|
Nicholas
P. DiNatale, CPA -
Certified Public Accounting & Business Advisory
Taxpayer
Resources -
FAQ's
Who can
be a dependent on my tax return?
To claim
a person as a dependent on your income tax return, you must pass 5 tests:
- Household
or Relationship Test – The person in question must be a relative,
or have lived in the taxpayer’s home for the entire year. If the
person is not a relative, the relationship must not violate the laws
of your state of residence. If a person (child, relative or other person
otherwise qualifying for this test) is born or passes away within the
year, they will meet this test although they are not members of the
household for the entire year. This includes children who are born and
pass away within the same year.
- Joint
Return Test – A dependent may be single or married. If married,
that person cannot file their tax return as married filing jointly,
unless the joint return is filed only to claim a refund of tax withholdings,
and no tax liability would exist for either spouse if they had filed
separate returns.
- Citizenship
Test – The person must be a citizen of the United States, resident
alien, or a Canadian or Mexican resident. An adopted child who lives
with the taxpayer cannot be claimed as a dependent unless this test
is met. When an adoption is finalized, this test does not need to be
met if the dependent lived with the taxpayer for the entire year.
- Income
Test – A dependent cannot have gross income in excess of $2,700.
There is an exception for students: if a child is under age 19 at the
end of the year, or under age 24 at the end of the year and a full time
student. Gross income includes gross rental income, but does not include
tax-exempt income, or income earned incidentally by a disabled person
at a tax-exempt organization providing medical care.
- Support
Test – A taxpayer must provide more than half of a person’s
total support to claim them as a dependent If a potential dependent
is supported by two or more persons, the dependent must be a close relative,
or meet the household test for each person who provided over 50% of
the support. Taxpayers who provide over 10% of the support for a dependent
must file form 2120 Multiple Support Declaration to indicate who will
be claiming the dependent deduction.
There are
special rules for children of divorced parents. Generally, the parent
who has physical custody of the child will be able to claim the child
as their dependent regardless of whether one parent or the other provided
50% or more of the support, unless a custodial decision is specifically
spelled out in a divorce decree. An agreement between parents to allow
one or the other to claim a dependent is stated on form 8332 Release of
Claim to Exemption for Child of Divorced or Separated Parents.
All dependents listed on tax returns after 1998 must have a social security
number. You can apply for a social security number by filling out and
filing form SS-5. Call (800) 772-1213 or visit your local Social Security
Administration office to receive this form.
I received a "1099-MISC" form, what
do I do with it?
You received
a "1099" as the result of working for someone who paid you as
an outside consultant, or you received money from an employer who did
not list you as an employee. This income item will most likely be subject
to self-employment taxes as well as income taxes. If you were self-employed
you may be able to offset some of the income with expenses you incurred
to earn the money.
Can I itemize my deductions if I don’t own
a home?
Each taxpayer
not reported as a dependent on someone else’s return is allowed a
standard deduction based on their filing status. Most people who do not
own a home will file using the standard deduction. To itemize your deductions,
you add up your deductible expenditures and if the total exceeds your
standard deduction, congratulations! You can itemize your deductions.
How is this related to owning a home? Most people will not have enough
deductible items to exceed their standard deduction unless they own a
home. When you become a homeowner, your real estate taxes and mortgage
interest, which are generally deductible, combine with your other deductible
items to cover your standard deduction number and enable you to itemize.
There are a large number of deductible expenditures in the following categories:
medical expenses; taxes paid; interest paid; charitable contributions;
casualty and theft losses; and other miscellaneous deductions. Consult
with your tax advisor if you have a question about the deductibility of
a specific item.
I sold my vacation home this year, will there
be a tax on the gain?
Recently,
homeowners were given a gift by congress. Effective for sales after May
6, 1997, gains of $500,000 for married taxpayers filing jointly, ($250,000
if filing singly) on sales of principal residences were excluded from
tax, of course, complicated by various rules. This replaces the previous
rules that provided a one-time lifetime exclusion of $125,000 for homeowners
aged 55 or older. The preferential treatment is only available for a taxpayer’s
primary residence, which is a home owned used by the taxpayer and used
as their principal residence for 2 out of the 5 years previous to the
sale. Vacation homes are treated differently.
Gains on the sale of a second home are taxable unless you have lived in
your vacation home as your primary residence for 2 of the past 5 years.
Unfortunately losses on these sales are still not allowed. The gain on
the sale of a vacation home rented to third parties is increased for the
amount of depreciation allowed during the time the vacation home was rented
to third parties. This is usually the situation if the home was rented
for more than 15 days. The accumulated depreciation expense will reduce
your basis and increase your gain. Fortunately, losses on the rental portion
of the second home are deductible as ordinary losses.
