The Taxpayer and the Kids

As we've progressed through this tax season, one of the most misunderstood issues seems to be about kids in college/kids still at home.

Let's start with the easiest. If you have a child still living at home that's not a student (college OR high school), that's 19 or older, and makes less than $3700 during the tax year, you have the right to claim him as your exemption. If none of those apply and he makes more than $3700, the next question is, who maintains more than 50% of the support of the household. Does he pay you rent, groceries, help with utilities? Do you make more than the child? If the answer to both questions is NO/YES, you may still claim the child as a dependent. He must file a return if he makes more than $9500, but if you claim the exemption, he cannot but he can claim the standard deduction of $5800 on his tax return to lower his taxable income. If he fully supports himself, he can claim his own exemption ($3700) and his standard deduction ($5800) when he files his return.

The other issue came to my attend when a friend told me that a lady in his office said that because her son is away at college and over 18, she cannot claim the son on her tax return. WRONG!!! If your child live with you (dorm or college apartment counts as living with you), you are the ONLY one who can claim the child's exemption. The child must have been in school some part of five months of the year. The student must be enrolled in the number of hours/courses that the school considers to be a full-time student. The child may have a part-time job for which he will file a return to get back any monies withheld for paying taxes, but the child cannot claim his own exemption.

How about education credits? If you own the exemption, you own the education credit. The American Opportunities Credit allows you up to a $2500 education credit to help with your tax burden. General rule is that the schooling must be paid out-of-pocket and mainly for tuition and books. Out-of-pocket means from your personal funds or a student loan, regardless in whose name the loan is. I say that because, sometimes, the loan is granted in the student's name. However, for tax purposes, the loan is out-of-pocket to the taxpayer, generally the parent.

There is one caveat -- the parent (taxpayer) may give the student the education credit on the child's tax return, but the parent cannot give away the exemption ($3700). When that happens, the exemption CANNOT be taken by either parent OR student. It is lost!

Just some things for you to think about when getting ready to file your taxes and trying to decide who gets the kid.

2007 Mortgage Forgiveness Debt Relief Act

In 2007, Congress enacted a law that provides some relief from taxation of forgiven debts.  The law is in effect until the end of 2012. Therefore, it may be beneficial for those tax payers who lost their homes to foreclosure or had short sales or restructured their mortgages to discuss this with their tax professionals. 

The most common exclusion is cancellation of taxation on debt forgiveness to homeowners that resulted from foreclosures, mortgage restructuring, and short sale of a principal residence.  The Act applies to forgiven or cancelled debt used to buy, build or substantially improve the principal residence or refinance debt incurred for those purposes, but not rental property.  The debt must be secured by the home.   The debt used to refinance the home qualifies for this exclusion, but ony to the extent of the principal balance of the old mortgage remaining immediately before the refinancing as many people refinance for more than the original debt to pay off other debts.

The maximum amount that can be treated as qualified principal residence indebtedness is $2 million for married filing jointly status and $1 million if married filing separately.  A Form 982 should be filed with the individual tax return to report to the IRS the amount forgiven.  When the debt exceeds $600, a Form 1099-C should be issued by the lender that provides all the necessary information to prepare the Form 982.  The amount of forgiven debt will be shown in Box 2 of the 1099-C and should generally be the amount you enter on Line 2 of the Form 982.  Check your tax software to make sure ithe Form 982 is available.   You can also download the form and instructions at www.IRS.gov.

Monies lost on the sale or foreclosure of personal property (home) are not deductible.  This Act applies to cancelled debt in relationship to the original mortgage.  However, there may be a combination of loss and forgiveness of debt by the lender, in which case the forgiven debt falls under this Act.

There are other caveats to the exceptions and each tax payer should discuss his situation fully with his professional tax advisor.  For example, in some cases, cancellation of credit card debt or unpaid student loans may qualify for exclusion. For more information, please read IRS Publication 4681, Cancelled Debts, Foreclosures, Repossessions and Abandoment. 

 

Tax Update

A few updates are available, but we're are still waiting for the final tax law changes coming out of Congress.  Once laws are passed, IRS provides to tax preparation companies the law changes written into the IRS tax code.  The companies update their software to match changes.  It's always a "catch up" situation the first couple of weeks in January.

One significant change is the Energy Credit.  This credit level is reverting to that offered in 2006, namely $500.  If you have already claimed and received an energy tax credit, for more than $500, you cannot claim any more.

Making Work Pay Credit has expired and will not be on the 2011 tax return.

