When tax time comes around. Are you being reactive or proactive? Do you find yourself swimming in a sea of questions like, is it better to do my tax return cheaply? How do I know if I’m doing them the right way? Welcome to the Tax Answers Advisor with Marcelino Dodge. Today, we’ll answer these questions and many more. Sharpen your pencils and take some notes. Now here’s your host, Marcelino Dodge.
MARCELINO: Hello again, I’m Marcelino Dodge, and welcome to The Tax Answers Advisor. The show that simply covers just what everybody loves to talk about their personal income tax and it seems kind of odd to maybe talk about this time of the year but this is just the right time of the year to discuss this matter. Today, we’re gonna be looking more at our dependents we put in our Tax Returns, who we can claim and not be claiming.
And some unusual circumstances that are often encountered during tax season because there’s a lot of them and people have such a variety of circumstances. But first, before we start into that. Going to start a new little here at the beginning of each show. We’re going to cover just a few updates that happened since our last program. And, one of the big happenings is for those who have a Payroll Protection Loan or the PPP Loan. Last week, the SBA released a simplified application. If you received a loan under $50,000.
It’s a lot less complicated than the first application but it’s supposed to be streamlined we’ll see how that works as like with anything. The SBA or any Government Agency puts off. But, it’s supposed to be simplified and a lot of different things are supposed to do. But yet hopefully, it’ll be simpler for those who have the loans for under $50,000. Also, we think about, what is today? October 14th.
Which means if you file an extension with already the extended time which was July 15th. If you filed an extension well tomorrow, October 15th is the deadline for you to have your Federal Tax Return File. What we need to keep in mind with this and that can be mailed which make sure you get a post marked on the 15th. And if you do happen to be mailing your tax return, I recommend you get a certified mail stamp on that so that you have proof that yes you filed or you mailed it on the 15th.
And thus you’re in of the disasters is where the IRS has allowed ones to extend that, so but make sure you get that in the mail or if you have a payment due, make sure you have that in as well. Another planning recommendation were making this week for ones and this is a good time of year again to be doing and that is to be checking your tax withholdings. And this would be true for not only your W-2. For those who are working and have continued to work for the last several months, through this pandemic.
It would also be true to check tax withholdings if you’ve been receiving unemployment because those amounts that you receive in unemployment are taxable income from the Government standpoint. Just a few tidbits to make sure you keep on checking and be aware of. So back to our Topic of the Day which is, “Who is my dependent”? Who can I claim as a dependent on my Tax Return?
While prior to the 2017, a Tax Cut and Jobs Act that those ones were normally considered as an exemption but since we no longer have exemptions basically, it’s who’s going to be my dependent on my Tax Return? That I can either get a $2,000 Child Tax Credit for, or get in other dependent credit to $500 for. Most commonly, this dependent is going to be your child aged 18, and under. And for most people that’s a pretty set in stone, kind of deal so not usually too complicated.
Now there are some circumstances where sometimes ones may have a parent living with them that they are caring for, that they are supporting and so on. So, yes there may be occasions where you may be able to claim a parent. And then there may be another one individual who would be known as a qualified child or qualified relative.
Now that is an individual who isn’t necessarily related directly by blood, it could be an uncle and cousin, niece, nephew, could be with any of those into type of individuals that meets up with the qualification that you can claim as a dependent on your tax return. Now, what we got to keep in mind as we look at who we’re going to claim as a dependent on our tax return. Many people don’t realize or just maybe don’t know, because they’re not always talking about, it’s actually seven tests as the Internal Revenue Service has, to determine whether an individual can be claimed on a tax return, seven of those and yet to meet all seven to be able to claim the individual.
The first three are usually not to talk about too much because they’re really streamlined, pretty, pretty simple and mostly everybody meets the first three. Which one is that the one trying to claim the dependent is not being claimed on another tax return or they’re not filing a joint tax married. Filing joint tax return, which that’s a pretty given to usually you’re not the individual you’re trying to claim is not married and it’s not going to be attack, not going to be firefighting with their spouse so that’s pretty, pretty given as well. And then the other end of the ones that they need to be a citizen of the United States, or a resident of the US, Canada or Mexico. So certainly, those three are usually pretty close, and usually not.
