Your Tax Question - 047(c)

(This segment is a continuation from Your Tax Question – 047(b) which explores the question about filing as Head of Household.)

Who is a Qualifying Relative?

A Qualifying Relative who qualifies must meet five tests as well and does not meet the Qualifying Child tests.

1. Gross Income Test
a. Must be LESS than the dependency exemption amount
i. $3,650 for 2010

2. Support Test
a. The taxpayer must provide more than ½ of the dependent’s support for the year
b. Special notice for Multiple Support situations

3. Relationship, or Member of Household, Test (either)
a. Varied levels of blood relationships
i. Death and divorces not a factor
b. Must be a member of the household all year

4. Citizen or Residency Test
a. U.S., Canada, Mexico
b. OR Legally adopted child but alien resident

5. Joint Return Test
a. Married individuals are not allowed to file as such for this exemption
i. Special joint return test allowance for couples not required to file a return

These are the 5 tests that individuals must meet in order to be considered your Qualified Relative.

There is one other situation that may cause you to be able to file as Head of Household. If your parent lives in his or her own home but you financially maintain that home then you are able to file as Head of Household.

According to your original question, Bart, I would agree that your son does indeed qualify as your Qualified Child but I do question your ability to claim your sister and brother-in-law as your dependents because the facts that you have given do not convince me that they will meet the Qualified Relative Test. To determine this I would need you to get ahold of me with more information.

I really hope this helps.
John

PS. Were you aware that I am accepting first time clients for the 2010 tax year filing season at just $69.00 per client? That’s unheard of but true. They say that you get what you pay for but I am willing to be that in this case you will get a whole bunch more.

Your Tax Question - 047(b)

(This segment is a continuation from Your Tax Question – 047(a) which explores the question about filing as Head of Household.)

Who is a Qualified Child?

A child who qualifies must meet fives tests.

1. Age Test (any of the three criteria to qualify)
a. Under age of 19 at the end of the year
b. Full-time student under the age of 24 at the end of the year
c. Must be permanently and totally disabled

2. Non-Support Test (must NOT have)
a. Must not have provided more than ½ of their own support (Scholarships not counted)

3. Relationship Test (must be the taxpayer’s)
a. Son
b. Daughter
c. Step-son
d. Step-daughter
e. Eligible foster child
f. Brother
g. Sister
h. Step-Brother
i. Step-Sister
j. Or decedent of any or the above

4. Principal Residence Test
a. Must live with the taxpayer more than ½ the year
i. Temp absence such as illnesses, vacation, education, military service, or other

extenuating circumstances notwithstanding.

5. Citizen or Residency Test
a. Must be a resident of the U.S., Canada, or Mexico

This is the 5 tests that a person must meet in order to be a Qualifying Child. In the next post I will explain who qualifies as a Qualifying Relative of a taxpayer which also a consideration in the Head of Household filing status. To read about the Resident Test, click the following link Your Tax Question – 047(c).

Your Tax Question - 047(a)

Dear John, I am a single man and one of my sons has come to live with me this year. Last year I filed my taxes as Single but I have been told that I can file as Head of Household this year because he is with me. Plus, my sister and husband are living with me this year due to the downturn in the economy and I have heard that they will be considered my dependents for the year on my tax return. Is this true? Thanks in advance, Bart
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Hi Bart,

Thanks for the question. It seems (off the top of my head) that everything you have been told is correct, but to make sure let’s run through the rules and make sure.

First, the conditions for the Head of Household filing status are as follows.

To file this way the taxpayer must:

1. maintain a home which is the primary residency
a. of a qualifying child(ren) or
b. other qualified dependent(s)

2. OR maintained a separate home for a parent

The conditions for the Head of Household filing status are straight forward but figuring out who is and is not a qualifying child or dependent is an altogether different matter. I will add these details in following posts so as to not overwhelm this one blog post. Click the following link in order to read Your Tax Question – 047(b), this next post explains the rules for who qualifies as a child.

Your Tax Question - 046

Dear John, I just received a new job and the company is classifying me as a 1099 employee. They have informed me that I will need to save up 15% of my income in order to pay for the these taxes at the end of the year. What gives? Thx, Charlie

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Thanks for the question Charlie,

Some companies classify their employees as 1099 contractors in order to not have to pay certain employment taxes. The IRS is wise to this and they are more than happy to tell you if you are indeed an employee of the company or a contractor. Simply fill out and submit IRS Form SS-8 for the determination.

If the IRS does indeed inform you that you are a W-2 employee and not a 1099 contractor they will have to change the way they treat your paychecks and you will have to fill out Form 8919 with your 1040 for this year. According to IRS Pub 15 employers are always liable for the employee portion of the taxes and add a (ahem) special bonus to the tax for employers who do it wrong.

I hope this helps.

John

PS. Look at the countdown timer just under the header, time is getting short and I am able to help. This year I am only charging $69.00 for new clients that I service as their tax accountant. Can you say "CHA-CHING!" ?

Your Tax Question - 045 (Part C)

(Continued from Your Tax Question - 045 (Part B))

Proposed changes in the tax law for 2011

* W-2 Forms Must Include Health Insurance Costs - Many people mat think that this is for the purpose of taxing workers on this non-taxable benefit but the official word is so that workers may know exactly how much it actually costs to insure them.

* Over-The-Counter Medication No Longer Allowed For No-Tax Health Reimbursement Plans - All those plans that you were putting pre-tax dollars into to pay for health stuff. In 2011 you will no longer be reimbursed for medications that do not have a prescription. Oh, and in case you try the next change is for you.