The Hope Education Credit has been eliminated.  The American Opportunities Credit is still available.  If you are a working college student and still a dependent of your parents, you cannot claim your own exemption if you file taxes for a part-time job, only the standard deduction.  Nor can you claim an education credit.  Your are OWNED by your parents.  If they want to decline your exemption, no one gets it but you can, with their permission, claim your education credit.  Be sure to get your Form 1098-T from the college that shows how much tuition was paid during the tax year. 

The Life-time Learning Credit (up to $2,000 per year for 5 years) is another type education credit.  Check with your tax preparer to determine which is most beneficial to you, the taxpayer.

As I get into the tax year and see any other significant impacts on my tax clients, I'll cover them in this blog.

Energy Credits

Energy credits for home improvements will be still be available for 2011.  It is limited to 30% of your energy -efficient home improvement, including labor/installation, but cannot exceed $1500.  A word of caution:  There are certain perimeters associated with energy efficient upgrades.  For example, air conditioner must have a Seasonal Energy Efficiency Rating (SEER) of 16.  Many dealers use close-out sales for old year ACs which do not meet this criteria and the customer cannot get the credit.  Another "come on" along this line is new roofing.  Many areas have been affected by wind storms/hurricanes.  Last year, I had two clients in two days looking for the energy credit for their new roof.  I actually called each of their dealers and ask the specific question about that client's purchase.  Neither qualified.  Easiest way to know if your new roof is possibly energy efficient -- is it white.  Last year, GAF-ELK white roof was the only one qualified for the energy credit.

The State of Virginia extends a small credit for Energy-Star applicances.  The federal credit was given to the manufacturer, not the consumer.  However, if you did buy a certified energy-efficient appliance in 2011, take your receipt to your tax professional.  The sales tax for the item is a deduction of the Virginia state tax form.

Taxes and You

This is not the advice I generally put out on the blog, but it is of importance to every tax payer.  Please understand, I do not vote either party; I vote for the person I feel best qualified for the job.  Therefore, I like to think this isa a non-partisan obversation because both parties in Congress are at fault for today's economic situation.

I often wonder where our Congressmen get the idea that enacting a $1. 2 trillion debt reduction over a decade will “fix” spending issues.  According to an article printed in the Virginian Pilot from the Associated Press on Oct 15, 2011, “US Government Ran a $1.3 Trillion Deficit Last Year”, the deficit for fiscal year 2011 was $1.3 trillion.  The nation deficit for 2010 was $1.29 trillion and that for 2009 was $1.41 trillion.  What that means is these deficits will be added to the current National Debt at the end of each fiscal year.  As of November 17, 2011 the gross national debt was $15.03 trillion.  No matter what the Super Committee recommends or what spending cuts automatically go into effect, neither will produce sufficient funds to make a dent in the national debt.

President Clinton saw that the only way to reduce the national debt was to not create a deficit and try to come in under the national budget each fiscal year.  He was able to create a balanced budget in the last two years of his administration through the Pay-Go system.  That is, if a Congressman wanted a project funded, he would have to find the money from another project he wanted less.

Another proposal President Obama wanted was to reduce spending by reducing Social Security payroll taxes from 6.2% to 4.2% which he did in January 2011.  The object of that plan was to leave more money in businesses to create new jobs.  Hasn’t happened.  Now, he wants to further reduce these taxes to 1.3%.  If jobs weren’t created with the first reduction, it stands to reason that companies will keep the reduced taxes in their profit margins and not create jobs.  Besides, the Social Security pyramid is already upside down, meaning that more is paid out in Social Security benefits each year than is taken in by payroll taxes.  You do the figures.

It makes the most sense for our Congress to pass a Balanced Budget Amendment to the Constitution to make our lawmakers more fiscally accountable.  That probably has as much chance of passing as would Congress taking a voluntary reduction in pay.

Taxes and IRS Preparation Regulation Initiative

It's tax time again.  There are new laws, extension of old ones, and a new professional tax preparer regulation initiative being implemented by the IRS in 2011. 

Starting January 1, 2011, you can start preparing your taxes.  If you e-file, the IRS will not accept them before January 15, so just be patient and file on the appropriate day.  If you mail them in, go ahead and do it.  Word to the wise:  if you don't have all your filing documents, WAIT!  You will be better served to have everything in hand before preparing and sending them in.  This is especially true of those who took out 401K or investment savings in 2010. The brokers who handle those accounts may not have to mail the required tax forms to you until mid-February, so wait on them.

Tax Credits Under Fire

We’ve all heard recently about the pending expiration of  “Bush Tax Credits”.  Many of us will be affected by the failure of Congress to extend these credits.  I recommend all tax payers keep aware of what is on the chopping block if the extension does not pass and how each may be impacted.

