Tips and Info

A dependent can either be a child or a relative. In general, a dependent must be a U.S. citizen, must not file a joint return, and must be either a qualifying child or a qualifying relative.

A qualifying child is a child who is related to you, younger than you, and is younger than age 19 (or younger than age 24 if the child is a full-time student). The child must also live in your home for more than half the year, you must provide more than half the child’s support, and the child cannot file a joint return for the year except merely to claim a refund. A college student is still considered to be living with you when away at school, and scholarship payments are ignored when calculating the support test.

If a child’s parents are divorced, the custodial parent may claim the child. The custodial parent is the parent with whom the child resides for the greater number of nights. The divorce decree no longer determines which parent may claim the child.

In order to claim a qualifying relative, the person must either be related to you (excluding cousins), or be a member of your household for the entire year. The person’s income must be less than $4,000 and you must provide more than half of his or her support for the year. Additionally, the person cannot be the qualifying child of any other taxpayer unless that taxpayer does not file a tax return.

Finally, you cannot claim any dependents if you, or your spouse, can be claimed as a dependent by someone else. Each dependent can only be claimed once, so it is a good idea to check and make sure that nobody else is claiming the child or relative.

The purpose of Form W-4 is to help your employer estimate how much should be withheld from your paycheck for your federal income taxes. Not all taxpayers are equal. For example, a married woman with four children would have far different withholdings than a single woman with no children. Filling out Form W-4 allows your employer to make an accurate estimation of how much to take out of your paycheck for federal taxes.

There are two factors that allow your employer to estimate your tax liability: your marital status and the number of “withholding allowances” you claim.

Your marital status can be either “married” or “single.” Calculating the number of withholding allowances, on the other hand, is where most people require more guidance. If you are single with no children, your options are limited to either zero or one. If you are married with no children, your options increase to zero, one, or two. The possible number of withholding allowances you can claim increases by one for each child you have. There are many factors that can influence how many withholding allowances is appropriate, and will depend on each individual person’s situation.

Thankfully, the IRS realizes that most people need assistance when calculating the number of withholding allowances to claim on their W-4. The IRS has attached several worksheets to the Form W-4 in order to assist you with your calculations. These worksheets include a Personal Allowances Worksheet, a Deductions and Adjustments Worksheet, and a Two-Earners/Multiple Jobs Worksheet.

You can also contact us to assist you in determining the correct number of allowances.

If you have sources of income that do not have taxes withheld, it is likely that you will need to make estimated tax payments. Common sources of income without taxes withheld are self-employment earnings, rents, alimony, dividends, interest, and stock sales. If these sources of income are significant, it will likely be in your best interest to make quarterly tax payments to avoid any penalties on your tax return.

You will be required to make estimated tax payments if you expect to owe more than $1,000 on your tax return next year, and either of the following are true:

• • You expect that your tax withholdings and credits will be smaller than 90% of the tax due on your tax return for that year.

• • You expect that your tax withholdings and credits will be smaller than 100% of the tax due on last year’s tax return.

If your adjusted gross income on your prior year’s tax return was greater than $150,000 (or $75,000 if you were married but filed separate returns), then you must pay 110% of the tax due on last year’s tax return. There are also special rules for farmers, fishermen, or household employers.

Quarterly estimated tax payments for this year must be postmarked by the following dates:

• • 1st  Payment:       April 15

• • 2nd  Payment:      June 15

• • 3rd  Payment:      September 15/li>

• • 4th  Payment:      January 15

Beginning in 2013, a new Medicare Tax of 0.9% will apply to certain taxpayers. This additional tax applies to wages and self-employment income over $200,000 ($250,000 for married couples filing jointly). The tax is in addition to the regular Medicare Tax of 1.45%.

Regardless of filing status or other income, once an employee’s wages reach $200,000, employers are required to begin withholding the additional tax. This could lead to an overwithholding of Medicare Tax.

Conversely, married couples filing jointly may not have enough tax withheld and may want to consider increasing withholdings. If combined wages exceed $250,000 the couple will be subject to the additional tax. However, if neither spouse earns more than $200,000 with a given employer, the additional tax will not be withheld and an underwithholding of Medicare Tax could occur.

