“It’s the least wonderful time of the year….” Yes, it’s time to prepare to file your tax return. While this time of the year is met with dread by many individuals, it doesn’t have to be quite as bad as it’s purported to be or as you may think. By following these steps, you can make it as stress-free as possible.
First, gather your information. By now, you should have received all the reporting documentation you’ll need. Here’s a checklist:
- Social security numbers: yours, your spouse’s (if filing jointly), and those of all your dependents
- W-2 forms from your employer(s) and those of your spouse (if filing jointly)
- 1099 forms (if applicable):
- 1099-MISC: for miscellaneous income earned as an independent contractor or self-employed person who earned more than $600 from an individual client. Provided by your client(s).
- 1099-INT: for interest income. Provided by your bank or investment firm.
- 1099-DIV: for dividend income. Provided by your bank or investment firm.
- 1099-R: for retirement income from withdrawals from your traditional IRA or 401(k) account. Provided by your bank or investment firm where the account is held.
- 1099-G: for unemployment compensation or a state tax refund. Provided by the appropriate government agency.
- 1099-C: for debt cancellation that the IRS treats as income. Provided by the company forgiving your debt (e.g. credit card company).
- Income from state and local tax refunds from the previous year (that may not be reported on a 1099-G)
- Accounting records for business income
- Social Security benefits
- Rental or royalty income
- Miscellaneous income (e.g. jury duty stipend, gambling/lottery winnings, prizes or awards, and distributions from a medical savings account [reported on Form 1099-MSA])
You can reduce your tax liability with deductions and credits. You should have the documents and amounts you paid for mortgage interest, student loan interest, IRA contributions, medical savings account contributions, moving expenses, childcare costs, charitable contributions and donations, qualified job and business expenses, casualty and theft losses, and any homebuyer or green energy tax credits for which you may be eligible.
Also, please share with us any life changes (marriage, divorce, new child, job change or relocation, death, etc.) that you experienced in the last year, so that we can fully and effectively address your tax situation and take advantage of certain credits, exemptions, deductions, etc. to which you may now be entitled.
Please provide your updated mailing address and bank account information to avoid a potential delay in your refund.
Finally, ask questions! We are here to serve you, so please don’t hesitate to ask any questions you may have.
Using Waddy’s Organizer
We understand that taxes can be complex, so we’ve created a tax Organizer to help you expedite the process. The Organizer walks you through your personal tax situation with a series of yes/no questions and easy-to-follow worksheets on which we’ll collect needed information about your dependents, income, healthcare coverage, as well as other income and adjustments. For those who need it, we’ll help you cover every detail for Schedules C (business), E (rental & royalties), and F (farming) as well as itemized deductions for which you may qualify to potentially reduce your tax liability.
With the Organizer complete, you can easily upload it to use via our secure online portal.
The average timeframe for Waddy to complete your tax return is two hours to two weeks depending on how your information is organized.
Once your return is filed, if you are getting a refund, the IRS issues most refunds in fewer than 21 calendar days. However, it may take longer, especially if you are claiming the Earned Income Tax Credit or an Additional Child Tax Credit. By law, the IRS cannot issue a refund in that case until at least Feb. 15, 2017.
You must also take into consideration the time it takes for your bank or financial institutions to post the refund to your account when getting the refund via direct deposit.
You can use the IRS “Where’s My Refund” site to track the status of your tax return.
When there is a death in the family, one of the last things you probably want to think about is the settling up with the IRS; however, a final tax return must be filed for the year in which the person (the decedent) died. Additionally, tax returns must be filed for any years preceding the year of death if the decedent had not done so.
For example, John Q. Public died in February 2016 before he filed his tax return for tax year 2015. His personal representative would be responsible for completing and filing two returns on his behalf: one for tax year 2015 (due on the normal date of April 15, 2016 or extension request filed by that date) and one for tax year 2016 (due on the normal date of April 15, 2017 or extension request filed by that date) that would cover the time from the start of the year until his death.
