Dealing with Dependent Friends

Dealing with Dependent Friends

You like to be there for your friends, especially when they need a little help getting on their feet. For those friends who have become non-rent paying roommates and are spending nights on your couch, you may be able to get a tax benefit by claiming those friends as a dependent.

Many people think only children and relatives can be claimed as dependents on tax returns. However, if you are supporting your unrelated friends, you may be able to claim them as a dependent, especially if you are providing shelter for them. The theory behind this allowance is that often these friends don’t file their own tax returns, meaning they don’t claim a personal exemption. It’s also thought that you will share your return with them.

What Criteria Must My Friends Meet?

Your friends don’t need to be of the opposite sex as you in order to claim them as a dependent. You are legally able to claim your friends who meet the five criteria set forth by the IRS:

You must be responsible for providing half of the other person’s support through the entire tax year. Support includes food, shelter, clothing, health care, education expenses, and other personal expenses.

Your friend must be a legal citizen of either the United States, Canada, or Mexico, or be a resident alien.

Your friend can’t make more than $3,950 in total taxable income. Gifts, welfare benefits, Social Security, or other nontaxable benefits are not included in income.

Your friend needs to have resided in your home for the entire tax year.

The person you are claiming as a dependent can’t file a joint tax return with their spouse. The only time this is acceptable, is if the dependent is filing for purposes for a refund only, because their income (combined with their spouse) is less than the required amount needed to file a return.

If your friend meets the five criteria, you’ll likely be able to claim him or her as a dependent on your taxes. This is the best reward for being a good friend.

Caring for Your Dependents

Caring for Your Dependents

Many taxpayers require a little extra help when it comes to taking care of their dependents. Those who hire professional care for their disabled relatives or childcare for their children younger than 13 so they can work may be eligible to recoup their expenses through the Child and Dependent Care Credit. This tax credit is worth up to 35% of qualifying expenses incurred due to the care of a dependent while you are at work.

Who is Eligible?

Taxpayers are eligible to receive the Child and Dependent Care Credit if they have paid for professional childcare services for any child under age 13. Children over the age of 12 may be eligible if they are not capable of self-care due to a disability. 

You will be required to provide proof that the dependent cannot take care of himself. Also, you’ll need to prove that you were employed, or sought employment, as a result of having the childcare. In situations where your employer offers childcare benefits, you’ll need to deduct the amount from your expenses prior to claiming the credit.

Another stipulation states that the dependent must have lived in your home for more than half of the year. You are required to have provided support to the child or disabled adult in terms of their living expenses. There are times when the noncustodial parent is eligible to claim the child as a dependent, if the child’s parents are divorced. In these cases, the parent with whom the child lives with can claim the credit, even if the child isn’t that parent’s dependent.

There are certain requirements that the care provider must meet in order to be eligible for the parent to claim the credit. When filing, you’ll be asked to provide the caretaker’s name, address, company name (if a business), as well as a tax ID number which is usually their social security number or employee identification number if they work within a company. This information is filed on Form 2441 in which the Child and Dependent Care Credit is claimed.

Child Care Tax Credit

Child Care Tax Credit

Finding someone to care for your child while you work or during school holiday can tie up a large portion of your budget. Sending your kids off to school can account for a much of your childcare needs, but if your children are younger than school age, or if they are on summer vacation, you’re likely to pay more money for childcare. The government wants to help parents offset the cost of childcare expenses incurred for children under thirteen by offering a tax credit. The child for whom the care is rendered must be the taxpayer’s dependent, and separate rules apply to parents who are divorced or separated.

There are different type of child care that qualify for the tax credit. It’s important to be aware of the qualifying care so you can maximize your benefits and cut back your expenses at tax time.

Camp: If you send your child to a day camp, even specialized camps (those that focus specifically on a single sport or craft), you may be entitled to the tax credit. It’s imperative that the day camp follows all state laws in correlation with other care centers. Camps where the child stays overnight don’t qualify.

Expenses for School Costs: Expenses for care before or after school for children in kindergarten or higher qualify for the Child Care Tax Credit. Even those children who aren’t yet at the kindergarten level may qualify if they have school related expenses.

