WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

* From the NJ Division of Taxation summer newsletter -

"The following jurisdictions are conducting tax amnesty programs. During the designated amnesty period, taxpayers have a chance to pay back taxes with reduced (or eliminated) penalty and/or interest. For more information, including eligibility requirements, or to obtain an application, visit the jurisdiction’s website.

Arizona  =  9/1/15 – 10/31/15  =  www.azdor.gov/Home.aspx

Indiana  =  9/15/15 – 11/16/15  =  www.in.gov/dor/amnesty/

Maryland  =  9/1/15 – 10/30/15  =  www.marylandtaxes.com

Missouri  =  9/1/15 – 11/30/15  =  http://dor.mo.gov/

Oklahoma  =  9/14/15 – 11/13/15  =  http://www.ok.gov/tax/#"

* The NJDOT newsletter also reported –

“P.L. 2015, c.73, signed into law on July 6, 2015, and effective immediately, amends the New Jersey Gross Income Tax Act to increase the amount of the New Jersey earned income tax credit from 20 percent of the federal earned income credit to 30 percent for tax years beginning on and after Jan. 1, 2015.”

FYI, it is my belief that the Earned Income Credit does not belong on either the federal Form 1040 or the NJ-1040.

* Dr. Jean Murray’s recent online newsletter on business taxes from ABOUT.COM covers “S Corporations and Single-member LLCs”.

* Bill Perez, also from ABOUT.COM, shares some advice on how to “Communicate Effectively with Your Tax Preparer”.

* Barbara Weltman makes a good point in “Time Cards for Owners?” at BARBARA’S BLOG –

“The question I raise is should every business owner clock in and out each day? From a tax perspective, it can’t hurt.”

* Check out “The Jason Dinesen Plan for Preparer Regulation” at DINESEN TAX TIMES.

Jason feels that the IRS is already regulating tax preparers via the PTIN program – and that is enough.

I do not support regulation of the tax preparer industry by the IRS or any other government agency, and agree with Jason that PTIN registration is sufficient.  But I do support the establishment of a universally accepted independent voluntary tax preparer credential – not to “regulate” tax professionals but to provide a way to acknowledge their competence and currency and to help the taxpayer public identify competent and current preparers.  

* And Jason continues his tutorial on “Choosing a Business Entity” with a review of the “Partnership”.

* No surprise here – unfortunately Hillary “Clinton Would Tinker With, Not Rewrite, The Tax Code”.

Clinton wants to continue to misuse the Tax Code “as a tool for economic and social policy”.

The purpose of the federal income tax is to raise the money necessary to fund the government – and not to “redistribute wealth” or to distribute social program benefits.

Howard Gleckman, who wrote the piece for FORBES.COM, suggests that, based on what Clinton has proposed so far, “unlike many Republicans, broad-based tax reform is far from the top of her mind”.

* While David Letterman is gone (I, for one, do not miss him), Top 10 Lists continue.  Here is a good one from the IRS – “Top 10 Tips about Tax Breaks for the Military”.

THE FINAL WORD –

It appears that Trump does not just screw his stockholders and lenders.  He screws everyone with whom he does business.

In the early 2000’s a long-time friend and client purchased a condo in NYC for cash and owed a small amount to finalize the deal.  The Trump Organization was the developer/builder.  The money was due to the financing bank.  Of this payment 90% would go to the bank and 10% would go to Trump.  Trump’s lawyer told my client to write a check to the Trump Organization and it would in turn pay the bank.

The bank did not want my client giving anything to Trump – they wanted payment to go directly to them.  The bank’s lawyer told my client that he did not trust the Donald because he had reneged and screwed the bank multiple times in the past.

My client told me -

“We later learned that Trump always shorted his sub-contractors by 5 to 10% and didn't care if they sued him.  Ultimately they would settle with him, taking a 5%+ haircut, and Trump always came out ahead.”

TTFN

ONE REASON YOU SHOULD KEEP COPIES OF YOUR TAX RETURNS FOREVER

One of the most frequently asked questions I get from clients and readers is “How long should I keep my tax returns?”.

I have always said you should keep the paper copy of your tax returns (Form 1040 or 1040A, and corresponding state returns, plus all supporting Schedules, Forms, and worksheets) forever. This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial reasons, or just to satisfy personal curiosity. 

