Taxes And Your Retirement Fund

A retirement fund is a smart financial decision to help offset the costs associated with life after employment. However, situations can occur that require you to withdraw some cash earlier than you expected from your savings plan. In this way, you can activate an additional tax and report withdrawals to the IRS. The following facts refer to early withdrawals from pension funds and can help you to file taxation times. Early withdrawal is defined as any money removed before the age of 59 1⁄2 from the pension savings. Any withdrawals during the fiscal year have to be reported to the IRS. You will probably have to pay income tax on the money you have received and you can pay an additional 10% withdrawal tax. However, this additional tax is not applicable to withdrawals which are not taxable. If you withdraw the amount you cost to participate in the pension plan, including all previously taxed contributions before you are added to the plan, you will not have to pay tax.   

Another tax free withdrawal is a roll-out. Rollovers take place when you move your assets from one plan to the next. You usually have a period of sixty days to move your assets to the second plan after they have been withdrawn from the original fund. The rules for pension plans and IRAs are different, but there are exceptions to paying the additional 10% withdrawal tax. In addition to your regular return, early withdrawals require the filing of Form 5329, additional charges on qualified plans (including IRAs) and other favored tax accounts.

If you are a parent and have to work, there is a good chance that you will have to pay for your child’s care during work hours. This can be quite expensive, but thankfully there is a tax credit which can help to compensate for the cost of childcare. The is the Child and Dependent Care Credit available to working parents who pay for child care. The IRS lists the following ten credit facts, which you must know to make full use of:

If you pay someone in the last tax year to look after your child, dependent adult or disabled spouse, you may qualify. You have to prove that the care was necessary to obtain work or that you were scheduled to work for hours. This also applies to your spouse if you file together. To qualify, a dependent must be a child under the age of 13 or a spouse or adult dependent who is unable to take care of himself, whether mentally or physically. In addition, they have resided in your home for more than half a year. While there are special rules for disabled spouses or students, you must earn income to qualify if you file with your spouse. If you have a single file, you’ll need wage proof. You can not claim expenses you paid for a child’s car to your spouse, a child under the age of 19 (even if the child is not your dependent), or to the parent of a qualifying person or dependent.

The tax credit can compensate for up to 35% of the cost of care and depends on your total income. The threshold is $ 3,000 per person and up to $ 6,000 per person for two or more dependents. If you receive benefits from an employer for dependent care, there are additional rules. For more information, see Form 2441, Child and Dependent Care Expenses. You must provide the social security number of the person qualifying for the loan. You will also have to provide the name, address and telephone number of the company or person who cared for the credit. A social security number is usually sufficient for an individual or a company’s identification number for an employer. In addition to your tax return, you will need to submit Form 2441 to claim the credit.

Filing Statuses

There is a variety of status in which you can file your taxes and the difference between them can help you determine which status you should file. At tax time, you can make the process as easy and smooth as possible with all the help you can get. What are the tax ratings? You can choose to file your taxes under one of five different classifications: single, married, separate married, householder or widow with dependent child. You can only choose one, so if you have multiple statuses that match your situation, you should choose the one with the biggest tax benefits.


It may seem quite straightforward to file as a single person, but there are some situations that can affect a single status. If you were separated by the last month of the year, you are considered to be a single person for the whole tax year. If you are not married and have no dependents, you are eligible to file individually. Cancelation and divorce are situations where you would also file as one person. However, if you are single or widowed in the year, you would have to change your status to either head of household or widow.

Married Filing Joint

As with the single status, married file requirements are relatively simple. Legally married couples who live together can file as married even for a small part of the tax year. Common law couples may file as married if their union is legal in their country of residence. If you do not live with your spouse but are not legally divorced or separated, you must still file as a married person. Married couples have the option of submitting a joint tax return processing household income through a single return. This requires both spouses to sign the tax return form and date it. The joint filers share the responsibility of paying all taxes, deductions, credits and exemptions due to them. Some clauses do not require joint responsibility, such as innocent spousal relief, liability separation for those who have not lived together for the tax year or equitable relief. If a spouse can not sign the joint return, such as the deployment of the military, the primary filer can sign as a proxy for the other spouse as long as a written explanation is included.

Married Filing Separate

Tax status used by married couples who choose to record their income, exemptions and deductions on separate tax returns. In most cases, married registration offers the most tax savings, especially if spouses have different levels of income. There is, however, a potential tax advantage to filing separately if a spouse has substantial medical expenses or various itemized deductions— or if both spouses have about the same income.


If you have been widowed in the tax year and you have not remarried, you can file for that year with your deceased spouse. For the next two years, an unmarried widow can file with qualified dependents as a widow. If you remarry that same year that your previous spouse passed away, you should file separately with your current spouse and marry the deceased spouse.