The typical IRS Form 1040 is used. Or, if the decedent would qualify, Form1040-A or 1040-EZ can be used instead. According to the IRS, “All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed.”
A personal representative must be named to oversee the decedent’s property and take responsibility for filing tax returns. This person is typically the person named as the executor/executrix on the decedent’s will and/or testamentary documents. If no will exists (or no executor named or the executor is unable to carry out the duties), the court will appoint an administrator to serve as the personal representative.
The personal representative is responsible for gathering all of the decedent’s assets, paying creditors, and distributing any remaining assets to heirs and/or beneficiaries. With regard to tax filing, the IRS states that the personal representative must also:
- Apply for an employer identification number (EIN) for the estate (if needed).
- File all tax returns, including income, estate, and gift tax returns, when due.
- Pay the tax determined up to the date of discharge from duties.
Apply for an EIN as soon as possible as this number will be needed on the documents you file on behalf of the decedent and the estate. You can apply for this for free at www.irs.gov (“Apply for an Employer ID Number”), and when applying online, you will receive the EIN immediately upon completion of the application.
It is important to note that funeral expenses are generally not deductible from the decedent’s income when filing the final tax return; however, executor fees and administration fees are deductible to the estate on the final return. That said, if you serve as the personal representative, any fees paid to you from an estate must be included in your own tax return as gross income for the year in which you receive them.
As noted, you must file the decedent’s return (or file for an extension) on the normal tax deadline (April 15th or the next business day when the due date fall on a weekend or other legal holiday). Include the word “Deceased” along with the date of death at the top of the return. If there is a surviving spouse on a joint return, include that person’s name and address in the appropriate fields. If there is no spouse or a joint return is not being filed, the personal representative’s name and address are included in the address field.
The personal representative signs the return. In the case of a joint return with a surviving spouse, the surviving spouse also signs the return as they normally would.
If you are the personal representative (with no surviving spouse), file the return for the place of your residence (if it is different from that of the decedent).
If the decedent would be due a refund, that money is not forfeited upon death. You would use Form 1310 to claim the refund. The IRS states, this form “does not have to be filed if you are claiming a refund and you are:
- “A surviving spouse filing an original or amended joint return with the decedent, or
- “A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return.”
If you inherit assets from the decedent, it may or may not be taxable. To determine any tax liability, you must first determine your “basis” in the property. According to the IRS, “The basis of property inherited from a decedent is generally one of the following:
- “The fair market value (FMV) on the property on the date of the decedent’s death.
- “The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation.”
Sale of the property is reported on Schedule D (Capital Gains and Losses) and on Form 8949 (Sales and Other Dispositions of Capital Assets). If you sell the property for more than your basis, there is a taxable gain. It’s advisable to get an appraisal for the most accurate assessment of a gain (or loss).
Estate and Inheritance Taxes
An estate tax is levied on the net value of all of a decedent’s assets, and this tax is paid by the estate prior to distribution of inherited assets to the beneficiaries. At the federal level, a filing is only required for estates that exceed $5,490,000 in 2017.
An inheritance tax is the responsibility of the recipient/beneficiary. Currently, there are only six states that impose an inheritance tax, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each state has different laws, thresholds, and tax rates.
One of life’s happiest transitions is welcoming a new family member. While you are getting adjusted to a new schedule and every other detail that comes with a new baby or child, it’s important to keep in mind that family expansion brings with it changes to your tax picture regardless if expansion is due to the birth of a new baby, adoption, or foster care.
First Things First: Your W-4
The first thing you should do is update your W-4 form. This is the form your employer uses to calculate the amount of federal income tax that is withheld from each paycheck. You now have another exemption to claim, and that lowers your tax liability as you will be adding a dependent. When you file for the tax year in which you added to your family, your exemptions increase. The personal exemption amount for tax year 2016 is $4,050 per exemption (depending on your adjusted gross income).