You should also keep copies of all W-2s forever, and, as fellow tax blogger Russ Fox of TAXABLE TALK has suggested, copies of proof of filing and proof of mailing returns.

This advice applies to tax professionals as well.  As a tax preparer I am required by law to keep on file copies of tax returns I have prepared for 3 years.  But I keep copies of every return I have prepared for all current clients.  For some clients I have copies of their returns going back to the early 1970s.

I recently came across an excellent example of the benefit of keeping copies forever.

A long-time client inherited from my mentor, a lifelong NJ resident, is beginning to take annual Required Minimum Distributions from his IRA accounts.  The source of the monies in his IRA accounts includes deductible contributions to Keogh and SEP accounts, eventually rolled over into IRAs, deductible IRA contributions (during the 5 years in the 1980s when everyone with earned income could contribute to an IRA regardless of the amount of their Adjusted Gross Income) and rollovers of employer pension plans partially funded by pre-tax employee contributions.

The RMDs will be fully taxable on the federal Form 1040, as all of his contributions to the various sources were either deductible or “pre-tax”.  However his federally deductible contributions to Keogh, SEP and IRA accounts were not deductible on the NJ-1040, and are “after-tax” for NJ state income tax purposes.  So he has a “basis” in his current IRA accounts for NJ state tax, and part of his RMDs will be non-taxable return of after-tax contributions on the NJ-1040.  The greater the total of employee after-tax contributions the greater the amount of the RMD that will be tax-free to NJ. 

I have copies of this client’s tax returns going back to 1984, so I can add up the amount of his federally deductible contributions to Keogh, SEP, and IRA accounts from 1984 through his retirement in the late 2000s.  However he was making contributions to these accounts in years before 1984. 

I can guess the deductible IRA contributions (everyone with earned income could make IRA contributions from 1982-1986 – so I can assume he made the maximum contribution in 1982 and 1983 based on the fact that he did so in 1984-1986).  But Keogh contributions are based on the amount of net self-employment income, and I would need the actual returns from before 1984 to get the correct numbers.

If the client had kept copies of all his federal tax returns forever I could get the needed information from him.

So, in this case, information from tax returns going back to the late 1970s would help reduce the tax liability on current state tax returns.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION

Sorry for the brief BUZZ installments lately – but there is not much happening in the federal tax arena.

The idiots in Congress have left for vacation without addressing the “tax extenders”.  As I have said in a previous BUZZ it looks like it will be déjà vu all over again as the idiots once again wait until the last minute to extend these tax breaks for another year or two. 

* Tax pros – Did you see the latest post at THE TAX PROFESSIONAL yet?  Why not?  There are two questions I want you to answer.

* In light of the comments by two of the candidates in the recent Republican debate Kelly Phillips Erb explains “Our Current Tax v. The Flat Tax v. The Fair Tax: What's the Difference?” at FORBES.COM.

I like the idea of a flat tax because –

“A true flat tax would mean, as Dr. Carson explained, that everyone would pay the same tax rate regardless of income.”

I don’t believe a person with higher income should be punished for ambition and entrepreneurship by being taxed at a higher rate.

The concept behind the “Fair Tax” – a national sales tax – should not be dismissed out of hand.  It has many advantages.  Because it is a consumption tax paid at the point of purchase those who currently avoid tax as part of the “underground economy” would be paying tax, including, as former Governor Huckabee pointed out at the debate, “illegals, prostitutes, pimps, drug dealers, all the people who are freeloading off the system”. 

* Over at DON’T MESS WITH TAXES Kay Bell, the yellow rose of taxes, warns us that the “Latest Tax Scam Arrives as Fake Snail-Mailed IRS Letters”.

For years we have been telling you that the IRS will never initiate contact with a taxpayer by telephone or email.  They will always do it by postal mail.  Scammers have been listening, and are now sending out phony IRS balance due notices via postal mail.

Kay points out that “real letters from the IRS, even those about amounts the agency says you owe, do not demand that you send it or its agents payments via specific methods such as pre-debit cards. And initial written notices from the IRS also give you time to respond to or rebut the agency's request for additional tax payment.”

For years I have also been telling you that whenever you receive any correspondence from the IRS or a state tax agency give it to your tax preparer immediately.  Do not send any money to anyone without first checking with your tax pro.

