Missouri Tax and Business Blog

There are many reasons to choose to use a tax return preparer to assist you in filing your return.  You may be in a position with a number of complicated issues, you may feel you get better results by using someone proficient in taxes or you may just don't want to deal with it.  The fact is this is a crucial choice.  You are legally responsible for the information on your tax return, so it's in your best interest to file your return correctly.  The question of who should you use is an individual choice that depends on your personal situation.  Some people are happy using one of the franchise chains, where other people benefit more from using an individual or small firm.  In this article we'll cover some tips from making the right choice.

The IRS has implemented a new oversight program for tax preparers.  Starting this year a taxpayer should use a preparer that signs the return and includes their PTIN (Preparer Tax ID Number).  Here are some tips to assist in choosing a preparer:

• Check the preparers credentials  The implementation of the PTIN requirement brings new requirements to the industry.  It is a good idea once you have verified that the preparer will be using a PTIN to ask if they belong to any professional organizations and if they are attending any continuing education classes.  The new regulations also include a competency test and continuing education requirements.  CPA's, Enrolled Agents and attorneys are exempt from the testing requirement due to the fact they have already satisfied the requirements of their professional designation.
• Check out the preparers history  It is a good idea to verify with the Better Business Bureau to verify if there have been previous complaints.  You should also check out any licensure violations with the state board of accountancy (for CPA's) or the IRS Office on Enrollment (for Enrolled Agents), if the preparer uses either of these designations.
• Ask the preparer about their service fees  If a preparer based their fee on a percentage of the amount of your tax return this is usually a red flag.  A refund that is direct deposited should only be deposited in an account bearing your name and should never be deposited in the account of a preparer.
• Signing the return  A reputable preparer will never ask you to sign the return prior to preparation.  You should also review the return before signing it.  It is also a good idea to make sure they sign the return when it is complete.
• Follow up  Make sure you can contact the preparer after the return is completed, even after the filing deadline, in the event you have questions or receive a notice.
• Get copies  Preparers are obligated to provide the taxpayer with copies of the return.  They must also maintain copies for their records.  The taxpayer copy can be either paper or electronic, an increasing number of preparers are going paperless.
• Report abusive tax preparers  The IRS has created Form 14157 to allow taxpayers to report abusive and potentially fraudulent activities.

The choice you make related to if you self-prepare or use a tax preparer is ultimately a personal one.  There is not a right or wrong answer, but it is important that it is the right choice for your situation.  The most important thing is that your return is submitted correctly to avoid any possible penalties in the future.  I hope these tips help you make an educated choice.  

The act of choosing the correct filing status on your return is an important one.  There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. In some cases a taxpayer may qualify for more than one filing status.  As a general rule it is best to choose the status that will give you the lowest tax liability.  It is possible that by choosing a less advantageous status you may not qualify for certain credits and deductions.  

Here are some important facts to keep in mind while choosing your filing status:

• Your marital status on the last day of the year determines your marital status for the entire year.
• If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
• Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
• A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
• If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
• A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
• Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
• You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.

The IRS considers a couple to be married if they are living together in the same residence or living apart, but not legally separated by a finalized divorce decree or separation maintenance agreement.  A taxpayer may still file a joint return if his/her spouse died during the tax year and the taxpayer did not remarry.  The IRS has ruled that one house cannot contain more than one household.  For head of household purposes, “temporary absences” for school, vacations, illness, military service, etc., do not change place of abode.  To determine cost of maintaining a household considers costs such as food consumed at home, rent paid, home mortgage interest and taxes, home insurance, repairs and utilities. Do not include costs of clothes, education, vacations, medical care, life insurance, and transportation. Cost paid by funds received from a governmental agency (such as Temporary Assistance for Needy Families, formerly known as Aid to Families with Dependent Children) do not count towards qualifying for Head of Household.

Additional information is available on the IRS website and in IRS Publication 501.  Please feel free to let me know if you have any questions.

It is possible that an individual may not be required to file a tax return if their income was below certain levels.  These vary based on age, filing status and type of income received.  There are advantages to filing a return even if you are not required to.  You may be eligible for a refund of any withholdings taken from your paycheck and you also may qualify for certain refundable credits.  Another consideration is the fact filing a return starts the statute of limitations.