Don’t bring up too much controversy or do not really get discussed. Where it really gets into the challenge, in these tests is first of all the relationship. How is this person you’re going to claim, or potentially claim related to you? Well in this case, as I mentioned, it can be a son or daughter, which is most common and that’s usually pretty streamlined and pretty easy to figure out, but then you get in there it’s like nieces, nephews, uncles, aunts, maybe the adopted child, those relationships off once again are usually pretty cut and dry.
Now there’s another one that can get really sticky though is residency. Where has that individual been for at least half the year, which for many people usually that’s not an issue, because they’ve had their child six months or more, there are some other circumstances, I’m going to get into a little bit as far as red and residency goes especially in the case of divorced parents. But yet residency usually is not too much of an issue although sometimes some children, sadly, are used as pawns and end up at one place.
And sometimes the results you think of working in some unusual situations but yet usually that’s figured out pretty easily. Age, of course age and can be claimed up to age 19 while under age 19. So that’s usually pretty good to age-wise, and then support. Who provided 50% or more of their support. And there’s some interesting cases where sometimes young people do a pretty, pretty good job of supporting themselves and make some pretty good money.
I mean there are some young people, especially when they can start going to work at age 16 can sometimes create an issue because they’ll go out and they’ll make $10 to $15,000 a year and those people are to be commended for the fact they went out and they worked hard. They’re trying to do something but yet all those tests, have to be met to be able to for a parent or another individual to be able to claim them or claim a young person on a tax return.
Now where we do get into some challenges, there’s a lot of special circumstances that can come up when dealing with young people, especially those 18 and under on a tax return. And some of that stems from parents who are who get a divorce, which is a sad circumstance. But yet parents sometimes that happens and the reality of it is that, one parent usually ends up being the custodial parent or they may have what they called as joint custody. Oftentimes, in this challenge is the fact that of you have a court accounting courting particular throughout this country and it happens throughout, throughout this country county courts say, this individual or this the mother has custody of the child but for tax purposes.
The father can claim this child for like as a dependent. They get, they can get really murky in there when that does happen and that’s because of that sometimes, if the parent who tries to claim the child, tries to claim too much. And there’s a whole another set of rules that go in with that. I dealt with a lot of issues on this when it comes to children of divorced parents because of the fact that county courts will say one thing, but the IRS actually has a whole different set of rules. And that’s Federal Law. Now, I always strive to educate parents matter which side of this issue that they are on.
Especially since in 2009, the Internal Revenue Service made a determination that divorce decrees are not acceptable, for 2009 later for divorces. 2009 later are not acceptable documents for claiming a child on a tax return. Now, I inform everybody that comes into my office or I speak to virtually, I always make sure I get a copy of that divorce decree that has that particular child section in it and I do that because there’s specific items I look for such as that, because I want to educate the parent as to exactly what the tax rules are in regards to that.
Now let me take a step back here, first say, as a Tax Professional that speaking to this. Now single parent essentially who has custody of their child. They’ll come in, they had they’re the custodial parent, they’ll bring down the divorce and say this is what the court said says and I will say okay, you’re the custodial parent. This is what the IRS rules are in regards to this and the rules are is that where the child resides for six months or more. Is the parent that can claim that child for or things such as earned income tax credit, child tax credit, dependent daycare credit all of that.
That’s what the IRS rules are in such circumstances, and the divorce decree is, is a piece of paper essentially to the IRS in such circumstances. Now it’s up to the custodial parent, at that time to make the decision of exactly what they’re going to do. I feel it’s always important for them, as the parent, to make that choice and be informed tax and be as a taxpayer. Be informed you can make the choice now. The only real choice that individual has, at that point is to just decide.
First of all, am I going to have my ex-spouse? Am I going to give up this child tax credit which is really the only thing. They’re really giving up child tax credit and maybe dependent daycare credit, those, those are the two things that they can give. They can choose to release to them by signing it the proper form. Because IRS rules are very specific on items such as the earned income tax credit, which basically is that where the child is, is who gets paid.