All individuals are required to have health insurance with minimum essential coverage or pay a penalty on their tax return. There are several government plans that qualify, but for most, minimum essential coverage is defined as coverage under an employer-sponsored plan in which:

1. The employee’s share of the premiums cannot exceed 9.56% of household income, and
2. The plan’s share of the total allowed costs of benefits provided cannot be less than 60% of those costs

Failure to acquire such coverage will require the individual to pay a penalty for each month without coverage. In 2015, the penalty is the greater of:

1. $325 per adult ($162.50 for those under 18 years old) up to $975, or
2. 2% of family income

Family income is defined as modified adjusted gross income less the standard deduction and personal exemption for the year.

This monthly penalty cannot exceed the national average for a bronze plan premium.

For example, assume Corby, an unmarried individual, is without minimum essential coverage for 7 months in 2015. His family income is $75,000. The monthly penalty is the greater of $325 or $125 [($75,000 X 2%)/12]. Since the applicable dollar amount of $325 is greater than the percentage of family income, this amount is compared to the bronze plan premium. Assume the bronze plan premium is $207month in 2015. Corby would have to pay a penalty in 2015 equal to $1,449 ($207 X 7 months). Corby would report this penalty on his 2015 federal income tax return.

When you come to our office for your tax appointment, there are a few items you should make sure to bring with you in order for us to be able to complete your tax return. These items are different for every person depending on their specific tax situation. However, some of the most common items include:

• Any tax forms you have received, such as W-2s, 1099s, 1098s, and K-1s.
• Documentation for any income and expense items which were not included on one of the tax forms listed above.
• Documentation to support your deductions, such as property tax receipts, charitable contribution receipts, medical receipts, rent paid, and any other deductible expenses.
• If you are a new client this year, a copy of your prior year’s tax return
• If you will receive a refund, and would like this refund direct deposited into your checking or savings account, we will need the routing number and bank account number for your account.

Previously, divorced parents would often agree upon certain years during which each parent would be allowed to claim their child on their tax returns. This agreement was often included in the divorce decree, such as one parent claims the child during even numbered years and the other parent claims the child during odd numbered years. The IRS, however, now says that the custodial parent is the parent who is entitled to claim the child as a dependent, regardless of what the divorce decree says.

The custodial parent is considered the parent with whom the child lives for the greater number of nights during the year. The child is considered to have lived with the parent for the night if the child sleeps at the parent’s home, regardless of whether or not the parent is present. The child is also considered to have lived with the parent for the night if the child is in the presence of the parent for the night, regardless of whether they are sleeping at the parent’s home, such as on a vacation.

The custodial parent has the right to claim the exemption for the child, but can waive this right and allow the noncustodial parent to claim the child. This is done by signing Form 8332, which can release the right to claim the exemption for 1 year, any number of years, or for all future years. Form 8332 allows the noncustodial parent to claim the child as a dependent for the year, which will allow the noncustodial parent to claim the child tax credit and additional child tax credit. The custodial parent can still claim head of household and claim the earned income credit for the year.

Beginning in 2011, you can take a deduction on your Indiana tax return for certain amounts paid for your dependents to attend a private school or homeschool in Indiana. To qualify, the expenses must be paid for a child that can be claimed as a dependent on your tax return, and the child must also be eligible for a free education in an Indiana school corporation. The child must have been enrolled for at least 180 days during the year.

Qualifying expenses include amounts paid for enrollment in a private elementary or high school, as well as the costs of tuition, fees, textbooks, computer software, school supplies, and other items which are used primarily for academic purposes. You cannot, however, deduct the cost of personal computers when figuring this deduction.

The amount of the deduction is limited to $1,000 per child per year.

Previously, self-employed taxpayers were able to take a deduction for the amount they paid for health insurance for themselves, their spouse, and their dependents on Schedule SE. This would reduce the taxpayer’s net income from self-employment on Schedule SE when calculating self-employment tax.

Self-employed taxpayers may no longer reduce their self-employment income by the amount they paid for health insurance when calculating self-employment tax on Schedule SE. A self-employed individual, however, may still enter their health insurance as an adjustment to gross income on line 29 of Form 1040.

Standard mileage rates can be used to calculate the deductible costs of using your automobile for business, charity, medical, or moving expenses. The standard mileage rate is used in lieu of tracking and calculating the actual costs of using your vehicle for these purposes.