It may seem complicated to determine the status of the file, but it is a crucial step in completing income tax returns. Once you have investigated the benefits that each status can offer you, you can make an informed choice about how to file and what the requirements for each status are.

Tax Donations

Do you know that many donations you make to the charity can be deducted from tax? That’s right, you can turn your household goods into a tax benefit that you no longer need. So, as you walk into the back of your closet, keep track of all the donated items. You ‘re responsible for reporting your donation to the IRS. All donated items must be in good condition or better in accordance with new taxation legislation. Previously, you could donate goods in fair condition, because you felt that something was worth it, but the new law requires that your items be questionable.

There are many computer applications available to help you determine the value of your donated items, although the traditional time – tested pen and paper method can be used. You will compile a list of your charitable goods and the value of each item in the goodwill box as you like. You do not have to send the list to the IRS, but you should keep it in a file with the remaining tax records. When you bring the items to the non – profit organization, make sure you receive a donation receipt. Although the receipt does not list the actual value of your donation, it can be used as evidence if you need it during a future audit. If the value of your non – cash donation falls between $ 250 and $ 500, you will need a written acknowledgement from the non – profit or charity. This is often the case with donations from vehicles, etc. If your donated property is over $ 500, you must complete Form 8283 in addition to your tax return.

Form 1099-MISC

More people are required to submit 1099-MISC forms throughout the country, as the IRS is diligent in ensuring that you pay your taxes–even if you are an independent contractor. Your customer sends the IRS a 1099-MISC form, which the IRS compares with the form you submit. It’s a bad idea to ignore a 1099-MISC because the IRS will track you. Anyone considered to be an independent contractor must complete a 1099-MISC form from their customer, provided that they have been paid more than $600 per year. Because you received nothing in your mail, you don’t have to file. Contact your customer and make sure that a form has been sent and that it has been sent to the correct address. Your customer may not even realize that a form is to be sent.

Even if the customer does not send a form, you must report your income. Often people don’t have to report their income if they make less than $600, but that’s not the case. The first step in compiling your tax return is the 1099-MISC form. Independent contractors who use a 1099-MISC form to file their taxes must usually fill in a Schedule C calculating the income earned and any expenses that can be deducted. In addition to Schedule C, contractors must submit a Schedule SE that covers the amount due for Medicare and social security deductions. It does not have to be a difficult process to submit a 1099-MISC. A tax preparation program can make it relatively easy to file your taxes. It is important to concentrate on maximizing your benefits, since independent contractors often have a few at their disposal.

Retain Your Records

Once you have submitted your taxes, you should keep all your records and supporting documents safe if you have to refer to them or if you are audited. But how long do you have to keep your records? The IRS has some tips to help you figure out how long your documents should be stashed. The IRS states that the document retention period depends on the document, the cost and the support of the document. In addition to the supporting documents, the IRS proposes to keep records of tax returns previously filed, which may help with future filings. In general, the IRS suggests any records supporting income or deductions claimed in a tax return until the limitation period expires. The limitation period is a specific time window in which the return may be amended in order to claim additional credits or refunds.

Some items and situations have different scenarios as to how long the documents should be kept. The IRS recommends the following guidelines: you have unreported income in excess of 25 percent of the gross revenue shown on the return. All related items should be kept for 6 years. You have filed a fraudulent return. For life, records should be kept. If you have not filed a return, records should be kept indefinitely. If you have modified your original return to claim a credit, you should keep records for at least three years from the date of the original return or two years from the date you paid the tax, whichever is longer. A loss of worthless securities or bad debt is claimed. All records must be kept for seven years. Any tax records paid by an employer should be kept for at least 4 years from the date on which the tax is due or from the date on which you paid, whichever is later.

The Right Filing Status

The tax benefits and tax rates and deduction amounts available to you depend on the filing status you choose. Your status will be determined by your marital status at the end of the year and whether you have dependents or not.

Married-Separate or Joint

If you are married as of 31 December, you are considered married for the whole tax year as far as the IRS is concerned. If a married person lives in a separate home from his or her spouse and has a dependent, special circumstances may allow him or her to claim the status of head of the household. Jointly married, filing occurs when a couple files a single tax return together, while married, filing separately requires each individual to complete a separate tax return. Joint filing means that the income of both spouses is combined, in addition to deductions. Calling together can often save you money when you file your return. If you have to keep your finances separate from your spouse or are in a divorce process, you should consider filing separately.