Depending on your situation and whether you itemize on your tax return, updating your W-4 may not be as easy as simply increasing the number of dependents you claim by one. If you claim other credits or income adjustments, you should take these into account when completing your W-4 form. Check out the IRS Withholding Calculator to help make the process a little easier.
Child Care Expenses
Babies and children come with lots of expenses. The majority of these expenses are not tax deductible; however, the cost of providing care while you work may entitle you to a tax credit. Because of the cost of child care, either parent may re-evaluate the feasibility of resuming employment. This credit can make the decision easier by reducing the economic strain of the cost of child care. Remember that this is a credit, not a deduction, so there is a dollar-for-dollar reduction to your overall tax liability.
Additionally, you can claim this credit regardless of income. While the credit is reduced at higher incomes, the Child and Dependent Care Credit does not entirely disappear at higher income thresholds as do many of the credits offered by the IRS. This is certainly a credit that you’ll want to take advantage of. The maximum credit is $3,000 for one qualifying child or individual or $6,000 for two or more qualifying dependents. You may not claim this credit, however, if your filing status is “married, filing separately.” According to the IRS, “The amount of the credit is 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.”
The percentage ranges from 20 to 35 percent of allowable expenses.
For children, a dependent qualifying child is one who is under age 13 when care is provided. (This credit is also available for older qualifying dependents in the case of physical or mental incapacity for self-care.) Additionally, your payments for child care cannot be made to someone you (or your spouse) can claim as a dependent. You will need to report identifying details for the caregiver or organization on your return. Use Form W-10 to request this information from your caregiver.
If you choose to use an in-home nanny for child care and other domestic support, you should withhold and pay Social Security and Medicare tax on the wages you pay. If you pay cash wages of $2,000 or more, you should withhold and pay those taxes. The taxes are currently 15.3 percent of cash wages. The employee’s share and your share (as the employer) are both 7.65 percent which combined equals the 15.3 percent.
You are not required to withhold federal income tax (but you may agree to do so); however, you may be responsible to pay federal unemployment tax. If so, this tax is covered by you and not withheld from your employee’s wages. You can learn more about “nanny tax” at the IRS site.
Adoption and Foster Care
Adopting is a wonderful way to open your heart and home to a child, but there are expenses involved with the process. The adoption tax credit is now a permanent part of the American Taxpayer Relief Bill. The credit is designed to help offset qualified adoption expenses including adoption and attorney fees, court costs, travel expenses, and other expenses involved in the legal adoption of a child.
For 2016, the adoption credit is $13,460 for those with a modified adjusted gross income (MAGI) of $201,920 or less. For those over that threshold but with a MAGI of less than $241,920, the tax credit is reduced. If your MAGI exceeds $241,920, you are not eligible for the credit.
This is a non-refundable credit, so it is limited to your tax liability for the year. In other words, this credit cannot drive your tax liability below zero, resulting in a refund to you. However, any credit that does exceed your tax liability for the year isn’t completely lost. You may carry the excess forward for up to five years. Learn more about the adoption credit at the IRS site.
If you provide care as a foster parent, there are also tax implications of which you should be aware. Foster children are typically not eligible for the same credits and deductions that your biological or adopted children are; however, there may be some tax breaks for you. First, to be considered, a foster child must be placed with you by a judgement, court order, or authorized placement agency. If this is not the case, you may not claim foster care tax benefits. That said, if you receive payments for providing care to a foster child that are paid by a child placement agency or state or local government, these payments are not considered taxable income. Additionally, you may also be able to deduct unreimbursed foster care expenses as a charitable donation if the placement agency is a recognized 501(c)3 organization. If not, those expenses may qualify as support, and the support you provide changes whether or not you can claim the foster child as a dependent. To learn more about claiming a foster child as a dependent, visit the IRS site.
As you can see, there is far greater tax implication when you add a child to your family than simply increasing your W-4 form by a single dependent, especially if you are adopting or providing foster care. It can be complicated, so feel free to contact us, and we can help you throughout the entire process.