For 2015, the standard mileage rates are as follows:

• • Business: 57.5 cents per mile

• • Medical/Moving: 23 cents per mile

• • Charitable: 14 cents per mile

For 2014, the standard mileage rates are as follows:

• • Business: 56 cents per mile

• • Medical/Moving: 23.5 cents per mile

• • Charitable: 14 cents per mile

For 2015, you can claim an exemption of $4,000 for each person you can claim on your tax return.

The standard deduction amounts depend on your filing status. If you file as single or married filing separately, you can claim a standard deduction of $6,300. If you file as married filing jointly or as a surviving spouse, you can claim a standard deduction of $12,600. If you file as head of household, you can claim a standard deduction of $9,250.

A Health Savings Account (HSA) is a special type of bank account that is established to pay for qualified medical expenses for you or your family.

There are several tax benefits from using an HSA. First, you can claim a tax deduction for amounts that are deposited into your HSA, as long as the deposit is not made by your employer. For 2016, you can deduct up to $3,350 if you have a self-only health plan, or $6,750 if you have a family plan. You can claim this tax deduction on the front page of your tax return, which means that you do not have to itemize your deductions in order to benefit from this deduction. If you are age 55 or older at the end of the year, you can contribute an additional $1,000 per year.

Additionally, you can leave your money in your HSA as long as you want. There are no spending requirements, and if your HSA earns interest it will be tax free. When you take money out of your HSA, it will be tax free as long as you spend the money on a qualified medical expense. A qualified medical expense is any expense that you would normally be allowed to deduct, such as prescription medication, copays, medical equipment, and hospital bills. You cannot, however, pay your health insurance premiums with your HSA. If you withdraw money from your HSA and do not use it for a qualified medical expense, you will have to pay tax on this amount, as well as a 20% penalty.

In order to qualify for an HSA, you must be covered under a high deductible health plan (HDHP). A high deductible health plan is a health plan that has a minimum annual deductible of at least $1,300 for self-only coverage and $2,600 for family coverage. Your health coverage must also have a maximum annual out-of-pocket limit, which can be no more than $6,550 for self-only coverage and $13,100 for family coverage. Additionally, you cannot qualify for an HSA if you are enrolled in Medicare or if you can be claimed as a dependent on another person’s tax return.

For individual taxpayers and corporations, there is a penalty for both filing your tax return late and for paying your tax late.

If you do not file your tax return on time, you will be charged a failure to file penalty of 5% of the tax due for each month (up to five months) that the return is late, plus interest. If your return is more than 60 days late, you will pay a penalty of at least $135 or 100% of the tax owed, whichever is smaller.

If you file your tax return on time, but do not pay the tax due with your return, then you will owe a late payment penalty. This penalty is ½% of the tax owed for each month that the tax is not paid, up to a maximum of 25%. If you receive a notice of intent to levy from the IRS, then the penalty will increase to 1% if you do not pay the tax within ten days.

If you owe both a failure to file penalty and a late payment penalty, then the failure to file penalty of 5% per month is reduced by the late payment penalty of ½% per month. If your return is more than 60 days late, the penalty will still be the smaller of $135 or 100% of the tax owed.

There are additional penalties for filing a tax return that is fraudulent or that is knowingly filed with incorrect information, or information that results in a substantially lower tax than what is actually due. This penalty can be as much as 20% of the tax underpayment.

The penalties associated with filing a late partnership tax return (Form 1065) are much more expensive. If a partnership does not file on time, the penalty is $195 for each month (up to a maximum of 12 months) that the return is late, multiplied by the number of people who were partners during the year. If a partnership fails to issue its partners a Schedule K-1 on time, a penalty of $100 per K-1 can be charged to the partnership. This penalty can be increased to $250 per late K-1 if the partnership intentionally ignored the due date for filing.

If you are a member or shareholder of a pass-through entity such as a Subchapter S Corporation, partnership, or LLC that incurred a loss, you are now required to attach a worksheet to your personal tax return.

Taxpayers who are shareholders or members in pass-through entities such as Subchapter S Corporations, partnerships, or limited liability companies (LLCs) are now required to attach a worksheet showing their basis in the stock of such entity if a loss was incurred. This worksheet is to be attached to the investor’s personal income tax return. Prior to this change, taxpayers had the option of including a worksheet showing the basis in their investment.

While this does not affect currently profitable pass-through entities, it is still a good idea to ensure that all basis calculations in your investments are accurate and up-to-date.