If you have “self-prepared” your tax returns, either by hand or via a “box”, and you receive correspondence from a tax agency you should contact a tax professional before doing anything (you should have used a tax pro instead of a “box” in the first place).  Click here for a starting point in your search for a tax pro.

* Sarah Brenner from THE SLOTT REPORT explains “How You Can Utilize an HSA Now to Save For Retirement”.

* Julian Block (I assume no relation) deals with the question “Fees for Divorce Mediators: What’s Deductible?” at ACCOUNTING WEB.

TTFN

THE TAX PRACTITIONERS BILL OF RIGHTS

The National Society of Accountants (the “other” NSA) has developed a “Tax Practitioners Bill of Rights” in response to continued IRS budget cuts and the recent serious decline in IRS “customer service”.

Here is NSA Tax Practitioners Bill of Rights:

1. THE RIGHT TO HAVE TAX LAWS AND RULES PASSED IN A TIMELY MANNER, INCLUDING:

a.  The right to have tax laws affecting the current tax year enacted no later than September 1 of that year.

b. The right to have IRS forms reflecting any new tax laws for the current year available no later than October 1 of that year.

2. THE RIGHT TO QUALITY SERVICE FROM THE IRS, INCLUDING:

a. The right to have telephone calls answered within 15 minutes, on a practitioner-only hotline, staffed by competent/knowledgeable employees.

b. The right to have taxpayer correspondence answered within 20 days.

c. The right to have any collection action on the taxpayer’s account frozen while the IRS is considering a taxpayer’s timely filed response to IRS collection activity.

d. The right to have one IRS representative deal with a tax issue from start to finish until the issue is resolved.

e. The right to request a supervisor be involved in resolving a matter if the initiating IRS representative is unwilling or unable to resolve an issue.

f. The right for practitioners with Practitioner Tax Identification Numbers (PTINs) to communicate electronically with the IRS on taxpayer matters in a secure manner.

3. THE RIGHT TO PRACTICE WITHOUT UNDUE IRS DEMANDS DURING TAX FILING SEASON, INCLUDING:

a. The right to have an IRS audit moratorium during the three weeks immediately before major tax deadlines such as March 15, April 15, September 15, October 15 of each year.

b.  The right to have an IRS moratorium on collection actions or collection information requests during the three weeks immediately before major tax deadlines such as March 15, April 15, September 15, October 15 of each year.

c.  The right to have an IRS moratorium on planned software maintenance and computer downtime periods during the three weeks immediately before major tax deadlines such as March 15, April 15, September 15, October 15 of each year.

The NSA has created a petition for tax pros to sign (click here).

This document addresses important issues that apply to taxpayers in general, and not just tax professionals.  Legislation is needed to guarantee the provisions of this document.  However, I see the need not for tax practitioner specific legislation, but for a “Taxpayer Bill of Rights” legislation that includes all of the items discussed in the NSA document.

Since 2007, National Taxpayer Advocate Nina Olsen has been recommending that Congress enact a Taxpayer Bill of Rights.  The IRS has already adopted a Taxpayer Bill of Rights (click here to download).

I would include a provision that, except for a bill to address a specific natural disaster, Congress could not pass “temporary” tax legislation.

We need to merge the “Tax Practitioners Bill of Rights” and the “Taxpayer Bill of Rights” into one document and provide an online petition open to all taxpayers to sign.

TTFN   

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

There was not much discussion of taxes in last night’s prime time Republican debate.  Huckabee expressed his support for the Fair Tax plan, a tax on consumption that would assure that "illegals, prostitutes, pimps, drug dealers" pay their fair share of taxes too.  Dr. Carson talked about a “tithe-based” 10% flat tax.  Under his plan a person making $10 Billion would pay $1 Billion in tax and a person making $10.00 would pay $1.00.  I like the flat tax concept.  It appears the consensus among the ten was that the current Tax Code, called “convoluted” by one candidate, needs to be rewritten.

* THE TAX PROFESSIONAL is back!  I pose some questions for tax pros.