That’s not a credit that is released for transfers to the other parent, or the noncustodial parent in this case. So that, so once that parent makes that decision and we prepare the tax return accordingly. Many times they choose to go, this is what the court has said, you need to do it, and many parents make the choice. I’m going to go ahead and go because the other parents been very cooperative. It’s been very good situation.
I’m going to go ahead and do that, because I’m like okay that’s fine, you’re the taxpayer, you make the decision, how you’re going to do it. Now when it comes to the other side of that paperwork whereas the noncustodial parent that brings me the divorce decree. It’s a whole another story, it’s a whole other ballgame. I informed them of the rules. Once again, this is what the IRS rules are that says, for you to claim his child on a tax return. You cannot use a divorce decree with the IRS.
I inform them that this is the form to protect you. I, as the tax preparer, need to have you go and have your ex-spouse sign this, it’s a form that releases the claim, for the exemption, or the claim is a dependency on that child for the tax year. Now that’s up now, I require that of anybody who comes in on the backside of that because that protects them as a taxpayer. And I honestly feel that if I do not do that or require that. I am being negligent as a tax preparer because I’m not protecting my tax client. And I’m to discuss that a little bit more when we come back in a couple of minutes here.
Again, this is Marcelino Dodge, Tax Answers Advisor, on the Voice America Business Channel.
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Today’s tax and financial environment is constantly changing, tax laws change rapidly, the traditional reactive approach to tax preparation and taxes, no longer works. To deliver the best possible outcomes in today’s world, you need a year round approach to take advantage of tax law changes, and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year, to limit his client’s tax liability.
Plus, with this year round approach, clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at firstname.lastname@example.org or call 844-394-4287.
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This is the Tax Answers Advisor with host Marcelino Dodge to reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to email@example.com. Now, back to the Tax Answers Advisor.
MARCELINO: Welcome back. I appreciate you sticking around with the Tax Answers Advisor, I’m Marcelino Dodge. Discussing about special circumstances, when you are trying to determine who can claim the child when it comes to divorce parent situations. And as discussing before the break, if you’re the noncustodial parent, it really be a challenge depending on how your ex-spouse, what the feeling are there? It’s always based best to make such situations as amicable as possible when it comes to tax time. These parents, noncustodial parents in particular can have a huge issue. And it just has the fact that to make sure they’re protected.
As I mentioned before the break, they need to make sure it has the proper form signed by their ex-spouse so that they can go ahead and claim that child and get benefits such as the child tax credit. On their tax return, because otherwise, they’re just rolling dice. Essentially is what’s happening because the IRS could come back and easily say, I’ve had this happen. I’ve seen the documents from the IRS. I’ve seen the letters from the IRS saying, prove to me, you can claim this child.
And oftentimes they’ll say, well I send in the divorce decree. I’m like, well, after 2009 The IRS said that’s not acceptable. And it’s even worse if that divorce decree says things like you can claim the child, if you’re up to date on your child’s support. That’s even worse than sense because that’s what is known as a conditional phrase, and even before 2009, if it had a conditional phrase, such as that on it, the IRS will not accept it. So it’s a very important that if you are a parent who has a divorce decree that says you can claim your child and you are the noncustodial parent.
It is my high recommendation to go speak to the person that does your taxes.
Find out what your responsibilities, what’s your rights are and get educated. And then, if at all possible, don’t wait till tax time. Get the form signed, that way you can bring it in with your tax return. That way you’re not having to deal with that at tax time trying to run down your spouse to sign the form. I would say do it in advance. Talk to your tax person right away and get that done.
Occasionally, another circumstance I encountered because this is happening a lot, is where a parent, and their child lives with the grandparent. That’s a whole different set of circumstances that can come in there and can get really complicated. And because of such circumstances. The IRS has what they call the tiebreaker rules in place that involve income and a lot of situations. But in many cases depending on the income of the parent of the child.
The parent usually will be claiming the child, although sometimes the grandparents are eligible to claim the child it just depends on the circumstances. And a lot of details involved in there, can’t really go into that here, but in a good discussion with your tax preparer and if the tax preparer does a thorough job of research and due diligence with them, they’ll be able to help determine who can actually be claiming that child.