Here's a filing requirement guide for most taxpayers

Filing Status		and at the end of 2011 you were	and your income was at least
Single		Under age 65	$9,500
		65 or older	$10,950
Married Filing Jointly		under 65	$19,000
Married Filing Jointly		65 or older (one spouse)	$20,150
		65 or older (both spouses)	$21,300
Married Filing Seperately		at any age	$3,700
Head of Household		under 65	$12,200
		65 or older	$13,650
Qualifying Widow(er) with dependent child		under 65	$15,300
		65 or older	$16,450

As previously mentioned there are benefits to filing a return even if not required.  Potential benefits include:
Federal/State tax withheld  If you had tax withheld from your pay by your employer, made estimated tax payments or had an overpayment from a prior year that was applied to the current tax year, you may be able to get a refund if you file a return.
Earned Income Tax Credit  If you did not make a lot of money this year you may be eligible for the EITC.  This is a refundable credit and can be claimed by a taxpayer without a child (under certain income limits).
Additional Child Tax Credit  If you have at least one qualifying child and were unable to take advantage of the full Child Tax Credit you may be eligible for the additional credit.
American Opportunity Credit  A student in the first four years of post secondary education may qualify for this credit.  The maximum amount available is $2,500 and this is a partially refundable credit (40%).  So even if you do not owe any tax you can get up to $1,000 cash back.
Adoption Credit  It is possible that you may be able to take this refundable credit to offset qualified adoption expenses.
Health Coverage Tax Credit  In 2011 certain individuals may be eligible to take the credit.  Those individuals are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation.  The qualified individuals can claim can claim a significant portion of their payments made for qualified health insurance premiums.

As you can see from the list above their are advantages that you may not normally think of.  My intention isn't to give you the "hard sell", the opportunies are there if a taxpayer is interested.  In today's economy the chance to claim money that is rightfully yours can be to your benefit.  If you have questions or need further clarification you can check the IRS website, consult your tax professional or feel free to contact me.

We have discussed the Child and Dependent Care Expenses and Earned Income Credit, now it's time to cover the Child Tax Credit.

The credit is a non-refundable credit allowed for the taxpayer that takes a dependency exemption for a qualifying child. The maximum amount is $1,000 per child, but is limited to tax liability (non-refundable credit). A portion of the credit may be taken as the Additional Child Tax Credit by taxpayers under certain income levels and this is a refundable credit.  The Child Tax Credit is reduced by $50 for every $1,000 over $110,000 (Married Filing Jointly), $75,000 (Single, Head of Household and Qualiying Widow(er)) or $55,000 (Married Filing Sepeately).

For the purposes of the Child Tax Credit the same rules apply as the ones used to determine qualification to claim the dependency exemption plus some additional criteria.  A qualifying child is:

1. Is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, grandchild, niece, or nephew),
2. Was under age 17 at the end of the tax year,
3. Did not provide over half of his or her own support during the year,
4. Lived with the taxpayer more than half of the tax year,
5. Is claimed as a dependent on the taxpayer’s return, and
6. Was a U.S. citizen, a U.S. national, or a U.S. resident alien. If the child was adopted, see Adopted child, below.

An adopted child is alway treated as the taxpayer's child.  If the taxpayer is a U.S. Citizen or U.S. National and the adopted child is a member of the taxpayer's home for the entire year item 6 above is satisfied.  There are certain circumstances such as school,
vacation, business, medical care, military service, or detention in a juvenile facility that are allowed exceptions to the time requirement in the taxpayer's home.

The Additional Child Tax Credit is the portion of the Child Tax Credit that was not refunded.  Any amount of the CTC not refunded due to the income phaseout cannot be refunded through the additional credit.  The amount of the credit is determined by whether the taxpayer has one or two children, or three or more children.  The maximum additional credit allowed cannot be more than the unused portion of the CTC and is:

• For one or two children - 15% of earned income in excess of $3,000
• For three or more children - The larger of: 15% of earned income in excess of $3,000, or FICA and Medicare tax paid minus EIC

The Child Tax Credit is filed directly on the Form 1040 and no additional form is required.  The Additional Tax Credit is figured using the Form 8812 and the result is carried over to the 1040.  I hope the coverage of these credits along with the discussions on EIC and dependent care expenses have been beneficial.  You may also feel free to contact me with any questions related to the topics covered in this series.

It's time to continue our discussion about tax credits related to children.  I hope the previous two
articles were helpful.  In this post we'll cover Child and Dependent Care expenses.

A non-refundable credit or exclusion from income may be taken by a taxpayer for expenses paid for
a dependent under the age of 13 if the expenses are related to work or the search for work.  It is
also possible to do the same for a spouse or dependent that is unable to take care of himself or
herself.  To take advantage of the credit or exclusion the Form 2441 must be used to claim either
of the following.  Exclude from income benefits received for dependent care by an employer plan or
claim a credit for dependent care expenses paid.  The benefits for the purpose of the exclusion are
reported in box 10 of the W-2 and are limited to the smallest amount of the following:

• $5,000 or $2,500 if Married Filing Separately and not considered unmarried.
• Qualified expenses incurred in 2011. It does not matter when the expenses were paid.
• Taxpayer’s earned income.
• Spouse's earned income.

If the benefits received are greater than the excludable amount the excess must be reported as income.

The credit is 20% to 35% of the smallest of the following:

• $3,000 or $6,000 for 2 or more qualified dependents.
• Qualified Expenses incurred and paid for in 2011.  You may also include amounts incurred in 2011 paid for prior to 2011.  You must reduce the expenses by any amount received and excluded from income.
• Taxpayer's earned income.
• Spouse's earned income.

The percentage listed above is based on Adjusted Gross Income.  If the credit is based on more than one dependent it is OK if the expenses are unevenly distributed between the dependents.

So what are the requirements?  The expenses must be for a qualified person.  The qualifying person must live with the taxpayer for more than half the year.  The expenses must be paid to
allow the taxpayer (and spouse) to work or look for work.  The payments cannot be paid to the taxpayer's spouse, the parent of the taxpayer's qualifying child under age 13, the taxpayer's
dependant or the taxpayer's child under age 19 at the end of the year (payments to other relatives are OK).  The provider's name, address and Taxpayer ID number (SSN or EIN) must be reported.  

I realize that is a lot of information let me elaborate on it.  For the purposes of the credit a qualifying person is:

• The taxpayer’s qualifying child under age 13 who can be claimed as a dependent.
• The taxpayer’s son, daughter, stepchild, foster child, sibling or stepsibling, or a descendent of any of them,
• Lived with the taxpayer for more than half of 2011,
• Did not provide over half of his or her support in 2011,
• Must be younger than the taxpayer claiming the person as a qualifying child,
• Did not file a joint tax return with a spouse unless filed to claim a refund only and no tax liability would have existed for either spouse if separate tax returns were filed, and
• Is claimed as a dependent by his or her parents, if allowed. If not claimed by allowed parents, the child was claimed by another taxpayer, but only if the AGI of the claiming taxpayer is higher than the AGI of any parent of the child.
• A spouse who is disabled and could not care for himself or herself.
• Any person who is disabled and not able to care for himself or herself that the taxpayer claimed as a dependent or could have claimed as a dependent except (1) the person received $3,650 or more of gross income or filed a joint return, or (2) taxpayer (or spouse) could be claimed as a dependent.

A couple more notes.  The qualification is based on a day by day basis.  In other words if a child
reaches the age of 13 during the year the time prior to the birthday qualifies.  The same goes for
the work related requirement, if the taxpayer (or spouse) fails to meet the work requirement for part
of the year the expenses paid during the time that qualifies would be allowed.  A temporary
absence of less than 2 weeks is allowed and does not require an offset based on the day to day
rule.  A spouse that is a full time student or unable to care for himself or herself is to considered to
have earned income for that period.

I hope that you found the post useful.  In the next post in the series we will begin the discussion on
the Child Tax Credit.  I realize there was a lot of detail in the post and if you have any questions or
need any clarification please let me know.

It's time to continue our discussion on tax credits related to children.  In the last post we discussed the requirements to be a qualified taxpayer for the Earned Income Tax Credit (aka. EIC or EITC).  We'll wrap up our discussion on the EITC by defining a "qualified child".

A child must meet all of the following tests for the purpose of being considered a qualified child for the purposes of the EITC:

• Relationship  A child must be the taxpayer's son, daughter, stepchild, foster child or a descendant of any of them (ex. grandchild); or brother, sister, half brother, half sister, step brother, step sister or any descendant of any of these (ex. nephew or niece).
• Age  The child must not have reached the age of 19 at the end of 2011 and be younger than the taxpayer (and spouse).  The child is under age 24 and a student (must still be younger than the taxpayer and spouse) the child meets the test.  Qualification is also allowed for a dependent that is permanently and totally disabled at any time during the year at any age.
• Residency  The child must have lived with the taxpayer in the U.S. for more than half the calendar year.
• Joint Return  The child cannot file a joint return during the year unless the return is filed solely to claim a refund.

When considering a child's eligibility to be claimed as a dependent on a parent's return the taxpayer must meet the support test (provides more than half the support of the child), for the purposes of the EITC there is no support test.  If the parents of a child do not claim the EITC on their tax return no one else is allowed to claim the credit unless their AGI is higher than the highest AGI of either parent.  As a rule only one parent can claim the EITC for a child.  In cases of divorced or separated parents the non custodial parent can claim the dependency exemption and child tax credit when certain requirements have been met.  The custodial parent claims the child and dependent care expenses, EIC and head of household status.  There are a number of different factors that come into play when considering eligibility in cases of divorced or separated parents, these cases can be complicated.  It is best that a divorce decree deal with topics of dependency exemption as well as the custody issues.  