* The CCH daily TAX HEADLINE email newsletter reminds us that “Failure to File 2014 Tax Returns Will PreventAdvance Payments of Premium Tax Credit in 2016” –

“Individuals who fail to file a 2014 tax return will not be eligible to receive advance payments of the PTC in 2016. Individuals who are not eligible for advance payment of the PTC will be responsible for the full cost of the monthly premiums and all covered services. In addition, nonfilers may need to pay back some or all of their 2014 advance payments.”

* Attention self-employed taxpayers – have you taken advantage of my special summer offer yet? The cost of THE NEW SCHEDULE C NOTEBOOK is normally $7.95 – but for all orders postmarked by August 31st the cost is only $5.30 – a 1/3 discount!  The report will be sent as a pdf email attachment.

Send your check or money order for $5.30, payable to Taxes and Accounting, Inc, and your email address to –

 

SUMMER SPECIAL OFFER

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY NJ 18428

 

THE FINAL WORD –

 

Tronald Dump is truly a buffoon and a clown, which Jeb Bush denied calling him at last night’s debate.

 

The self-absorbed fool showed pride in the fact that he took advantage of bankruptcy laws to screw his investors and lenders out of millions of dollars not once or twice but four times. 

 

He also appeared proud of the fact that he contributed to many political campaigns, of both Republicans and Democrats, not because he supported their politics but solely so he would be able to call upon them for favors as needed in the future.

 

When called out for insulting women, and not just Rosie O’Donnell, as “fat pigs, dogs, slobs, disgusting animals” and worse, Trump said he did not believe in being “politically correct”.  Calling women, or anyone, fat pigs, dogs, slobs, disgusting animals and worse in response to criticism is not “politically incorrect” – it is childish and inexcusable.  If President Trump or the Unites States was criticized or questioned by another world leader would his response be “You’re ugly!”? 

 

Trump’s candidacy should not be taken seriously.  It should be treated as the joke that it is.

TTFN

 and worse

FORM 1098-T WILL BE REQUIRED FOR CLAIMING EDUCATION BENEFITS

While the idiots in Congress have not passed any actual tax bills so far this year there have been some procedural changes tacked on to some non-tax bills.  Like the business tax return filing deadline changes in the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015”.

The “Bipartisan Congressional Trade Priorities and Accountability Act of 2015” includes a change in the documentation of education tax benefits.

Kay Bell explains in “Form 1098-T Will be Needed to Claim Education Tax Breaks” at DON’T MESS WITH TAXES -

“Under the new trade preferences act, 1098-T information will have to match up with American Opportunity or Lifetime Learning tax credits claims.

Similarly, a Form 1098-T {“Tuition Statement” – rdf}  “will be required to claim the above-the-line tuition and fees deduction, which actually expired at the end of 2014, but is expected to be renewed under pending extenders legislation.

Basically, if you don't have a valid 1098-T with the info you're putting on your return, the IRS will not accept your education claims. This effectively means that folks claiming education tax breaks will have to wait to file until they (and the IRS) get their Form 1098-T copies, delaying filing by folks who submit their returns early because they're getting big refunds.”

This change is effective for tax year 2016 – for tax returns filed in 2017.

My initial response to this new matching requirement concerns the fact that most Form 1098-Ts that I see during the tax season are as useful as tits on a bull.

I said as much in my 2012 post “Bull Tit”.

To quote from that post –

“Box 1 of the 1098-T is for payments received ‘from any source’ for qualified tuition and related expenses.  This is the information I need.  However in the years that this form has been in use I have only seen an entry in this box once – and it was incorrect.  It showed only the payments received directly from the student (actually the student’s parents).

Box 2 is for amounts billed for qualified tuition and related expenses.  This is the box that is always filled in.  To be honest, I don’t care a rat’s hind quarters how much was ‘billed’.  My clients are cash-basis taxpayers – I need to know what was paid during the calendar year, not what was billed.

Colleges will generally bill students for the semester beginning in January of the following year at the end of the current year.  So the amount in Box 2 usually includes this amount.  But parents or students do not always pay this amount until the following year.”

As I point out in the post –

“Thankfully some colleges and universities will provide a supplement to the Form 1098-T mailing that itemizes the various charges and payments made for the year by date, which is extremely helpful.  But unfortunately not all.”

I do not rely on the 1098-T for claiming education credits or deductions.  I instruct clients with children in college that “I need all Form 1098-Ts received and all the ‘Burser’s Reports’ for the year that show tuition and other payments.  You may be able to print-out a financial report from the college’s website.” 