And documentation is so important when trying to claim the child, especially in the case if a child gets claimed on a return. They shouldn’t be claimed on school records, doctor records.
That’s where a court order for the custodial parent is right up. This document says this child is to live with this person and this person and someone else claim that child, that’s that a parent can get, get it taken care of. Another often certain special circumstances, maybe you have a permanently disabled child. IRS rules do dictate that a parent can basically be claiming a disabled child, basically as long as that child is in the home and the parents are supporting that disabled child.
And for parents who qualify for the earned income tax credit, they also qualified to get that on the disabled child. There’s usually doctor records that support that and so you always want to keep those as part of your tax records as well. You may also have a child in college, which usually this gets into a very fascinating area because I always run into challenges when it comes to children, young people going to college, they’re wanting to be independent, they’re wanting to go to go do stuff on their own, that’s great.
But yet, sometimes you don’t realize, and you just don’t think that what effect is going to have on my parents, especially if I’m not earning a lot of income because sometimes young people are going to college, they’re getting scholarships, they’re doing odd jobs, making below the support filing requirement, which is often, which is just over $12,000 right now. So, they’re not usually required in most cases, some do, but it just depends once it comes down to that child in college. How much are they earning?
Now, sometimes the ones will go there’s education credits that are out there which sometimes a child will focus. They want to get their creditor whatever. Well, sometimes it’s still not a good idea and the reason it’s not a good idea is because oftentimes because of income, the young person is better off allowing their parents to claim them. And then hopefully the parents would share with them because sometimes you can get a better credit by the parents claiming the child and taking the education credit so it’s just a really situation.
So I was trying to encourage parents and their adult children who are in college, to really cooperate and try to bring in all their paperwork together. Because too often, sometimes a child gets eager and wants to go file their tax return, they do it like right away after e-filing sparks that creates a headache for the parents down the road. Which is not a good thing but try to just be cooperative and communicative with each other so that everybody can be, get the best tax everything within the law. The best tax result for everyone in the family.
Now when we deal with dependents there what’s my filing status to keep in mind those filing statuses that you have with the IRS. Now, am I head of household? Well, if you’re a single individual, and you have a qualifying child that qualifies you as head of household. You can be head of household, which is, which is a normal filing status. If you’re unmarried or considered unmarried. Now, you may be asking, what is considered unmarried?
While there is a provision in the tax code because sometimes some people, for whatever reason. There’s a married couple. Sometimes before July 1st of the year, I think they separate or they get out of the same household. Don’t know, it can be any number of variety of reasons. But from July 1st through the end of the year this married couple is not in the same household. So essentially the person in the household that has the qualifying child can be considered unmarried, in that situation and qualify for Head of Household filing status which could be a good thing, could be a bad thing.
I don’t know it just depends on the circumstances, so much so many of what happens with income tax depends on each individual circumstances. It’s not one size fits all. So it’s basically one can be head of household. Now the next question is that, am I going to be married filing jointly, married filing separately. Well, you could be married filing joint. Once again, if you, as the taxpayer are married during the year, this can be.
Whether you’re married on January 2nd or you’re married on December 30th.
Your filing status is either married filing or married filing separate. Now, when you’re claiming dependents on a tax return. It is usually the best for couples to do married filing joint, even if only one of them have an income. That is the high recommendation that is usually best and that’s usually best because the one with the higher income.
Usually, while they have higher income and then the one that doesn’t have like an income like you have mother staying at home, taking care of the children.
The one without income is in way supporting the one by taking care of the children and taking care of the household items as well as the fact that a married filing joint standard deduction is much better than household head of deduction so they’re better off doing it now. There are circumstances where a married filing separate once again, there’s specialized circumstances. With that, it could be good, might be good according to what is needed but we just really don’t know as it really depends upon the circumstances.
So as we look at this, we want you to be thinking about being very careful with that, married filing separate when you are married and the reason I say that is because you do a married filing separate tax return. Many times, not many times, it’s just the fact you lose several tax credits, that married filing joint qualify for. Now there may be valid reasons to do married filing separate, but you lose many good credits on a married filing separate return. Now, what we’re thinking about here next.
