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).

Your teen turned 16 and has finally gotten a first job. Congrats! As a parent, you may be wondering if you should file a separate tax return for your working teen. Basically, there are three different questions to answer to determine whether your child should file a return of their own.

  1. Does the IRS consider your child a dependent?
  2. How much income did your child earn?
  3. What types of income does your child have?

To the IRS, a child a dependent if they are under 19 years old, or 24 if they are a full-time student. Children who are permanently disabled at any age are considered dependents. Dependent children live with you for over half of the year and aren’t responsible for providing more than half of his or her own support, financially.

The next part of the decision to file a separate return revolves around your child’s income. You’ll need to take a close look at the amount and type of income your child has. It gets more complicated when breaking down the type of income: earned income from working, unearned income from dividends and interest, or a mix of the two types.

Earned Income

If your dependent child works, and only has earned income – they do not receive income from dividends, investment gains, or interest – they are only required to file a federal income tax return of their own if their earned income is greater than $6,350 in 2017. If your child’s annual earned income was less than that amount, they won’t have to file a return.

However, it may be worth filing a return anyway, in case they are owed a refund of overpaid taxes. If your child’s employer withheld federal income tax, they may have overpaid their share and can be eligible for a refund. The only way to receive the money is to file a return.

Unearned Income

Unearned income is treated differently in relation to tax returns. Children with unearned income over $1,050 in 2017 are required to file a tax return. However, if your child only has unearned income, you can choose to add the amount to your own return or have the child file their own. Be aware that if you include the unearned income amount to your own return, it could bump you up a tax bracket, which would mean higher tax rates.

Both Types of Income

The rules are slightly different if your child has both types of income for the year. They will be required to file a separate return of their own if their unearned income is greater than $1,050, earned income is more than $6,350, or combined totals are equal to either $1,050 or earned income (up to $6,000) plus $350, whichever is larger.

For example, if your child had made $6000 at their job last year, and had an additional $100 in interest, they wouldn’t need to file a return because all her incomes are below the specific income limits, and when added together are still less than $6,350 (earned income plus $350). If that interest amount increased to $500, the unearned income amount would still be below the threshold, but when combined, the total income would be $6,500, greater than the earned income plus $350 standard, which means your child would be required to file a separate return.

Another scenario: Your child has $500 in earned income, and $900 in interest income. The combined income of $1400 is greater than $1,050 (which is larger than earned income plus $350), so a separate return would be required.

Which Form-1040 is Right for Me?

When tax tie rolls around, there’s three different forms one can use in order to file their tax return: the 1040EZ, the 1040A, and the full Form 1040. There are benefits and restrictions to all three forms, so deciding which to use should be based on which is best for your tax situation. You can always rely on the full Form-1040, which is the most complicated form, as it’ll cover any situation. However, you may be subjecting yourself to more work than is necessary, and you’ll have a more complex set of directions to comply with. On the other hand, even if you can use a simpler form, you may not get all the tax benefits you’re entitled to in doing so. Use the following tips to differentiate the different forms and decide which one is right for your return.

1040EZ

One in six taxpayers opt for this simple tax form, which consists of only a single page and 14 lines to complete. It’s definitely one of the most popular forms, and the easiest and quickest to file, but it’s also very selective. Only a specific group of taxpayers are eligible to file their return using this form. The requirements include:

  • Taxable income must be less than $100,000
  • All earnings must be reported on a standard W-2 from a traditional form of employment
  • Must file as either single or married filing jointly (all other statuses are ineligible).
  • Must not have any dependents
  • Must be less than 65 years old
  • Must not itemize deductions
  • Interest income must be less than $1,500

You cannot make adjustments to your income for student loan interest or IRA contributions if you want to use the 1040EZ. Also, you can’t claim dividend or capital gains income. Your ability to claim many tax benefits is strictly limited. In fact, the only credit allowed on the 1040EZ is the Earned Income Tax Credit.

