This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Are you taking care of an elderly parent or relative? According to the U.S. Census Bureau, there were 43.1 million people age 65 and older in the United States in 2012, nearly 15 percent of the total population.
Whether it's driving to doctor appointments, paying for nursing home care or medical expenses, or handling their personal finances, dealing with an elderly parent or relative can be emotionally and financially draining, especially when you are taking care of your own family as well.
Fortunately, there is some good news: You may be able to claim your elderly relative as a dependent come tax time, as long as you meet certain criteria.
Here's what you should know about claiming an elderly parent or relative as a dependent.
Who qualifies as a dependent?
The IRS defines a dependent as a qualifying child or relative. A qualifying relative can be your mother, father, grandparent, stepmother, stepfather, mother-in-law, or father-in-law, for example, and can be any age.
There are four tests that must be met in order for a person to be your qualifying relative: not a qualifying child test, member of household or relationship test, gross income test, and support test.Not a Qualifying Child
Your parent (or relative) cannot be claimed as a qualifying child on anyone else's tax return.
He or she must be U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; however, a parent or relative doesn't have to live with you in order to qualify as a dependent.
If your qualifying parent or relative does live with you however, you may be able to deduct a percentage of your mortgage, utilities and other expenses when you figure out the amount of money you contribute to his or her support.Income
To qualify as a dependent, income cannot exceed the personal exemption amount, which in 2014 is $3,950. In addition, your parent or relative, if married, cannot file a joint tax return with his or her spouse unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.
You must provide more than half of a parent's total support for the year such as costs for food, housing, medical care, transportation and other necessities.
Claiming the Dependent Care Credit
You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.
In addition, expenses you paid for the care of a disabled dependent may also qualify for a medical deduction (see next section). If this is the case, you must choose to take either the itemized deduction or the dependent care credit. You cannot take both.
Claiming the Medical Deduction
If you claim the deduction for medical expenses, you still must provide more than half your parent's support; however, your parent doesn't have to meet the income test.
The deduction is limited to medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if either you or your spouse was born before January 2, 1949), and you can include your own unreimbursed medical expenses when calculating the total amount. If, for example, your parent is in a nursing home or assisted-living facility. Any medical expenses you paid on behalf of your parent are counted toward the 10 percent figure. Food or other amenities however, are not considered medical expenses.
What if you share caregiving responsibilities?
If you share caregiving responsibilities with a sibling or other relative, only one of you--the one proving more than 50 percent of the support--can claim the dependent. Be sure to discuss who is going to claim the dependent in advance to avoid running into trouble with the IRS if both of you claim the dependent on your respective tax returns.
Sometimes, however, neither caregiver pays more than 50 percent. In that case you'll need to fill out IRS Form 2120, Multiple Support Declaration, as long as you and your sibling both provide at least 10 percent of the support towards taking care of your parent.
The tax rules for claiming an elderly parent or relative are complex. If you have any questions, please give us a call. We're here to help you.
Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.
Employer Identification Number (EIN)
The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Please note that as of May 21, 2012 you can only apply for one EIN per day. The previous limit was 5.
State Withholding, Unemployment, and Sales Tax
Payroll Record Keeping
Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.
If you need help setting up the paperwork for your business, give us a call. Letting our experts handle this part of your business will allow you to concentrate on running your business.
If you're looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home in order to reduce your taxable gain on the sale of a home.
The IRS home sale exclusion rule allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime (but not more frequently than every 24 months), as long as you meet certain ownership and use tests.
During the 5-year period ending on the date of the sale, you must have:
Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.
If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.
Tip: As we mentioned earlier, the exclusion can be used repeatedly, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.
Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.
Improvements Increase the Cost Basis
Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home, thereby reducing the capital gain.
Additions and other improvements that have a useful life of more than one year can also be added to the cost basis of your home.
Examples of improvements include the following: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.
Partial Use of the Exclusion Rules
Even if you do not meet the ownership and use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call us for additional details.
Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, you should keep records proving your home's cost basis for as long as you own your house.
The records you should keep include:
Tax considerations surrounding the sale of a home can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.
U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, may have a U.S. tax liability and a filing requirement in 2014.
The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return.
Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies.
Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income.
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.
Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Please call us for details.
Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, please contact us.
If you are a U.S. taxpayer living here or abroad and have questions about your U.S. tax obligations, please don't hesitate to call us. We're happy to assist you.
If you don't have taxes withheld from your pay, or you don't have enough tax withheld, then you may need to make estimated tax payments. If you're self-employed you normally have to pay your taxes this way.
Here are five tips you should know about estimated taxes:
1. You should pay estimated taxes in 2014 if you expect to owe $1,000 or more when you file your federal tax return. Special rules apply to farmers and fishermen.
2. Estimate the amount of income you expect to receive for the year to determine the amount of taxes you may owe. Make sure that you take into account any tax deductions and credits that you will be eligible to claim. Life changes during the year, such as a change in marital status or the birth of a child, can affect your taxes.
3. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 16 and Sept. 15 in 2014, and Jan. 15, 2015.
4. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. If you mail your payments to the IRS, use the payment vouchers that come with Form 1040-ES, Estimated Tax for Individuals. Or, you may also electronic payment options on IRS.gov. The Electronic Filing Tax Payment System is a free and easy way to make your payments electronically.
5. Use Form 1040-ES and its instructions to figure your estimated taxes.
Questions about estimated tax payments? Give us a call. We're here to help you with these and all of your tax needs.
The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be easily dealt with without having to call or visit an IRS office. Here are eight things you should know about if you receive a notice or letter from the IRS.
1. There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.
2. Each letter and notice offers specific instructions on what action you need to take.
3. If you receive a correction notice, you should review the correspondence and compare it with the information on your tax return.
4. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
5. If you do not agree with the correction the IRS made, it is important to contact us before responding. We'll help you to prepare a written explanation to send to the IRS of why you disagree and make sure it includes any information and documents the IRS should consider that support your case. You should hear from the IRS within 30 days regarding your correspondence.
6. Most correspondence can be handled without calling or visiting an IRS office. In order to handle any issues that arise more quickly, we ask that that you please have a copy of your tax return, as well as any correspondence from the IRS available when you speak to us.
7. It's important to keep copies of any correspondence with your other tax records.
8. IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.
If you have received a letter or notice from the IRS and have questions or concerns don't hesitate to call us.
Starting in June 2014, the Internal Revenue Service is beginning a one-year pilot program to help small businesses with retirement plans that owe penalties for not filing reporting documents. By filing current and prior year forms during this pilot program, they can avoid penalties.
Certain small businesses that maintain retirement plans and may have been unaware that they had a filing requirement and this program will bring a significant number of small business owners into compliance with the reporting requirements.
Plan administrators and sponsors who do not file an annual Form 5500 series return can face stiff penalties--up to $15,000 per return. Those who have already been assessed a penalty for late filings are not eligible for this program. This program is open only to retirement plans generally maintained by certain small businesses, such as those in an owner-spouse arrangement or eligible partnership.
Multiple late retirement plan returns may be included in a single submission. If a retirement plan has delinquent returns for more than one plan year, penalty relief may be available for all of these returns. Similarly, delinquent returns for more than one plan may be included in a single penalty relief request. No filing fee will be charged during the pilot program.
If you're a small business owner that maintains a retirement plan and weren't aware of the filing requirements, give us a call today. We can help.
Employees who work for tips - If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.
Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. (U.S. citizens living in the U.S. should have paid their taxes on April 15.) If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.
Individuals - Make a payment of your 2014 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2014.
Corporations - Deposit the second installment of estimated income tax for 2014. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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