This next point is on filing status is I touched on a little bit earlier, this person will say, I live with my parents. What’s going to be my filing status? Well, that’s where once again it gets a little, it can get a little murky depending on your income, but you could very well. I mean your parents could be having a good income supporting, taking care of their household, and so on and may you even looking for parents who are on social security and retired.
Well, in that particular case, but you make a good living and maybe it could be a circumstance. Your parents maybe living with you there’s a lot of numbers and stuff that goes through trying to calculate that, but you may qualify for the head of household in that particular circumstance. If you’re providing 50% or more of the support for the household, so that can definitely be a good possibility there. So then, which leads us back to our tiebreaker rules for certain things, if depending on work, supporting house, and so on.
This tiebreaker rules can come again they can get very murky but yet, going down through the challenge or the information that the IRS has helps to determine actually who can claim a dependent on what and what filing status would be proper according to various situations. So again, it’s very important to have all the facts and circumstance together and talk to your tax person. When I visit with somebody, what I do and talk to that person, I asked all the questions. Do you have documentation showing that this is your child?
Like, birth certificate? Do you have documentation showing that this child was in your home? Such as doctor record, a school record. You can prove that this child was in your home six months or more? There’s a few more items we can get into in just few moments on this thought here. So we’ll look forward to talking to you just a few moments here again, this is Marcelino Dodge on the Tax Answers Advisor from the Voice America Business Channel.
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Today’s tax and financial environment is constantly changing. Tax laws change rapidly, the traditional reactive approach to tax preparation and taxes, no longer works. To deliver the best possible outcomes in today’s world, you need a year round approach to take advantage of tax law changes, and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year, to limit his client’s tax liability. Plus, with this year-round approach.
Clients can increase their cash flow and be as prepared for the future, as they can be. Email Marcelino at firstname.lastname@example.org or call 844-394-4287.
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This is the Tax Answers Advisor with host Marcelito Dodge. To reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to email@example.com. Now, back to the Tax Answers Advisor.
MARCELINO: Welcome back to The Tax Answers Advisor. I appreciate you sticking around again, because we have so much information here and this is so vital to understand how and what’s necessary to claim dependent on your federal tax return and be able to have documentation which is such a vital need. It is so important to have that. I encouraged ones and there’s a whole form that the IRS has, it says this are what you need. To do this and oftentimes I asked for copies because of this as I mentioned before the break, some of the paperwork, I asked for everybody that walks in the door, anybody to handle through my online portal.
I need to, of course an ID for you as a person. I need to have the birth certificate for your child, so I know that this is your child you’re trying to claim. Now, if this isn’t your biological child. I need some other documentation, like for example, for some clients I actually have a court document that says that my client is the guardian for this child which in some case, the child could be their grandchild.
And so all that documentation is so important to establish where this child has to be, or in the case of divorce parent, showing that this child is this person is the custodial parent of this child and this child is going to be in this home. And then even goes a little bit farther than that, to prove that they were a physical actual address that’s where it really gets a little sticky is the fact that a physical address such as utility bill, a phone bill. Having the physical address on your doctor’s records, on your school records if they’re in school.
All of that is vitally important information to have when claiming a dependent on your tax return, because at any time. They may not do a physical audit, but the IRS does a lot of what’s called correspondence audits. I see these happen at random, it may be nothing to do on your tax return that draws attention. Sometimes it’s just random. Your it’s like your social security comes up we’re gonna send you a letter. We just want you to verify you can claim this. So, it’s a vital we have all have all that information.
You’re gonna claim a dependent and as we’re talking about now some of these various tax credits that you can get for dependents. One that I’d like to start with is our child care credit or basically take your child to daycare, up to age 12. They can be with the day, you take could be with the daycare provider, which doesn’t have to be a licensed daycare provider but a person who is caring for your child on a regular basis that you are paying, you can get a tax credit for.