1040A

A little less restrictive than the 1040EZ, the 1040A is available to all filing statuses. You are able to claim tax credits and deductions for children and dependents, education expenses, child care costs, and other credits. The 1040A form can also be used if you need to claim IRA contributions or student loan deductions, and you’re able to report interest and dividend income, Social Security benefits, retirement plan distributions and certain capital gains from mutual funds. The 1040A is available to more taxpayers, though it still doesn’t cover everyone. Those who earn more than $100,000 need to use the full form, along with those who want to claim different credits than the selected ones on the form. If you want to itemize your deductions, you won’t be able to use the 1040A. Even with these additional restrictions, more than 40 million taxpayers were eligible to use the Form 1040A when filing their return last year.

Full Form 1040

No matter what, you can always use the full 1040. Every taxpayer is eligible to use this form, and it allows you the opportunity to claim any deduction or credit available to you. One con about using this form is that it’s long and complicated. The form spans multiple pages, front and back, and has many lines to complete on each page. If your income is greater than $100,000, you’ll have to file using the full Form 1040. The same goes for anyone who wants to itemize their deductions. Entrepreneurs with business income or investors with capital gains and losses should opt to use the full Form 1040.

Electronic Tax Payment Options

When it’s time to pay your tax bill, you have a few quick and easy options to make an electronic payment.

Electronic Funds Withdrawal (EFW)- Taxpayers can chose to file their tax return electronically and pay directly from their personal bank account. You’ll need to e-file if you want to use this option, so it’s best to use tax preparation software or a professional.

Direct Pay – log on to the IRS website at IRS.gov/directpay to make a secure payment from your checking or savings account without being charged fees. This free tool allows you to schedule your payment up to 30 days ahead of time. Once you’ve submitted your payment, you’ll receive an instant confirmation, and you can receive email communication regarding payments made with Direct Pay, if you choose.

Credit/ Debit Card – Using your credit or debit card, you can pay online, by phone, or with your mobile device. Be aware that the debit and credit card processors charge a fee, and none of that money goes to the IRS or is assessed by the agency for processing payment. You can visit www.irs.gov/payments to see a list of authorized card processors and related phone numbers.

IRS2Go – The official mobile app for the IRS, IRS2Go is free and simple to use. You can conveniently make payments with Direct Pay through your bank account for free, or with your card for a fee through an approved processor. The mobile app can be downloaded through Google Play, The Apple App Store or the Amazon App Store.

Electronic Federal Tax Payment System – You can pay for free safely and conveniently by phone or online by calling 800-555-4477 or logging on to eftps.gov. Both businesses and taxpayers can use this method and choose to receive email notifications regarding payments.

Cash – If you want to pay using old-fashioned cash, you can use the PayNearMe option, however the IRS suggests planning ahead. Since it’s a four-step process, beginning well ahead of the deadline will help avoid penalties and fees for late payments. Using PayNearMe, you’re limited to $1,000 per day and a fee of $3.99 will be added to each payment. This option is provided in part with OfficialPayments.com/fed and specific 7-Eleven stores in 34 different states. You can get more information by visiting IRS.gov/paywithcash.

Same-Day Wire Transfer – You may be eligible to pay your taxes using a wire transfer from your financial institution. You should familiarize yourself with the availability, cost, and cut-off time for same-day transfers. You’ll need to complete a Same-Day Taxpayer Worksheet for each payment you wish to complete, if you’re paying for multiple forms or period.

All 2017 tax returns need to be filed by April 17th, 2018 unless an extension has been granted. Taxpayers can request a six-month extension using Free File, filing Form 4868, or by paying all or part of the estimated taxes due and marking the payment as part of an extension through Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or with a credit or debit card. You won’t need to file separate extension forms, and you can expect a confirmation number for your records.

If you choose to pay your tax bill with check or money order, you should make it out to the “United States Treasury” and include Form 1040-V, payment voucher. This will help the payment get properly credited to your account. You should also include “2017 Form 1040, your name, address, phone number, and SS number somewhere on the front of the check.”

You owe money to the IRS but aren’t able to pay the whole balance at once. What can you do?