 

The Alternative Minimum Tax (AMT) was passed in 1983, but never indexed to inflation over these past years.  It was designed to place a higher tax on the wealthy.  If a “patch” is not applied each year, about 30 million middle-income tax payers will fall under this higher tax rate.  An AMT Patch has been applied over the years to keep those tax payers safe from the AMT.  It has not yet been passed for this tax year, but is one that is expected to be in place before Congress adjourns for the holidays.

 

The changing tax landscape also includes many tax breaks that expired December 31, 2009, and thus are not available for calendar year 2010. These provisions, sometimes referred to as the “small” extenders, were temporary provisions originally scheduled to last just a few years, but have been extended year after year – until now.  While there are many expired or expiring provisions, some of the more common expired tax breaks are:

 

• Educator’s expense (aka teacher’s) deduction—adjustment to income up to 250.

• Tuition and fees deduction—adjustment to income up to $4,000

• Qualified charitable distributions from IRAs (up to $100,000)

• State and local sales tax deduction

• Additional standard deduction up to $500 for state/local real property tax

• DC First-time homebuyer credit and other DC tax incentives

• Waiver of minimum required distributions

• Special tax treatment for casualty losses attributable to federally-declared disasters and other national disaster relief provisions

• Business incentive credits, including the research and experimentation, new markets tax credit, and Indian employment

Credit

 

Also unavailable for 2010 are one-year (2009) provisions from the American Recovery and Reinvestment Act:

 

• New vehicle sales tax deduction

• Exemption of first $2,400 of unemployment benefits

• Economic Recovery Payment (ERP)—nontaxable payment of $250 • Government Retiree Credit—refundable credit of $250

 

For a complete listing of provisions that expired December 31, 2009, as well as those scheduled to expire in future years, see The Joint Committee on Taxation’s List of Expiring Federal Provisions 2009-2020.  It can be accessed at http://www.jct.gov/publications.html?func=startdown&id=3646

24 Hours of H&R Block “Taxpertise”

 The 2nd Annual Tax Talk Line is set for March 25th. Experts from H&R Block and The Tax Institute will once again be manning the phones and email to answers taxpayers questions. The event kicks off at 12:01 a.m. and offers a full 24 hours of free “taxpertise.” Taxpayers will be encouraged to call 1-866-HRBLOCK or email taxtalk@hrblock.com  anytime that day with their tax questions.

In addition to this opportunity, don't forget to use local sources. In this day and age of menu-driven telephone services, H&R Block offices are among several tax professional services that allow you to talk with live people face-to-face.  Most are happy to answer questions even if you elect to do  your own taxes with online services or boxed software. 

Available hours in our offices are dwindling as late filers want to come in to get their taxes done.  Take a moment and call a local office to set up an appointmen guaranteed to meet you convience.

 

Energy Efficiency Credits

It's been a busy tax year so far, so I've been remiss on giving out information.  One item we've found taxpayers do not understand is the Energy Efficiency Credits.  Replacement windows are the easy item to qualify for a credit.  Let's look at the others.

The Consortium for Energy Efficiency  (CEE) is the government's oversight agency for these credits.  On the CEE website, you can find the minimum standard required to meet Energy Efficiency Credits.  Here is that site:  www.cee1.org

(1)  Air Conditioners:   The central ACs must be Tier 3 with a Seasonal Energy Efficiency Rating (SEER)  of 16.  We are seeing people come in with new ACs with a SEER of 13.  These do not qualify for the credit.

(2) Furnaces:  New replacement furnaces must use biomass fuel (oil, natural gas). A new electric furnace does not qualify for the credit.

(3)  Energy Star Appliances:  This credit is for the manufacturers of the appliances, not the buyers.

(4) Insulation, siding and roofing:  Check the CEE site to see if the product to be used on your home qualifies.  It is a lengthy list so check it before you buy.

If you think you have a qualifying energy credit, take your purchase papers with you to your tax preparer. 

Haiti Relief Contributions

Many of you are making contributions for Haiti relief operations.  Congress just passed legislation that allows you to deduct contributions for this effort to be taken as a deduction on your 2009 tax return.  We've all needed help during our lives, and here is a chance to reach out to others. 

Locally, the Weyo LLC out of Norfolk has opened its website to collect contributions for the St. Vincent's Home for Handicapped Children.  In 2008, Chris Tyree, CEO of Weyo and a  former award-winning photojournalist with the Virginian Pilot, visited this Home with a local non-profit organization to document the work done there.   Unfortunately, the Home was hit hard during the quake and 8 students perished.  Weyo is helping to restore hope to these children by raising money for them for food, shelter and to eventually rebuild the Home.

Contributions may be made at http://weyo.org/Weyo_auction.html   It's easy to donate and you can print your receipt for your tax return quickly.  Please take a few moments and let these children know that you care.  Thank you.