Now, to claim this credit though, that person or organization has to provide you with information and many childcare providers know that they need to provide this. Many parents claim this credit, it’s up to $3,000 for one child per year, up to $6,000 for two or more children and there’s a threshold in there as to what percentage it is depending on your income, but yet those are the limits of what you could possibly claim depending on where your income is through the year.
But you do need to get some basic information from the childcare provider be at organization or individual (name, address, tax ID number which could be a social security number), for an individual that may be running as a sole proprietorship or for a business side is just like maybe running is now LLC or Corporation or Partnership or whatever. That’s information that you need to do. That you claim that credit, you bring that information in.
There’s a W form for that, I can’t remember what it is right now, but there’s a W something form for that. You can also have them fill out go and give sometimes childcare providers do that. Now the other credit and that oftentimes and many times is probably more often claim than even most credits is the Child Tax Credit, which is can often be the most confusing credit. And the reason this is big can be confusing is the fact that the child tax credit, has both a non-refundable portion and a part that it considered refundable.
What I mean by non-refundable is that, for that to be claimed, you have to actually owe tax. So, after we figure out your tax, take off your deductions, you have a certain taxable income amount. Let’s say, $30,000, then your tax is calculated off of that, which let me see is 12 %, $3200 you owe on tax. And you have a child, you can get to $2000 if the child is 16 under. Now, which you can get $2,000 of non-refundable credit for so, $3200 I mentioned and you have one child 16 and under, that would immediately reduce that down to $1,200.
Now, often misconception of the child tax credit that I actually encounter a lot, is sometimes ones will think, well my child turns 17 this year. I can no longer claim that, well that’s a myth because you can still claim your child, you just don’t get the child tax credit. One of the big questions I get, and even questions I’ve asked various professionals as I’ve gone to education is, where did they come up with this random age of 16 as the maximum age to get child tax credit because oftentimes the child is in the home of up into age 18.
I wish I could answer that question, some type of political thing. All I can say is why they came up with the age 16 on that. Now the other side of that is the refundable part of that. See this is where it gets a little confusing is that they pass a Tax Cut and Jobs Act, which benefited many, many, and many people who took the child tax credit, and made $100,000 or less a year so many people benefited. What we see is that, of that refundable amount one can get is only $1,400 max per child that you can get.
Now, I want that is also based on there’s an income calculation in there as to whether you’ll get the full $1400 refundable amount or not, but it can’t be up to that amount per child. And that’s where oftentimes I hear people say well I get $2,000 this place over here. Give me like $2,000 per child, whatever it’s like well, the law says this, you can get up to $2,000 non-refundable per child or up to $1400 refundable per child.
It just all depends on circumstances and cases. And for many, many parents they do get a good refund because they have several children 16 and under, 2 or 3, sometimes 4. It just depends on the family size, it just varies. But yet, it’s just having a little good understanding and to claim this credit you have to be claiming the child as a dependent on your tax return. Now the credit that perhaps has the most controversy around it and even a lot of fraud.
This is the highest fraud you can find in tax credits and that is the earned income tax credit, because you get it for up to three child. On this one is not based on a certain amount per child, it’s not based on, you just get X amount. It’s based as it says on earned income is what it’s based on. See some people will come in and they’ll get a different amount. Next year, it went less, and then I have to go through the whole explanation as to, well it’s based on income.
So your earned income was X amount this year and this year it was this amount, and sometimes that amount went down or went up. And that’s because you’re earned income change, this credit change. And I often have to pull out the charge on the chart and say, this is what it is, that makes sense then. But mostly, most of the biggest issues is when their income actually increases, so they go from saying making 20,000, to 30,000 a year, or 35 or 40,000 a year here they go their income jumps and then they’re like oh wait, wait, “Where’s My Refund Go”? Well, because this credit decreases as you make more money.
That’s just the way it’s written, that’s what the law is and I can’t change it. Then when other thought on this here is exactly what is earned income. There’s a lot of misnomers on that and think about this earned income is taxable wages or earnings from self-employment income. So you got to actually be working to have for this credit to be effective. So if you make very little money, you’re not going to get much of ac credit. If you’re making 20, 30, even up to $40,000. If you’re dealing with two or three children you can get a decent credit.