The EITC can be a valuable credit for many lower income taxpayers.  As I've mentioned previously it is also one the IRS is monitoring closely, so it is in your best interest to be educated prior to taking the credit.  In the next post we will discuss the Child and Dependent Care Expenses Credit.  If you have any questions related to anything we've discussed please feel free to contact me.  

I thought it might be helpful to have a discussion about tax credits related to children.  The topics we'll discuss will be the Earned Income Credit (EIC), child and dependent care credit and the Child Tax Credit (including the Additional Child Tax Credit).  I'll spread the discussion out over several posts so I can provide some detailed information and avoid a long dense article.  Let's start with a discussion of the EIC and who qualifies to take the credit.

First let's define what the Earned Income Credit is.  The Credit is a refundable credit for low income individuals, typically those with a qualifying child although it is possible to claim the credit if you do not have a child.  You may be wondering what a "refundable credit" is.  Well a non-refundable credit is one that offsets the tax liability only, once your tax liability is at zero you can no longer gain benefit from the credit.  So that means a refundable credit is one where you still benefit from the credit even if your tax liability has reached zero.  The EIC is allowed only for a 12 month tax year unless the return is for a deceased taxpayer.  Taxpayers with investment income of more than $3,150 for 2011 or filing Form 2555 (2555-EZ) with foreign earned income do not qualify for the credit.

Qualifying Taxpayer.

A qualifying taxpayer (and spouse if filing jointly) must have a valid Social Security number.  A qualifying child must also have a valid SSN.  Adoption and individual taxpayer identification numbers do not qualify for the credit (ATIN's and ITIN's). If a SSN is labeled as "not valid for employment" that SSN also does not qualify, but a number labeled "valid for employment with DHS (or INS) approval" does qualify.  The taxpayer must also be a US Citizen or resident alien.  A non-resident alien married to a US Citizen (or resident alien) may also qualify if they elect to be considered a resident for the entire year by filing a joint return.  The filing status of Married Filing Separately does not qualify.  A taxpayer who is a qualifying child of another is not allowed to take the credit.

A taxpayer without a qualifying child must meet all the requirements listed in the previous paragraph and they must also meet the following requirements.  At the end of 2011 must be between the ages of 25 and 65 and cannot be the dependent of another person.  The taxpayers principal place of residence must be in the US for more than half the year, this does not include US possessions such as Puerto Rico.

We've discussed in this article the qualifications to claim the Earned Income Credit.  In the next post we'll dive into a discussion of the definition of a Qualified Child.  The EIC is a Credit that is often abused and for that reason an area the IRS is focusing on.  It is in your best interest to understand the requirements of the Credit prior to making a questionable claim.  If you have any questions before then please let me know.

This is the time of year some start to think about making a charitable contribution to a qualified charity.  Here are some tips that you can use all year long that will help you ensure that gift is tax deductible.

Let's first discuss the topic of financial gifts.  In order to deduct the gift you must itemize your deductions.  The gift generally must be documented by a bank record or verification from the charity.  The documentation must show the name of the organization, the date of the donation and the amount.  Foreign charities are generally not allowed with the exception of Canada, Mexico and in some cases Israel.  There are contribution limits that apply based on the type of entity, but there is an opportunity for a carryover.  In a previous post related to year end tax planning I covered the topic of IRA to Charity distributions.

The other common form of donation is clothing and household goods.  A donation may only be deducted if the condition of the items are in good used condition or better.  Additionally, the IRS may deny a deduction for goods with minimal monetary value, for example used socks.  An exception may be allowed for a used item in less than good condition if the taxpayer includes a qualified appraisal with the tax return and the value is greater than $500.  Household items include things like furniture, furnishings, electronics, appliances, linens, and other similar items. Food,paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.  Documentation is also important for these non cash donations.  It is your responsibility to determine a reasonable fair market value.  You should also keep track of what was donated, this will be important when you attempt to determine the value.

The last form I want to cover is personal benefit.  A donation of cash or property is deductible only to the extent you received no personal benefit from the donation.  In other words, the fair market value of dinner tickets, YMCA dues, school tuition, raffles, etc. may not be claimed, just the amount in excess of the FMV.  A tax court ruling disallowed a taxpayer's claim that they did not attend the dinner in which they had purchased tickets for, it was disallowed on the basis that forfeiture was not allowed because they purchased the "right to attend".  On the other hand if the tickets are returned to the charity for resale and no refund is given this would most likely be allowed. 

These are only a few examples of tax law related to charitable donations.  If you have more in depth questions there are a variety of IRS publications related to the topic.  You can also direct questions to you tax professional and I'm always happy to help so feel free to contact me as well.