Several years ago I was given a Form 1098-T for a student who had graduated in the tax year.  Box 1 and Box 2 were both empty.  Upon questioning the taxpayer I discovered that there were indeed payments made for qualified tuition and fees during the year.  These payments had been billed in the previous year, and were included in Box 2 of the previous year’s Form 1098-T.    

 

If the IRS is now going to match all Form 8863 and Form 8917 claims to the information reported on Form 1098-T is the IRS also going to require all educational institutions to properly complete Box 1?

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION

* The JOURNAL OF ACCOUNTANCY reports that there is some good news in the short-term highway funding extension bill – “Return Due Dates Changed in Highway Funding Bill”.

“For partnership returns, the new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). (Currently, these returns are due on April 15, for calendar-year partnerships.) The act directs the IRS to allow a maximum extension of six months for Forms 1065, U.S. Return of Partnership Income.

For C corporations, the new due date is the 15th day of the fourth month following the close of the corporation’s year. (Currently, these returns are due on the 15th day of the third month following the close of the corporation’s year.)

Corporations will be allowed a six-month (instead of the current three-month) extension, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026.

The new due dates will apply to returns for tax years beginning after Dec. 31, 2015.

The due date for FinCEN Form 114 is changed from June 30 to April 15, and for the first time taxpayers will be allowed a six-month extension.”  

This is truly good news for taxpayers, and especially for tax preparers.  Hopefully the earlier partnership filing deadline will reduce the number of late K-1s.  And I am also pleased about the extended filing deadline for C corporations.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236).was signed into law by BO last Friday.   The changes will take place for tax years beginning after December 31, 2015.

CCH has a Tax Briefing on this new law.  Click here to download in pdf format.

While I am pleased with the changes in due dates, Joe Kristan, returning to his daily Tax Round-up posts after a European vacation, makes a good point in “Tax Roundup, 8/3/15: Due date scramble edition, with extendable FBARs!’ –

“The bill is an empty gesture to 1040 filers who get frustrated waiting on K-1s. They won’t get issued any faster. K-1s aren’t delayed because people are sitting around waiting for the due date. They are delayed because the tax law is hard, businesses can be complex, and it takes time to get the work done. On top of that, everybody is on a calendar year, thanks to Congress, so the professionals are trying to get all the returns completed at the same time.

All this means is that more partnership returns will be extended. It won’t get the K-1s out any sooner. The only way to change that is to simplify the tax law and to once again enable pass-throughs to have tax years ending on dates other than December 31.”

* I agree with Kathleen King, managing director of Alvarez & Marshall Taxand’s Washington, D.C., office.  In “Mid-Year Tax Planning Hampered by Extenders' Fate” from Roger Russell at ACCOUNTING TODAY she correctly observes –

“It will be August next week. Washington will clear out, and there will really be only a month until those who are running have to go back home and campaign until after the elections, so we’re looking at mid-November for something to get through.”

It is August already!

So it looks like it will be déjà vu all over again.

Making tax breaks - that are not in response to a specific event (a natural disaster like Katrina) – temporary is just plain stupid.  But then again, the members of Congress who did this are idiots. 

* For those who are interested ABC NEWS tells us “Clinton Releases Tax, Health Records on Busy Friday”.

* Jason Dinesen continues to keep us up-to-date on state same-sex couple filing issues with “New Nebraska Guidance on Same-Sex Marriage and Taxes”.

* BTW, my thoughts on Trump’s Presidential candidacy recently appeared in my local paper – “Homer Simpson – 1, Donald Trump – 0”.

TTFN

AN IMPORTANT MESSAGE WORTH REPEATING

The IRS phone scams have been ongoing for over a year now. 

According to “Phone Scams Continue to be Serious Threat, Remain on IRS ‘Dirty Dozen’ Listof Tax Scams for the 2015 Filing Season” from the IRS website -

“The Treasury Inspector General for Tax Administration (TIGTA) has received reports of roughly 290,000 contacts since October 2013 and has become aware of nearly 3,000 victims who have collectively paid over $14 million as a result of the scam, in which individuals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards.”