Now the income that some get that they think they can get this credit is, well I got a pension income, I’m getting retirement income, I’m getting child support, I’m getting unemployment. All those items are not considered earned income. They’re considered “non-earned income’’ and they do not use in computing the earned income credit when it comes to earned income. Now the one exception was actually beauty which this is for those who are in the military is that compact combat pay elections, which allow ones to put Combat Pay in as an election to calculate their earned income tax credit
Another exemption when it comes to disability pay, is when you get payments from like a third party for your disability like you worked for an employer and those benefits are reported on a W-2 instead of on another form but the reported put on a W-2. I’ve seen several of these over the years, where they get their income on a W-2 and it’s considered earned income basically under the law is what it comes down to. so they can qualify for that.
And of course, self-employment income as I mentioned, which is like if you have a small business that you’re running, and it’s filed your tax return on a schedule. See self-employment income or even farm income that’s considered earned income but you have to have actual profit. It’s not based on your gross it’s actually based on your expenses afterwards. After expenses are subtracted, whatever your earned income is.
So that is just kind of a highlight of the Earned Income Tax Credit, but there’s a lot of other information that goes along with that, especially when it comes to where one is located now with the earned income tax credit. You do not have to claim the child as dependent to get the credit. This is an example of a credit or a tax. Something that can contribute to your tax refund, where you allow your ex-spouse to claim the child as a dependent but because of the way tax rules are written, you get to claim different income tax credit for that child.
And you are also head of the household for that child because that child lives in your home. We got one more credit to discuss here and we’ll talk a little bit about some of the education credit to qualify for and a little bit more when we return on the Voice America Business Channel. This is Marcelino Dodge with The Tax Answers Advisor.
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This is the Tax Answers Advisor with host Marcelino Dodge. To reach our program today, please call in. The number is 1-866-472-5790, that’s 1-866-472-5790. You may also send an email to email@example.com. Now, back to the Tax Answers Advisor.
MARCELINO: Welcome back, for this final portion of the second episode of The Tax Answers Advisor and I’m Marcelino Dodge. And just before the break, I am going to discuss just a little bit about Education Credits you can claim with your dependent. This is the one that oftentimes were people get, just a simple way to put between a parents and their adult children going to college which is why it is so important for parents and their adult children in college to be able to work together, to maximize this education credits.
Now, especially for once, in their first four years of college, going after their Bachelor’s Degree working on that. This is vital because of the American Opportunity Credit, which is a very nice credit and also part of it can be refunded back to the taxpayer. But, for this credit to be claimed by the parents or their adult children in college, they have to be able to claim the child as a dependent. And, that’s where coordination is absolutely essential.
And so, to claim the credit, parents, you need to make sure you have copies of the expenses spent, tuition fees and so on. Those are absolutely needed, you need to have a, it’s a form 1098T. I’m always asking for this form from parents because it doesn’t usually go to the parents because it comes in the child’s name and goes with the child’s college tax stuff. So it just needs to be coordinated very nicely so that proper credit, that credit can be maximized.
Now, can only be taken for four years, the American Opportunity Credit, but yet it can be very beneficial for the parents. Now in some cases where it’s more appropriate for the young person in college to claim themselves. Because of their income level like some that make 12, 13, 14, maybe $20,000 per year during college. I’ve got some college students that have done that. And they do very well and maybe more appropriate for them to take it. And so it just really depends on the circumstances, and amount being paid.
In particular, if you’re getting loans to go to college or ever that means we’re being paid to college, and not to take these credits now the one area that does eliminate taking up these credits, and usually shows up on the 10908T, is when the individual college student received a lot of grants and scholarships.
And if those are in excess of the tuition fees and usually one is not able to take the credit, the educational credit.
Essentially when you put money out, you got money, you were given money, and money was applied to your tuition fees and maybe room and board as well. So just something to keep in mind as you look at claiming dependents over the course of the year. Now just to touch on here about dependent to some highlights of what we discussed today. Just keep in mind about claiming dependents on your tax returns, make sure you’re always being very careful, always have good documentation which is absolutely essential.
When you’re a parent and the children are living with you. