Tax Tips BlogTax Tips for Individuals and Small Businesses

There are 5 requirements that must be met for an individual to be considered a qualifying child.

1. 1.     Relationship.  The child must be:
   1. Your child, stepchild, adopted child, foster child, or a descendant of any of them (grandchild); or
   2. Brother, sister, step-brother, step sister, half-brother, half-sister, or a descendant or any of them (niece/nephew)

Also include in this group adopted and foster children.  An adopted child includes any child lawfully placed with the taxpayer for legal adoption.  A foster child is any child placed with the taxpayer by an authorized placement agency or by a judgment or decree issued by a court.

1. 2.     Residency.  The individual has to have resided with the taxpayer for more than 6 months of the tax year and must be the qualifying child’s principal home.  Temporary absences for illness, education, business, vacation, or military service may count as time lived with the taxpayer.

 If a child who is born/dies during the tax year will be considered as living with the taxpayer for the entire year if the taxpayers home was the child’s home for the time the child was alive.

If a child is presumed by law enforcement authorities to be kidnapped by someone who is not a member of the family and the child resided with you more than 6 months of the prior tax year, then the child satisfies the residency test for all years ending during the period in which the child is missing.  The child ceases to satisfy residency the year beginning after the calendar year the child is determined dead or if the child turns 18.

1. 3.     Age Requirement.  The child must be:
   1. Under age 19 at the end of the calendar year
   2. Under the age of 24 at the end of the calendar year and a full time student for at least 5 month of the year
   3. Permanently & totally disabled at any time during the calendar year regardless of age.

To meet the age test and not be disabled, the individual must be younger than the taxpayer/spouse if married filing jointly (individual does not have to be younger than both just younger than one of the married taxpayers)

1. 4.     Support.  An individual must NOT provide over 1/2 their own support during the year to be a qualifying child.  A scholarship received by a child that is a full time student is not considered support.
2. 5.     Joint Return.  An individual CANNOT be a qualifying child of another taxpayer if they file a joint return with his/her spouse for the year unless the joint return is filed solely as a claim for refund.

I hope the information above has clarified if you can claim a child placed in your care or away at college.  If you have other tax questions please feel free to shoot me an email at tami@highbaughtax.com or ask your question in the comments section below.

Wondering if you are required to file taxes in 2011.  You may not have to… So who must file a Return in 2011?  The information below should help you figure it out.

You must file a return if you are a U.S Citizen or Resident Alien and have gross income that is more than the amounts show below in the table.  There are some exceptions though… for instance you must file a return:

• If you had net earnings from self employment of at least $400.00
• If you received any advance earned income credit (EIC) payments from your employer
• If you had wages of $108.28 or more from a religious organization that is exempt from Social Security and Medicare Taxes

Also if you owe any of the following special taxes:

• Social Security & Medicare taxes on tips not reported to your employer
• Uncollected Social Security, Medicare or railroad retirement tax on tips reported to an employer
• The alternative minimum tax
• Household employment taxes
• Additional tax on a qualified retirement plan, including an IRA
• Additional tax on a health savings account (HSA), Archer MSA, Coverdell education savings account (ESA) or qualified tuition program
• Recapture of certain tax credits and other benefits reported on line 44 and line 60, ie. education credit, investment credit, first-time buyer credit, and the credit for employer-provided childcare facilities

Who Must File  a Return in 2011

When tax time comes I am always bombarded with a million questions… and why shouldn’t I be?  Tax laws change every year so with each year comes new issues, new concerns, and new questions.  Below is a question I am asked every year… “what Tax Bracket am I in?”.  I decided to put together a quick reference table to answer that question.

2011 Tax Bracket by Filing Status

I often have clients ask me to explain the differences between business entity types and which type of entity is the best for their company.  Honestly it depends on the goals you have set for your business and the resources you have available to you.  For tax filing purposes it is important to keep your business compliant.

Business Compliancy Tips:

• It is essential to keep a separate bank account for all companies you own or operate.
• Keep accurate accounting records (you may have to hire someone knowledgeable to help you with this or get some training)
• Check with your Secretary of State for business entity filing fees and requirements
• Check to ensure your state does not require a special business license to operate
• Be sure to get your EIN or Tax ID number
• If you are selling retail items you will need to complete a vendors registration form and state taxes may be applicable

If you are thinking about going into business with your spouse and do not want to incorporate or set up an LLC, you must form a partnership.  Regardless of the fact that you live in the same house and are operating the same company, the IRS sees any company owned by two people as a partnership.

What Business Entity type is right for you?

Business Entity Comparison Chart

Dangers of Mixing Business with Personal Transactions

It is important to remember that the businesses can only benefit from their limitied liability status if they operate their businesses as though they are a company.  This means it is important to keep good accounting records and separate bank accounts.  If you mix business and personal, by paying for personal items from your business account or purchasing business items on your personal account, a judge can determine that since you mix business and personal, you can lose your limited liabilty status and your personal assets are at risk if sued.

I hope this helps you determine what type of business you want to set up.  Remember that in some states a lawyer and/or CPA may be needed to setup a C Corporation.  I wish you luck with your business venture and remember that Highbaugh Tax is authorized to file taxes in all 50 states and we would be happy to help you with your business set up or tax prep needs.

Every wonder what all those tax terms mean but don’t want to ask?  Well here is your cheat sheet courtesy of JK Lasser.

AGI. Adjusted gross income (AGI) is gross income minus allowable adjustments (e.g., alimony payments and deductible IRA contributions).

AMT. The alternative minimum tax (AMT) is a tax triggered if certain write-offs reduce your regular tax below the tax figured for AMT purposes.

EFTPS. The electronic federal tax payment system (EFTPS) at www.eftps.gov is an online and phone option for transferring taxes to the U.S. Treasury.

EIN. An employer identification number (EIN) is the 9-digit number from the IRS that is used by employers, trusts, and other entities for tax reporting purposes.

ESA. A Coverdell education savings account (ESA) is a special account set up to fund education expenses of a student.

FBAR. A report of foreign bank and financial accounts (FBAR) is required annually by U.S. citizens and residents with an interest in or signature over such accounts.

FIFO. First-in, first-out (FIFO) is an ordering rule used for both inventory purposes which says that the first items acquired are treated as the first items sold; FIFO is also the default method for determining which shares of stock or a mutual fund are sold when shares are acquired at different prices and sell than the full holding is sold.

FSA. A flexible spending account (FSA) is an account funded by an employee with salary contributions to pay for medical or dependent care expenses on a pretax basis.

FICA. The Federal Insurance Contributions Act (FICA) is the federal tax paid by employees and employers to cover Social Security and Medicare taxes.

FUTA. The Federal Unemployment Tax Act (FUTA) is the federal unemployment tax paid by employers on employees’ wages.

HRA. A health reimbursement account (HRA) is an employer-established health account to provide tax-free reimbursements to employees for medical costs.

HSA. A health savings account (HSA) is a type of medical plan combining high-deductible medical insurance coverage with an IRA-type savings account to pay unreimbursed medical expenses.

IRA. An individual retirement account (IRA) is a type of tax-favored account used for retirement savings.

IRB. The Internal Revenue Bulletin (IRB) is a weekly publication containing IRS rulings, notices, announcements, and other official pronouncements, which can be found www.irs.gov/app/picklist/list/internalRevenueBulletins.html.

ISO. An incentive stock option (ISO) is an equity compensation plan under which the recipient of the option does not pay income tax until the stock acquired pursuant to the option is sold.

MACRS. The modified accelerated cost recovery system (MACRS) is a depreciation system that applies to assets placed in service after 1986.

MAGI. Modified adjusted gross income (MAGI), an amount used to determine limitations to certain deductions and credits, is AGI increased by certain items such as the foreign earned income exclusion.

MSA. An Archer medical savings account (MSA) is a type of medical plan combining high-deductible medical insurance coverage with an IRA-type savings account to pay unreimbursed medical expenses.

OID. Original issue discount (OID) is a discount from the par value at the time a bond is issued; OID is reported annually and is taxed as interest income.

PIN. The Personal Identification Number (PIN) is a 5-digit that you select if you e-file; the PIN ensures that your electronically submitted tax return is authentic.

QDRO. A qualified domestic relations order (QDRO) is a court-ordered direction to qualified retirement plans directing that a share of benefits be paid to a spouse, child, or other named person (called an alternate payee) rather than to the plan participant.

REIT. A real estate investment trust (REIT) is trust that invests primarily in real estate and mortgages and passes through income to its investors.

RMD. A required minimum distribution (RMD) is the amount that must be distributed from a qualified retirement plan or IRA, usually starting at age 70¹/₂, in order to avoid a 50% penalty.

SEP. A simplified employee pension (SEP) is an IRA-like retirement plan set up by an employer or a self-employed individual.

SIMPLE. A savings incentive match plan for employees (SIMPLE) is a type of retirement plan to which both employees and employers make contributions; SIMPLEs function much like 401(k) plans but with lower contribution limits.

TIN. The tax identification number (TIN), which is the number used for income tax reporting purposes, usually is an individual’s Social Security number.

VAT. A valued added tax (VAT) is a tax imposed on each stage of production and distribution of products. Currently, there is no VAT in the United States.

With the tax deductions almost upon us… I thought I would give you a little tax humor. Enjoy courtesy of Turbo Tax.

If you are an employee and you are worried this year or any tax year that you might owe money you may have some tax deductions you didn’t think about.  Many employees have “Employee Business Expenses”.  Expenses you incurred for the purpose of working for your employer that was not reimbursed by your employer can be eligible.

Examples of these expenses are:

1.              Business Travel Away from home

2.              Business use of your own personal vehicle

3.              Business meals and entertainment

4.              Business use of your home

5.              Education/Training

6.              Business supplies you purchase

7.              Business tools you purchase

Now if your employer reimburses you for these expenses you cannot claim them on your return.  IRS publication 552 will give you more details on what can and cannot be claimed.  It is your responsibility to keep accurate records of these expenses in the event of an audit.

Lastly, only the amount of the expenses that are in excess of 2% of your adjusted gross income can be deducted and are still subject to the standard deduction.

Call your Tax Accountant or preparer if you have any questions.

Tami Highbaugh-Abdullah

Highbaugh Tax

317.345.4182

Last year Americans were able to benefit from tax law changes that for some resulted in an increase in their refunds of up to an additional $1,000.  This year filers have not been so lucky.  Although there have been some tax law changes that are beneficial to Tax filers, many will be seeing a decrease in their refunds.  Many of 2009′s Tax Breaks were not extended and you will see a difference.

Below information is Courtesy of J.K. Lasser

ADDITIONAL STANDARD DEDUCTION FOR REAL PROPERTY TAXES

ADDITIONAL STANDARD DEDUCTION FOR DISASTER LOSSES

SALES TAXES ON CAR PURCHASES

UNEMPLOYMENT BENEFITS

ADDITIONAL IRA CONTRIBUTIONS IN CERTAIN BANKRUPTCY CASES

SUSPENSION OF REQUIRED MINIMUM DISTRIBUTIONS

BUSINESS-RELATED BREAKS

• Five-year recovery period for depreciating farming business machinery and equipment.
• Extended net operating loss (NOL) carryback (there had been an option to carry NOLs back for up to 5 years).
• Reduced estimated tax payments for small business owners.

The amount of income you can receive before having to file your taxes has increased for the 2010 tax year.  See the table below.

Filing Status

End of 2010 were

Then File a Return if your Gross income was at least…

Single

Under 65

$9,350

65 or Older

$10,750

Married Filing Jointly

Under 65 (both spouses)

$18,700

65 or Older (one spouse)

$19,800

65 or Older (both spouses0

$20,900

Married Filing Separately

Any Age

$3,650

Head of Household

Under 65

$12,050

65 or Older

$13,450

Qualifying Widow(er) with Dependent Child

Under 65

$15,050

65 or Older

$16,150

Just because you fall within these guidelines does not mean you should not file your taxes.  Talk with your tax preparer because chances are… if you don’t file your return you will be missing out on your refund…. and the IRS will not be calling you if they owe you money… they will just keep it.

Tami Highbaugh-Abdullah

Highbaugh Tax

317.345.4182

tami@highbaughtax.com