Parents can cut taxes with child-related credits

Are you a parent? Give yourself some credit – a child-related tax credit, that is. Here are two that can reduce your 2013 federal income tax liability.

Child tax credit. The child tax credit applies if your dependent children were age 16 or younger at the end of 2013. The basic credit is $1,000 per child, though the amount you can claim may be less when you file a joint return and your income is more than $110,000 ($75,000 for other parents).

You may also qualify for the "additional child tax credit," which can generate a refund even if you owe no tax, and comes into play when your tax bill is less than the basic credit.

Child and dependent care credit. Did you pay a daycare or babysitter to take care of your child so you could work? You can claim a credit of as much as 35% of your expenses, up to a maximum of $1,050 for one child ($2,100 for two or more children). To qualify, your child must generally be under age 13. In addition, both you and your spouse must have earned income, unless one of you was attending school full-time.

You can claim both of these credits on your 2013 federal income tax return in addition to the $3,900 dependency exemption for each child. Contact us if you need more details.

The AMT: Will this tax apply to you?

What's your alternative minimum tax (AMT) preference?

Though you might prefer to not think about the AMT, certain income and deductions, known as preference items, affect the way the tax will apply to you. Those amounts, along with others called "adjustments," are added to or subtracted from the income shown on your tax return to arrive at your AMT taxable income.

For example, certain bond interest that you exclude from your regular taxable income must be included when computing income for the AMT. This is a "preference item" because tax-exempt interest gets preferential treatment under ordinary federal income tax rules.

Adjustments include personal exemptions and your standard deduction. In the AMT calculation, these taxable-income reducers are not deductible. Instead, they're replaced with one flat exemption, which is generally the amount of income you can exclude from the AMT.

Note: For your 2013 tax return, the AMT exemption is $80,800 when you're married filing a joint return or are a surviving spouse, $51,900 when you file as single, and $40,400 if you're married and file separately. The exemption decreases once your income reaches a certain level.

What if you itemize? Some itemized deductions are allowed, such as charitable contributions. Others, including medical expenses and mortgage interest, are computed using less favorable rules.

Whatever AMT preference – or adjustment – applies to you, we're here to help calculate the best tax outcome. Please contact us for details or assistance.

Who must file a 2013 income tax return?

The rules for filing 2013 tax returns are straightforward for most people. Marital status, age, and income level are generally the determining factors. Here's a quick overview of the income levels at which a 2013 return is required.

*Single individual…..$10,000

*Single individual, 65 or older…..$11,500

*Married individual, separate return, regardless of age…..$3,900

*Married couple, joint return…..$20,000

*Married couple, joint return, one spouse 65 or older…..$21,200

*Married couple, joint return, both spouses 65 or older…..$22,400

*Head of household…..$12,850

*Head of household, 65 or older…..$14,350

*Qualifying widow or widower (surviving spouse)…..$16,100

*Qualifying widow or widower (surviving spouse), 65 or older…..$17,300

Different IRS rules govern filing for dependents, those who owe special taxes (e.g., self-employment tax), children under age 19 and noncitizens. Also taxpayers due a refund should file regardless of income level.

For more information or filing assistance, contact our office.

How to maximize your tax deduction after a disaster strikes

Fire, flood, tornado. Violent weather can wreak emotional and financial havoc. If your home, vehicle, or other personal property is damaged or destroyed by a sudden, unexpected casualty, an itemized tax deduction may help ease the financial burden.

In most cases, you claim a casualty loss in the taxable year the calamity strikes. However, if you're in a presidentially declared disaster area, you have the option of amending your prior year return, thereby getting tax relief sooner.

Either way, to receive the maximum benefit you'll need to calculate the amount of your loss. Here's how.

1. File an insurance claim. If your property is insured, file a timely claim. Otherwise, you'll only be able to take a deduction for the part of the loss that isn't covered by insurance.

2. Get an appraisal. An appraisal determines the decline in fair market value caused by the casualty. Tax rules require that you measure the difference between what your home or property would have sold for before the damage and the probable sales price afterward. Your loss is the lesser of this decline or your adjusted basis in the property.

3. Establish basis. Generally, your home's adjusted basis is what you paid for it, plus improvements. If your records were lost in the casualty, recreate them using reasonable estimates or the best information you have.