Here is an important message worth constant repeating –

THE INTERNAL REVENUE SERVICE WILL NEVER INITIATE CONTACT WITH A TAXPAYER BY TELEPHONE OR EMAIL.  THEY WILL ALWAYS SEND A WRITTEN LETTER OR NOTICE VIA POSTAL MAIL.

A long-time friend and client recently received a phone call with this pre-recorded message - "We have tried to reach you many times.  This is the IRS.  Please call this number.  We are preparing a case against you."  The message then provided a phone number to call.

My friend correctly immediately emailed me.  I explained that is was a scam and told her to ignore it - and if they call again to hang-up. 

IF YOU RECEIVE A PHONE CALL CLAIMING TO BE FROM THE HANG UP.  

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

* I realize it is early in the Presidential race – but the TAX FOUNDATION is already “Comparing the 2016 Presidential Tax Reform Proposals”.

The couple of tax proposals from Hillary Clinton, one involving the taxation of capital gains, are disappointing but not surprising.  They continue to further complicate the Tax Code, already a mucking fess.  Hillary and the Democrats, including BO, have absolutely no interest in serious and substantive tax reform.  They want to continue to complicate the Code and use it for social engineering.

Those Republicans who have provided tax reform proposals tend toward a more simplified Tax Code and a flat tax.  While many of the Republican candidates may be off on other important issues, and unacceptable due to Tea Party leanings, simply from a tax reform standpoint it is clear that the Republican position is truly the better one.

* A recent TAX FOUNDATION map answers the question “How High Are Gas Taxes in Your State?”

For once my situation is reversed.  My new home state of Pennsylvania has the highest rate at 51.60 cents per gallon – but my former home state of New Jersey has the second lowest at 14.50 cpg.  It is perhaps the only time where NJ actually does not have the highest, or almost highest, tax in the nation.

* More disturbing news on the sad state of IRS taxpayer service.  Robert W Wood tells us “Report Says IRS Mishandled 24,000 IRS Tax Lien Notices---Just Ask Robert De Niro” at FORBES.COM.

Continued word on how budget cuts and mismanagement have wreaked havoc at the IRS, with taxpayers as the victims.

* Also at FORBES.COM “Taxgirl” Kelly Phillips Erb reports “Back To School Sales Tax Holidays For 2015 Starting Soon”.

Her post lists the states, dates, and specific exemptions.

* Jason Dinesen is up to Part 14 in his series on “Marriage in the Tax Code” – “The Marriage Penalty Gets Worse Through the 1970s”.

* The BALTIMORE SUN gives us the word that “Maryland to Have 'Amnesty' for Delinquent Taxpayers this Fall”.

“Those who are behind on their taxes will have a relatively short window — Sept. 1 to Oct. 30 — to apply and be enrolled in the program. It applies to a variety of overdue taxes, including personal and fiduciary income tax, corporate income tax, sales and use tax, employer withholding tax, and admissions and amusement tax.”

Click here for the 2015 Amnesty page of the Comptroller of Maryland website.

THE FINAL WORD –

It is one thing to speak your mind and call a spade a shovel.  But the contents of idiot Donald Trump’s mind are limited to thoughts of himself, and when he speaks only nonsense comes out.

TTFN

CAN I CLAIM MY SON (OR DAUGHTER)?

As a veteran tax professional with 44 filing seasons under my belt and tax blogger one question I am often asked by clients, readers, and cocktail party guests is “can I claim my son, or daughter?”.

In order to be claim someone as a dependent on your tax return that person must be either a “qualifying child” or a “qualifying relative”. 

A qualifying child includes your child by birth, stepchild, or a foster child who is placed with you by an authorized agency or by judgment, decree, or other court order.  A child you have legally adopted is treated as your child by birth.

He or she must be either under age 19 at the end of the year or under age 24 at the end of the year and a full-time student for any part, even 1 day, of 5 months during the year.  A child is enrolled in an online or correspondence school does not qualify as a full-time student.  

The child must live with you as a member of your household for at least 6 months of the year.  If the child is temporarily at another location for a specific reason, such as in a dorm at college or in military service, he or she is still considered to be living with you.

A child who was born or who died during the year is considered to have lived with you for the entire year.  There is no limitation on the number of days – a child who passes on January 1, 2014, or is born on December 31, 2014, can be claimed as a dependent.