Single – Head of Household

Anyone who was not legally married until 31 December of the tax year is usually a single filer. If you are not married but have a dependent to claim, you can usually benefit by depositing the head of the household. This tax status offers a higher standard deduction combined with lower tax rates than a one-status filing.

Qualifying Widow

There are two options for filing if a spouse died during the tax year: married, jointly filed or married, separately filed. If the spouse’s death occurred within two years before this tax year, the taxpayer should file as a qualifying widow or widower, which allows the same standard deductions and the same tax rate as if you were married together.

Education in Tax Credits

For those who pay for their education, some tax credits can help to reduce the amount due. For those responsible for education expenses, such as tuition, fees, textbooks, supplies and equipment, the American Opportunity Credit and the Lifetime Learning Credit are available. Some expenses incurred, such as insurance, transport and personal charges, are not eligible for either tax credit.

American Opportunity Credit:

Taxpayers can receive a dollar benefit of up to $ 2,500 per student who meets the criteria for qualifying. To be eligible, the student must be enrolled at least half a year throughout the tax year for a minimum of one academic semester. The student must also study to obtain a degree or certain certifications. The taxpayer claiming the credit can not have a criminal record including a felony drug conviction, otherwise the credit is not eligible. The American Opportunity Credit enables even those who do not owe taxes to be reimbursed up to $ 1,000, as 40 percent of the credit is reimbursed.

Lifetime Learning Credit:

Every eligible student can receive a Lifetime Learning Credit of up to $ 2,000 every year. Unlike the American Opportunity Credit, these benefits are not limited by graduation or student status, which means that part – time graduates can still benefit from this credit. However, all taxpayers claiming the credit for lifelong learning must have paid taxes for the year. There is no reimbursable part of the loan for those who have not owed tax. Unlike the previous loan, taxpayers with drug offenses may also claim this loan. These tax breaks are not available to taxpayers who pay through grants, fellowships or scholarships for educational expenses. Both credits have income restrictions, and the person claiming either credit can not be listed as a dependent on the tax return of anyone else. Further education can be expensive, but thankfully these tax breaks can help make your pocket tax time a little easier.

Claiming Dependents?

In order to get a little extra cash back this tax season, consider the benefits you can claim as dependents for children or adult relatives. For each dependent you claim that you qualify, you may be eligible for an additional tax credit that can reduce your tax liability and save you money depending on the age and relationship of the dependent. You may claim tax credits for your dependents, including child tax credit, earned income credit, child care credit and dependent care credit. A single filer with a qualifying dependent can claim the status of head of household, which can also be valuable during tax season.

IRS Criteria for Dependents; In order to claim a child or adult relative, the IRS requires that taxpayers and their dependents meet the following qualifications: the person who files may not be claimed as a dependent on any other return. The dependent may not be married and file together unless he or she owes nothing to taxes when filed separately and only a refund of withholdings is issued. The dependent must be a U.S. citizen, an alien resident and, in some cases, a resident of Canada or Mexico. The dependent can only be claimed once, so they can not be dependent on the return of anyone else. Children claiming to be dependent must live with the filer for more than half a year. The taxpayer has to pay more than half of the dependent’s support. The IRS has specific information about who qualifies as a dependent for relatives and children. When two filers list the same person as a dependent on two separate tax returns, the risk of auditing is higher. Further information on the qualifications required to claim dependents in each type of tax benefit program can be obtained from the IRS, since the criteria can vary from credit to credit.

Form 2441 Child and Dependent Care Credit

It can be expensive to hire a professional to care for a disabled adult or to pay for childcare services for children under 13. Fortunately, the government has a tax credit to reduce these costs and put more money in your pocket. The child and dependent care credit can put up to 35 percent of the costs you incurred in your hands throughout the year. What are the requirements for eligibility? To qualify for this tax credit, you must have a dependent child under 13 years of age who has received paid child care services. You can also qualify if your dependent is over 12 years of age, but has a physical or mental disability that impedes self – care. In such cases, you will have to prove that your dependent is unable to take care of himself. You will have to obtain evidence that you have been given the opportunity to work for income or to seek employment due to childcare. If benefits are offered by the employer, the benefit amount must be deducted from the total credit claim.

In order to qualify for child and dependent care credit, the dependent must have lived in your home for more than 6 months a year. In addition, you must have supported the child or adult dependent by paying more than half of their shelter costs. In the case of divorce, parents who do not have full custody can still claim to be dependent on the child. In such situations, even if the child is not claimed as a dependent, the parent who houses the child can still file with the child care credit. To claim the credit, the care provider must comply with certain criteria. When filling out the IRS Form 2441, you are often required to provide specific information about the caregiver, including but not limited to their name, address, company name (for those working in a company) and tax identification number (either a social security number or an employee identification number).