Keep in mind that this is separate from the requirement of investment companies to report taxpayers’ basis in stocks and other investments to the IRS whenever an investment is sold.

Indiana taxpayers can invest in a college savings plan called a CollegeChoice 529 Investment Plan. Learn about the tax breaks the plan offers as well as penalty taxes for withdrawals not intended for higher education expenses.

A CollegeChoice 529 Investment Plan is a college savings plan sponsored by the State of Indiana. A 529 Plan is especially convenient for saving for college because anyone can open and contribute to a plan for a beneficiary, including parents, grandparents, other family, and friends. Total contributions to a 529 plan cannot exceed $298,770 for each beneficiary, however, account balances may grow larger than this amount through investment earnings.

A 529 plan has numerous tax advantages which have made them increasingly popular. Primarily, if you are an Indiana taxpayer, you are eligible for a state income tax credit equal to 20% of any contributions made to a 529 plan, up to $1,000 per year. Additionally, any amounts contributed to a 529 plan will grow tax deferred and will be free from Federal income tax when the funds are eventually withdrawn, as long as they are used for qualified higher education expenses. Qualified higher education expenses include books, supplies, tuition, mandatory fees, any equipment that is required to be purchased, and room and board if the beneficiary is enrolled at least half-time.

If funds are withdrawn from a 529 plan for any purpose other than qualified higher education expenses, the funds may be subject to federal income tax, as well as a 10% penalty tax.

When your child has income from unearned sources like interest or dividends, you may be required to pay a “Kiddie Tax.”

A special tax, referred to as the Kiddie Tax, applies to children who have income from unearned sources. Unearned income includes income such as interest, dividends, and capital gains from stock sales.

A child will be subject to Kiddie Tax if they meet the following criteria:

• • The child is younger than age 19 at the end of the tax year, or younger than age 24 if the child is a full-time student

• • Either of the child’s parents are alive at the end of the tax year

• • The child has unearned income greater than $2,100

• • The child does not file a joint return

If a child meets the above criteria, the child’s unearned income will be taxed at the same tax rate as the parents. Since the parents are usually in a higher tax bracket than the child, this often results in additional tax on the child’s return.

In order to avoid filing a separate return for the child, the parents can elect to include the child’s unearned income on their own tax return, as long as the child’s income is between $1,050 and $10,500 for the year.

There are numerous tax strategies for avoiding the Kiddie Tax. For example, the Kiddie Tax can be avoided by delaying the collection of unearned income until the child reaches age 19 (or age 24 if the child is a full-time student), investing in growth stocks which do not pay dividends, investing in tax exempt bonds and U.S. Savings Bonds, or moving these accounts into a Section 529 college savings account.

A personal hobby is generally not considered a trade or business. This means that any loss incurred can only be deducted, as a miscellaneous itemized deduction, to the extent of any revenue earned. No net operating loss can occur and no losses can be carried forward or backward to offset profits. With this treatment, a part-time coin collector can only deduct expenses incurred to acquire rare coins against any revenue earned. The collector cannot deduct more than the revenue earned for the year.

However, if the hobby falls under the classification of a trade or business, losses are allowed and expenses may be deducted in excess of any revenue earned. Generally, a trade or business is an activity that is carried on with a profit motive, even if the motive is unreasonable. If challenged by the Internal Revenue Service (IRS), the taxpayer must show a profit motive exists and that some type of economic activity was conducted.

In addition, if there was a net profit in any 3 of the past 5 years, the IRS will presume the activity is a trade or business.

The Tax Courts also look at several factors to determine if a hobby qualifies as a trade or business. No one factor carries more weight than another and the following is not an exhaustive list of factors:

1. The manner in which the taxpayer carries on the activity.
2. Is the activity carried on in a manner similar to profitable activities of the same nature?
3. The expertise of the taxpayer or the taxpayer’s advisors.
4. The time and effort spent by the taxpayer in the activity.
5. Is there an expectation that the assets will appreciate in value?
6. The history of income or losses for the activity.
7. The history of any earned profits in relation to any losses.
8. What is the financial status of the taxpayer?
9. Is there an element of personal pleasure or recreation?

Consult your tax professional if you feel your hobby may qualify as a trade or business as you may be entitled to additional tax benefits and deductions.