* Increased Penalty Tax on Non-Qualifying HSA & Archer MSA Distributions - For HSA, the penalty is currently 10% but is raised to 20% and for Archer MSA the current penalty is 15% but is increased to 20%.

* Annual Fee on Drug Manufacturers & Importers - Ever wonder how Medicare Part B is going to be funded? Well, partly it will be funded by this tax on Branded Drug Manufacturers & Importers.

* Small Employers May Establish Cafeteria Plans - For small employers, there will be a 2 year moratorium from the nondiscrimination requirements and be allowed to establish a cafeteria style plan for its employees. For this allowance, an employer must have less than 101 employees average on either of the prior two years.

OK Byron, I think I have sufficiently beat this dead horse sufficiently. I could continue on about 2012, 2013, 2014, and on to 2018 with the proposed changes. However, after Congress regroups for the year who knows what may happen and when. Suffice it to say that this Health Care changes a lot of what we knew about the tax law and if not tempered will do so for years and years to come. For more information you can read about it at the IRS website.

I hope this information clarifies,

John

Your Tax Question - 045 (Part B)

(Continued from Your Tax Question - 045 (Part A))

I won't try to detail all of the items that are new in 2010 because of the Health care Act but I will point out some of the details that will affect most individual tax payers...

2010:

* Tanning Services Excise Tax - This is a 10% tax on all tanning services. As of July 1, 2010 owners of tanning service facilities are required to charge their customers a 10% sales tax on the tanning service and remit those monies quarterly to the IRS. If the business is a health facility that offers health and fitness services but allows its members to use tanning beds as part of the membership then there is no excise tax.

* Small Business Health Insurance Credit - For eligible small employers (ESE) who provide their employees with health insurance a credit may be available. An ESE must have no more than 25 full-time equivalent (FTE) employees [NOTE: A full-time employee is one who works 30 hrs a week for this credit] and an average of $50k per year annual salary per employee including the owner's wage. [Should this be called the Good Luck Small Business Health Insurance Credit?]

* Child Under 27 & Employer-Provider Health Insurance - It used to be that your children were allowed to be on your employer provided health insurance until they turned 24 so long as they were students in an accredited higher education program. Now, your child is allowed to be on your health insurance until the end of the year that they turn 27 years of age and they need only be your child - not even in school.

* Adoption Credit - Under the old law the maximum credit was $12,170 but under this plan the credit is increased by $1000 to $13,170.

While there are more changes to this and the details shared are more intensive than this I hope to have helped you see some of the changes that may effect you for this coming tax season. In Part C of this series I will share a little about the future proposed changes for 2011 and beyond.

John

Your Tax Question - 045 (Part A)

Dear John, I have been hearing all sorts of stories about tax implications of the new Health Care Bill. Can you tell me about what is official and what is hog's-swallow? Thanks, Byron.

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Hi Byron,

There is certainly a lot of speculation about the new 2010 Health Care Act. Before I try to explain what I know, let me clarify that my information is current as of this moment (11/9/2010). Congress has gone on recess and tthey are expected to return before the end of the year to massage the detail. However, that is the nature of taxes, it is only ever current FOR NOW. With that stated, let me details some of the items of interest.

On March 23, 2010 Congress passed, and the President signed into law, new legislation dealing with health care, consisting of H.R. 3590, the Patient Protection and Affordable Care Act and H.R. 4872, the Health Care and then the Education Reconciliation Act of 2010 (Reconciliation Act on March 30, 2010). The most important part of the new health reform law act seems to be the mandate for most U.S. residents to obtain health insurance. This mandate carries with it many new TAX RULES such as:

1. Penalties for individuals who choose to remain uninsured,

2. Tax credits for participating in new insurance coverages,

3. Penalties for larger employers that do not provide insurance (or provide coverage deemed

inadequate or unaffordable),

5. A voucher system for certain lower income employees who choose not to be covered by the

company health plan, and

6. The definition of who is a dependent for an employer health plan (and other purposes) has been expanded.

This Health Care Act is paid for with taxes, penalties and tougher rules for health care related exclusions and deductions. Without getting too political, this legislation could have easily been called the "Tax The Hell Out Of'm Act" to be more to the point. I won't go into too many details but in summary some of the new provisions include:

1. Surtax on “Cadillac” employer health plans,

2. Increased Medicare Tax for higher income individuals,

3. New Medicare Tax on unearned income for higher income individuals,

4. New 10% AGI for deducting medical expenses,

5. New limits on FSA contributions under cafeteria plans,

6. Limits on executive compensation deduction for insurance providers,

7. Annual fees for pharmaceutical companies, manufacturers and importers of medical devices,

and health insurance providers,

8. Codification of the Economic Substance Doctrine and imposition of new penalties,

9. Information reporting for payments to corporations,

10. Eliminating the credit for “black liquor,” and

11. Estimated tax changes for large corporations.

This Health Care Act legislation also creates a few new benefits:

1. A “simple” cafeteria plan for small businesses,

2. Increases the adoption credit and adoption assistance,

3. Creates a new tax credit to stimulate new therapeutic discovery projects, and

4. Provides a new exclusion for certain health professionals.

Of course, all of this is implemented on a timeline that extends into 2018 so how all of it will pan-out has yet to be worked out. So this post doesn't get too cumbersome I will add more details in subsequent posts but for now I just wanted to give you an overview.

Best,

John

P.S. A prof once told me that everything I write has been lifted from someone, the point is to avoid plagiarism and give credit where credit is due. So I would like to credit the UMTax program and the materials that they provide for the information that I know (or at least think I know).