And you must provide more than 50% the child’s support for the year.  

A qualifying child who is married can only be claimed as a dependent if he or she does not file a joint tax return with their spouse, unless the only reason for filing a joint return is to claim a tax refund.

If a child is the “qualifying child” of both parents, who are separated, divorced or unmarried, there are “tie-breaking” rules for determining who can claim the child as a dependent.  Generally the child is the dependent of the “custodial parent”, which is the parent with whom the child lives with for the greater part of the year.  What is comes down to is the number of nights during the calendar year that the child sleeps at a parent’s home. 

You may also be able to claim your son or daughter as a dependent as a “qualifying relative”.  This happens if the child is over age 19, or 24, and has gross taxable income of less than the amount of the personal exemption deduction, which for 2014 was $3,950 and for 2015 is $4,000.  Non-taxable income, such as SSI or non-taxable Social Security or Railroad Retirement benefits, do not count toward the $3,950 or $4,000. 

In this situation the child does not have to live in your home as a member of your household, but you must provide more than 50% of his or her support.

Here are some examples, all assuming you provide more than half of the son or daughter’s support –

Your son, age 20, is a junior in college who lives away at school most of the year.  He has a summer job and earns $6,000 in W-2 wages.  You can claim him as your dependent.

Your 25 year-old daughter is in medical school.  She does not work and has no taxable income other than interest, dividends, and capital gains that total less than $1,000 for the year.  You can claim her as a dependent.

Here is a real-life example from my mentor’s practice.  Your 40+ year old son lives with you.  He does not work and has no income.  He basically lives off you.  You can claim him as a dependent.

How much tax will you save by claiming your child as a dependent?  Depending on your situation the savings can be substantial.

In addition to claiming an additional personal exemption – a $4,000 exemption will save $1,000 in federal tax for taxpayers in the 25% bracket – based on your level of income and the child’s age you may also be able to take advantage of the Child Tax Credit, Child and Dependent Care Credit or exclusion of child care benefits paid through a flexible spending account (FSA), and the Earned Income Tax Credit. 

The tax savings for having a dependent child, or the tax cost of losing a dependent, is much more substantial for a single parent with one child.

In order to be able to claim the tax-advantaged Head of Household filing status you must pay more than half of the cost of keeping up your home, which is the principal residence for more than 6 months of your qualifying child or qualifying relative.  A qualifying child does not have to be claimed as a dependent – a custodial parent can “release” the dependency exemption to the non-custodial parent – but a qualifying relative must be claimed a dependent.

So, as with just about every tax question, the answer to “can I claim my son, or daughter?” is “it depends”.

TTFN

HOW TO ENJOY A TAX DEDUCTIBLE VACATION

Here is a summer-appropriate post taken from my THE NEW SCHEDULE C NOTEBOOK.

One of the reasons I am called the “Wandering” Tax Pro is because once the tax filing season ends I enjoy travel via all methods – car, bus, plane, ship and train (not necessarily in that order).

Over the past 30 years my annual travel itinerary has often included two totally tax-deductible domestic vacations. I would attend the National Conference of the National Association of Tax Professionals (NATP) and the Annual Convention of the National Society of Tax Professionals (NSTP), held each year in a different US city. I have visited Alexandria, Anaheim, Arlington, Atlanta, Austin, Boston, Corpus Christi, Las Vegas, Minneapolis, New Orleans, Orlando, Reno, Sans Antonio, Diego, Francisco, and Juan, Washington DC, and other locations as a registrant of these two annual events, and deducted my travel expenses.

You can deduct expenses that are “ordinary and necessary” for your business. An “ordinary” expense is one that is common and accepted in your specific trade or profession and a “necessary” expense is one that is helpful and appropriate.

One “ordinary and necessary” business expense for which you can claim a tax deduction is the cost of education that is (1) expressly required by an employer, by law, or by government regulation, or (2) maintains or improves skills required in your current trade or business. If a conference falls under this category the associated registration and travel expenses are deductible.

You must show that your attendance at the conference or convention benefits your business. The convention agenda or program generally shows the purpose of the convention.

Deductible expenses include –

• The registration fee and any related books or materials.

• Round-trip airfare, train fare, or bus fare at cost, or the standard mileage allowance for business travel if you drive (or, as an alternative, a percentage of the total actual costs of operating your car) and related red cap tips.