4. Keep receipts for repairs. In some situations, repairs you make to restore your property to its pre-casualty condition can be used as an indicator of the decline in the fair market value.

The aftermath of a casualty is often a stressful time. We're here to help you resolve the tax issues. Please give us a call.

Check the tax rules before lending money to relatives

There are many worthwhile reasons to lend money to a relative. For example, you may want to help a child or sibling continue their education or start their own business.

But lending money to relatives can have tax consequences. The IRS requires that a minimum rate of interest be charged on loans. If you do not charge at least the minimum rate, the IRS will still require you to pay tax on the difference between the interest you should have charged and what you actually charged. If these excess amounts become large, or if the loan is forgiven, there may also be gift tax implications.

There are some exceptions, though. Loans of up to $10,000 generally can be made at a lower (or zero) rate of interest, as long as the proceeds aren't invested. Loans between $10,001 and $100,000 are exempt from the minimum interest requirement as well, as long as the borrower's investment income is $1,000 or less. If the investment income exceeds $1,000, you'll be taxed on the lesser of this income or the minimum IRS interest.

For the IRS to treat the transaction as a loan and not a gift subject to the gift tax rules, the transaction must look like a loan. The borrower should have the ability to repay the principal and interest. A contract should be prepared which specifies the loan amount, interest rate, the payment dates and amounts, any security or collateral, as well as late fees and steps to be taken if the borrower doesn't pay. Have the document signed and dated by all the parties. For assistance, give us a call.

Don't overlook the "nanny tax"

As you review your filing requirements for 2013, make sure you don't overlook the so-called "nanny tax." If you have a household employee, you could be liable to pay state and federal payroll taxes.

First, you must determine whether you have a household employee. Generally, this is someone you hire to work in or around your house. It could be a babysitter, nurse, maid, housekeeper, or gardener. It doesn't matter whether they work part-time or full-time, or whether you pay them hourly, weekly, or by the job.

But not everyone who works around your house is an employee. For example, if a lawn service sends someone to cut your grass each week, that person is not your employee. As a general rule, workers who bring their own tools, do work for multiple customers, or control when and how they do the work, are not your household employees.

If you have a household employee, you'll generally be responsible for 2013 payroll taxes if you paid that individual more than $1,800 last year. However, federal unemployment tax kicks in if you pay more than $1,000 to all domestic employees in any quarter.

It's not always easy to tell whether you have a household employee, or whether exceptions apply. If in doubt, don't hesitate to contact our office.

Should you adjust your withholding for 2014?

Early this year, review the amount of income tax you're having withheld from your wages to see if it should be adjusted. While you must meet minimum tax payment requirements, don't overwithhold or you'll be giving the IRS interest-free use of your money for a year. Don't underwithhold either, or you face penalty and interest charges on the underpayment.

Poor recordkeeping means lost deductions

Check your records to be sure you have the paperwork you need for charitable contributions you want to deduct on your 2013 tax return. Cash, check, and other monetary donations of any amount can be deducted only if substantiated by a bank record or written documentation from the charity. The rules require you to obtain the necessary records before you file your 2013 return.

Check your children's filing requirements

Your children may need to file a 2013 income tax return. A return is needed if wages exceeded $6,100, the child had self-employment income over $400, or investment income exceeded $1,000. If the child had both wages and investment income, other thresholds apply. Contact us for more information or filing assistance.

IRS announces new FSA rule

Flexible spending accounts (FSAs) allow taxpayers to set aside pre-tax dollars to pay for out-of-pocket medical expenses. The drawback has been the fact that unused amounts each year are forfeited. Plans could provide a 2½ month grace period to use up unspent set-asides.

Now a change announced by the IRS adds more flexibility to these accounts. Plans can be modified by employers to allow up to $500 of unused amounts to be carried over into the following year. Health FSAs cannot have both the old 2½ month grace period and the $500 carryover; they can have one or the other (or neither).

1099 reporting due in January

Nearly every company, large or small, has to file Form 1099-MISC with the IRS and send a copy to recipients by January 31, 2014.

You use Form 1099-MISC to report miscellaneous payments to nonemployees. This includes fees for services paid to independent contractors, such as consultants, lawyers, cleaning services, and others. Generally, you don't report fees paid to corporations, but there are exceptions (payments to lawyers, for example).

For details or filing assistance, contact our office.