This 2 of 5 rule provides a tax planning opportunity for taxpayers owning
a primary residence and a vacation home. If a home was rented for less
than 15 days per year, and therefore most likely not depreciated, a taxpayer
can sell their primary residence and move into the vacation rental for
two years. At the end of the two year term, the taxpayer can then sell
this home, and exclude the gain from this sale as well. For further details
on this and other tax strategies, consult with your tax advisor.
I cannot afford to pay my balance due!! What
can I do?
First, don’t
panic…Assess the situation. Do you have your return completed? If
so, you should file it even if you cannot pay the balance due. The penalties
for late filing (5% of the balance due per month up to 25%) are much higher
than those for late payment (.5% of the balance due per month up to 25%).
The IRS has provided an opportunity to pay the balance due in installments.
You will pay the balance monthly as if it was a loan, and like the bank,
they will charge you interest plus any applicable penalties. There is
also a small fee ($43) to process your installment request. Generally,
the IRS will want you to pay your balance due by the next return due date,
but may extend the agreement up to 5 years. To apply, prepare form 9465
Installment Agreement Request and attach to your return. You can find
form 9465 and the related instructions at the IRS website.
Some hints: the IRS will like to see you paying something with the return.
You should make an effort to pay as much as possible at this point. The
installment agreement will ask you how much your monthly payment should
be and what day it is due. Between the time you send in your installment
agreement and when you receive your confirmation letter, you should make
your payments in the amount and on the date you requested. Remember, penalties
and interest are accruing.
Taxpayers relying on this method of payment often find themselves in a
never ending cycle where they pay last year’s balance due with the
money that should be paying this year’s tax. When the current year’s
return is due, many taxpayers have not paid in enough tax and the cycle
begins again. This is not the most efficient way to pay the balance down,
and anyone considering this method should weigh their options before applying
for installment payments.
I work from my home, can I claim a home office
deduction?
Until just
recently, the rules regulating the home office deduction were very restrictive,
to the point where many CPAs avoided taking the position fearing an audit
flag. Most of the reservation stems from the milestone "Soliman"
case, which effectively eliminated the home office deduction for business
where the home office was not the "principal place of business,"
or the place where the business procedures were actually conducted. Specifically,
the Soliman case was a situation where a doctor performed his administrative
duties in his home, and visited his patients at his office in a local
hospital. Because his patient work, and therefore his revenue, was conducted
in the hospital, his home office deductions were denied, as they weren’t
his principal place of business. This precedent sealed the fate for the
home office deduction, until the tax reform act of 1997.
For tax years beginning after December 31, 1998 a home office will generally
qualify as a principal place of business if: 1) the office is used exclusively
and regularly by the taxpayer to conduct administrative or management
activities of a trade or business; AND 2) there is no other fixed location
of the business where the taxpayer conducts these activities. In addition
to this, other home office rules require the area to be used exclusively
and on a regular basis as a home office.
These "regular and exclusive" concepts require the home office
to be used consistently as a place of business. If the home office area
is used sporadically, or incidentally, this will not meet the "regular"
requirement. For example, if twice a month you meet a client in your kitchen
for coffee before regular business hours, your kitchen will not qualify
as a home office.
The "exclusive" use test requires an area to be used as a place
of business only, and does not allow a dual use area. Exceptions exist
to allow regularly used inventory storage areas and day care facilities.
As with many tax laws, the application of the home office concepts vary
based on the type and extent of the business use of your home. You should
consult with a tax advisor before claiming these deductions.
How long do I keep my tax records?
Most individual
taxpayers will want to maintain their tax records in the event of a tax
audit. Of course there are other reasons, such as when dealing with the
bank, or for long-term research. Before making a final decision to retain
or dispose of any specific records, be sure to consult your tax advisor,
(if you also operate a small business, refer to our record retention suggestions
in our Small Business FAQ section.) The following is a guide to assist
in making decisions on how long to store your business records:
Keep Three
Years:
- Employment
agreements, health insurance documentation (keep 3 years after leaving
your job).
- Insurance
policies (period beginning after expiration date)
- Utility,
credit card and other monthly statements if not used for business
Keep Seven
Years:
- Individual
income tax returns, schedules and supporting documentation (W-2 forms,
1099 forms, mortgage interest statements, real estate tax bills, etc.)
- Check
books, bank statements, canceled checks and bank statement reconciliations
- Insurance
records, accident reports and claim details
- Personal
loan agreements with anyone or any company (keep 7 years after satisfaction
of the debt)
Keep Indefinitely:
- Tax authority
audit determination letters and related tax returns and supporting documentation
- Deeds
and titles to vehicles, land, homes, time-share property, etc.
- Mortgage
agreements and closing statements
- Independent
appraiser’s property assessments
- Estate
tax returns (form 706)
- Stock
and investment transaction settlement sheets, monthly statements and
other valuation information
- IRA and
other self-directed retirement plan contribution details, including
amount, date, account number and whether it was deducted
- Personal
bankruptcy filings and related correspondences
Back
to Taxpayer Resources
|