Relax. You have options. In most cases, taxpayers can qualify for a relief program to help repay their financial obligations to the IRS. The two most popular programs include:

Payment Plans with Installment Agreements – Payment plans can be set up with the IRS, in which you can make installments using the IRS Online Payment Agreement. It only takes a few minutes to make your payment.  Those who owe $50,000 or less in taxes, including penalties and interest may be eligible for a payment plan extending up to 72 months under a long-term payoff option. Short-term options are available to those who owe less than $100,000 in taxes, with penalties and interest included in the total. The short-term payment plan lasts up to 120 days. The Online Payment Agreement is inclusive, and no paperwork needs to be filed. You don’t have to call or write the IRS, as everything is taken care of online. Long-term payment options require the taxpayer to file Form 9465, which can be downloaded from the IRS website. Mail the form and a copy of your tax return, IRS bill, or notice.

Offer in Compromise – taxpayers who qualify for an offer in compromise can agree to settle their tax debt with the IRS for less than they actually owe. The IRS offers a free online tool which can help you determine if you’re eligible for an offer in compromise.

You can access your federal tax account at IRS.gov/account, and all information is secure. You can check the amount you owe, make an online payment or set up an agreement to pay. You’ll also have access to your tax records and the last 18 months of your payment history. You can also check your important tax information for the current year filed. IRS.gov/secureaccess will lead you to the appropriate identity authentication process to ensure your information is safe and secure.

Disabled taxpayers who wish to deduct their medical expenses at tax time, generally must follow a unique set of rules to do so. Expenses related to the disability that fall under the category as necessary and ordinary business expenses include:

  • Those necessary for you to perform your work in a satisfactory manner
  • Goods and services which aren’t required or used in your personal business, with the exception of incidentals
  • Those expenses which do not fall under other income tax rules, specifically.

You must meet the IRS definition of disabled if you want to deduct your medical expenses. You’re considered disabled if you meet any of the following conditions:

  • You have a physical or mental disability (blindness or deafness, for example) that can limit your ability to be employed.
  • You have a physical or mental impairment which significantly impacts daily activities such as walking, breathing, speaking, earning, working, and other manual tasks.

Disabled taxpayers who work are eligible to claim a business deduction for medical expenses they acquire to work. These expenses are not subject to the traditional 7.5% limitation applied to general medical expenses.

How to Report and Deduct the Expenses

As an employee, you’ll first need to complete Form 2106, Employee Business Expense, or Form 2106-EZ, Unreimbursed Employee Business Expenses. Next, you’ll put the amount related to your disability, which you calculated on Form 2106, onto a Schedule A (Form 1040), line 28. On line 21 of the Schedule A, you’ll record the amount unrelated to your disability.

Disability-related work expenses aren’t limited to the 2% adjusted gross income restriction that’s applied to other employee business expenses.

Self-employed and impaired taxpayers will use the appropriate form, either Schedule C, C-EZ, E, or F) to report the business income and expenses

How Likely Is It I’ll Get Audited?

Believe it or not, the IRS does actually audit a significant number of returns. The common rumor is that the IRS audits fewer returns than you might think. However, the IRS generally audits tax returns six times more than is reported.

The IRS reports auditing roughly a million taxpayers every year, (approximately 0.7% of all tax returns). Millions of additional tax returns are subjects to automated audits as well, boosting the chance of getting audited to 1 in every 23 returns. This may not be a full audit, but some challenge of the information reported.

One reason the audit rate is misrepresented is due to the fact that the IRS has many verification methods for ensuring accuracy of returns. They can also assess penalties, taxes, and interest to inaccurate returns. The IRS uses computerized algorithms and filters to verify many more returns than traditional audits.

Example: The IRS conducted 1.56 million audits in 2011, though another 11 million additional returns were audited using automated programs. The IRS will continue to use similar programs for the 2018 tax season.

Automated auditing and earlier deadlines for the reporting of necessary documents by employers means the IRS can easily match the information provided on the tax return with the reports on 1099s and W-2s. If something doesn’t match up, the IRS will request explanation. The 2016 tax season saw approximately a million audits, but over 3 million requests for explanations regarding mismatched information. These are called CP2000 notices.

Though this extra request for information technically isn’t an audit, it comes across as one to many taxpayers who receive a letter questioning their tax return.

Education Savings Bonds and Taxes

Qualified U.S. Savings Bonds generate interest, which isn’t required to be included in your income at tax time, if you used the bond to pay for certain higher education expenses. Additionally, that interest isn’t subjected to any state or local income tax.