Day Care Center: Facilities who serve six or more children qualify for the credit if they abide by all laws, both local and state. Parents whose children attend a qualifying day care center are eligible to claim the credit.

Care at Home: This is an important distinction. If you pay someone to watch your child in your own home, you do not qualify for the credit. This is because the caretaker would be your employee, and you should be following payroll rules and taxation.

The Child Care Tax Credit ranges between twenty and thirty five percent of your expenses, in relation to you annual income. The higher your income, the less of a credit you are entitled to. For one child, the credit may be worth anywhere from $600 to $1,050, because you can claim up to $3,000 of expenses for the year. For more than one child, the expense limit is increased to $6,000, however that is the maximum amount regardless of how many children are given care.

You will be required to submit information about the child care facility, such as the provider’s name, address, tax ID number for those organizations who are not exempt. You should ask for all of this information upon payment of the service, so you are able to claim the credit.

Some states offer a tax credit in addition to the federal credit. If you reside in a state that has this option, you may need to provide additional information like a phone number, in order to claim the expense. You can also qualify for the credit if you file a joint return with your spouse, provided your spouse is a full time student. Additionally, those who are the primary caretaker for their disabled spouse may qualify for the credit.

Let’s Make Amends

Let’s Make Amends

If you've found errors on your tax return after it’s been filed, you may need to file an amended return, depending on the type of error and the circumstances of the return. However, determining when to file an amended return can be a complicated process.

In some cases, taxpayers may notice that their previous year dividend income has changed after they received their statement from their financial institution. If the change is a minimal amount, despite being enough to warrant a small refund, many financial counselors recommend ignoring the difference. Often, it’d cost more to file the updated return than it’d be worth.

However, if you are notified of a pending refund that concerns a large sum of money, you’ll want to change your tune. The IRS suggests that you file an amended return if there was an error in filing status on your original return. Filing status can affect income, deductions, and credits, and taxpayers who file an amended return should use Form 1040X. It’s also necessary to determine the specific requirements for your state, and abide by them.

According to the IRS, the best practice when expecting a refund from the original return, is to wait to file your amended return until you after you’ve already received the refund. It can take 12 weeks to process a Form 1040X request, but it is acceptable to cash the original refund check while waiting on an amended return.

If you owe additional taxes, the IRS expects payment of the balance as soon as possible. You should abide by this expectation in order to avoid unnecessary interest and penalties.

The status of your amended return is available three weeks after you submit. You can check the status via the IRS website (irs.gov) and clicking on the link: “Where’s My Amended Return?” If you don’t have access to the internet, you can call the IRS hotline at 866-464-2050. The tracking system can provide the status of an amended return for the previous three years.

Party Like It’s 1099

Party Like It’s 1099

You can’t escape the IRS. No matter what your job, even if you’re an independent contractor, the IRS wants you to pay your taxes, and they will find a way to make sure they get their money. Thanks to the Form 1099-MISC, independent contractors can file their taxes and avoid scrutiny from the IRS. The IRS receives the form from your client, and matches it with the information you send.

Independent contractors who receive more than $600 of compensation throughout the tax year from a single client will need to file a 1099-MISC. If you fail to receive the form by mail, you should contact the client and have them resend a form. It is your responsibility to make sure you file your 1099-MISC, as the IRS will find out. Some clients may not know they have to send the form, so you should always take a proactive approach when it comes to your 1099-MISC.

You are required to report the income regardless of whether the client sends the form or not. While there is a $600 threshold for filing a 1099-MISC, that doesn’t mean you don’t have to report income made under that amount.

Typically, taxpayers who file their taxes with a 1099-MISC form can calculate their earned income and qualifying deductions using a Schedule C. Those taxpayers who are self-employed or independent contractors also have to file a Schedule SE, to account for Medicare and Social Security which may need to be paid by the taxpayer.

There’s no reason to make filing your taxes with a 1099-MISc difficult. In fact, when you use tax preparation software, the process is virtually done for you. Those who file with a 1099-MISC can maximize their benefits by using deductions and exemptions, and independent contractors often qualify for a wide variety of money saving options.