on or before June 30, 2010.  The credit is claimed using Form 5405 which is filed along with the individual tax return.  That form was recently revised by the Internal Revenue Service but the documentation requirements are significantly more stringent.  However, several written documents must be included with the tax return and the Form 5405. Taxpayers also can not file their tax returns electronically, and must paper file.  This requirement not only extends the time frame for the receipt of a tax refund, it also increases the risk that an administration processing error may occur or that tax returns may be questioned by the IRS.  Instructions for the completion of the Form 5405 and the associated required supporting documentation can be found on the IRS website (http://www.irs.gov)   Here is the information that was provided by the IRS today:

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