• Taxi fares to and from the airport, train or bus station, to and from your hotel, and to and from other business locations while away.

• Hotel or motel lodging expenses, including tips to bellman and maids and the cost of laundry services.

• 50% of meals.

After I deduct all my travel expenses, I often save enough in taxes to cover the registration fee and some of the travel expenses! I get a free quality education, which benefits my practice, and I save on the actual cost of the trip.

If you are travelling with your family, only your expenses are deductible. However airlines often offer discounts for accompanying family members, and a hotel room is generally the same price whether regardless of the number of people in the room. You can deduct what it would cost if you were travelling alone. There are special rules if your spouse also works for your business.

You cannot deduct auxiliary sightseeing expenses while at the conference or convention, such as guided tours or travel to and from attractions, museums, sporting events, theatres, etc (unless you were attending with a client or colleague and the activity qualified as deductible business entertaining).

As with any business expense you must keep detailed records and receipts. Use a credit card for all meals, get receipts from taxi drivers, and keep a copy of the detailed hotel bill in addition to the charge card receipt. And be sure to save the conference or convention agenda/schedule to prove its relevance to your business.

Just as with business use of your automobile and the standard mileage allowance, the IRS allows you to deduct either actual out of pocket expenses or claim a federal “per diem allowance” that is determined by the General Services Administration each year based the location of the trip. If you claim the per diem allowance you do not have to save receipts for actual expenses. There is a per diem rate for lodging and one for meals and “incidental” expenses. However sole proprietors cannot use the per diem rate for lodging; they must deduct actual lodging expenses.

The per diem rate for meals and incidental expenses includes tips given to porters, baggage carriers, bellhops, hotel maids (the “incidental” expenses) – so the actual out of pocket for these incidentals are not deductible if you claim the per diem. On the first and last day of a business trip you claim 75% of the per diem amount, unless you can show you leave before breakfast on the first day and return after dinner on the last.

The per diem rates are based on the city where you “lay your head” at night. If your business meetings are in New York City, but you stay overnight at a hotel in New Jersey to get a lower room rate, you would use the New Jersey location to determine the appropriate per diem amount.

If you do not incur meal experiences while traveling you can still use a per diem amount for incidental expenses, which is currently $5.00 per day regardless of the location.

You can decide whether to deduct the GSA meals and incidental per diem rate or actual expenses on a trip by trip basis, but you must use the same method for all days within any single business trip. You can use the actual expenses when attending a conference in New York City in May and the per diem rate for an August convention in Las Vegas.

If you are claiming actual meal costs you must have documentary evidence, such as a credit card receipt or an itemized hotel bill (if a meal is charged to your room), for any expense that is $75 or more.

For business meals and entertaining, whether away from home overnight for a conference or convention or any other business purpose or during the course of your normal business day, you also must record the time and place, the name(s) and “relationship” (1040 client, business owner or “CFO of XYZ”) of any person(s) you are entertaining or with whom you are dining, and the business purpose or business discussion (“NATP Annual Conference”, “business proposal”, “tax planning”, “audit preparation”). The back of your credit card receipt for the meal or drinks is a good place to record this information.

Make sure to schedule your trip so that it remains 100% business. If registration begins on Sunday, with activities that begin on Monday and end Thursday, you would want to arrive on Saturday or Sunday and leave on Friday. This way you have no “personal days”. Schedule your time so you spend at least four hours each day participating in a conference event or activity. Keep time logs or sign-in information to prove your participation in conference activities.

Travel that is extended to get a reduced airfare (such as a Saturday or Sunday night stay-over for domestic travel) is allowed, even though there is no business activity on the extra day, if the extra cost of the stay-over is less than or equal to your airfare savings (IRS Private Letter Ruling 9237014).

So you have always wanted to visit San Francisco. Find a conference or convention related to your business that is being held there and take a tax-deductible vacation!

The cost of THE NEW SCHEDULE C NOTEBOOK is normally $7.95.  I am offering a special summer discount – for all orders postmarked by August 31^st the cost is only $5.30 – a 1/3 discount!

Send your check or money order for $5.30, payable to Taxes and Accounting, Inc, to –

SUMMER SPECIAL OFFER

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY NJ 18428

TTFN