Note: You can’t use the same expenses to claim the interest exclusion for a savings bond AND any other educational tax benefit. This includes tax-free distributions from savings plans, scholarships, military student aid, tuition waivers, employer assistant, the American Opportunity Tax Credit, The Lifetime Learning Credit, or a deduction for tuition and fees.

The interest exclusion only applies to Series EE U.S. Savings Bonds that were issued on 1/1/1990 or later and all Series I U.S. Bonds. Any bonds issued before 1990, as well as Series H and Series HH Savings Bonds aren’t eligible for the interest exclusion.

The bond must be owned directly by the taxpayer or co-owned with the taxpayer and their spouse. If you use your dependent’s bond to pay for educational expenses, you can’t claim it for the interest exclusion. The dependent can be designated as a beneficiary on your bonds, though.

The purchaser has to be 24 years of age or older when the bond is issued. The issue date is the first of the month in which the bond was purchased.

All proceeds from redeeming the bond needs to be spent on qualified higher education expenses or rolled into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account if you want to claim the interest exclusion. If the redemption amount exceeds the expenses for the year and the remainder isn’t put into a qualified savings account, the interest on the excess isn’t eligible for exclusion from income.

The bond must be redeemed in the same year the expenses were incurred.

There is an income phaseout for the interest exclusion for both single filers and married taxpayers filing jointly. Married taxpayers are only eligible for the exclusion if they file a joint return. For 2017, the income phaseout is as follows:

  • Single, Head of Household, Qualifying widow(er): Modified Adjusted Gross Income of $93,150 or more
  • Married Filing Jointly: Modified Adjusted Gross Income of $147,250 or more

You can’t take the exclusion if your income exceeds these amounts.

You may be able to bypass the income phaseout if you know you’ll have a higher income once the student is enrolled in college, but currently fall below the income amount. To do this you’ll have to redeem your bond now and roll the proceeds into one of the aforementioned education savings accounts. The income phase outs do not apply to tax-free distributions from 529 college savings plans, prepaid tuition plans, or Coverdell education savings accounts.

The Final Tax Return

Have you ever wondered what happens if a taxpayer becomes deceased during the calendar year? We know that both death and taxes are inevitable, but do taxes outlast the deceased? In most cases, the answer is yes. Tax filing obligations remain even if the taxpayer has passed part way through the tax year.

The final income tax return will include income up to the date of death and is required to be filed on paper. Deceased income tax returns cannot be electronically filed. Income or deductions that incur after the date of death need to be reported through the estate’s income tax return.

Certain types of income, such as interest, dividend, and capital gains can cause issues when determining the date they were acquired. The only income that should be reported on the final tax return was that earned prior to death.

Married taxpayers who file a joint return don’t experience much difference in their final return than previous years. You have to report the date of death of the individual taxpayer on the top of the form, but other than that, income and deductions are treated the same as they’ve been in years prior. (more…)

When to Hire a Tax Professional

Sure, it may seem easy to do your own taxes, especially with all the easy to use tax programs available. Those taxpayers who have a simple W-2 from their employer and very little else can have a quick and easy tax filing season. However, not all taxpayers are that lucky, and there are some situations that are much more complicated. If you fall under one of the categories below, you may want to consider hiring a tax professional to help prepare and file your return, so you can ensure accuracy.

  1. You own rental property. This is a complicated landscape regarding taxes, as the rules on how much property is taxed and how taxes are assessed are some of the most complicated in the tax code. If you live in your own rental property during the year, this further complicated the situation, as does any property loss (such as a fire) or made upgrades or bought items for the home. It’s best to let a professional handle your Schedule E in these cases.
  2. You didn’t file your past returns. Some taxpayers just don’t file their returns, especially if they think they will owe a significant amount in taxes. If you don’t file, you’ll be in hot water with the IRS. In many cases, it’s better to file the return and not pay the taxes, then to not file at all, as the penalties will be less since you’re not committing tax fraud. The penalty for “failure to file” is up to 25% of the amount due.  Not filing your return is serious, and you’d definitely benefit from hiring a professional to help. You’ll need to file your missed returns, and a tax pro can help ensure you’re getting all the deductions and credits your eligible for, and not just meeting the minimum requirements for filing, which can save you a lot of money in the end.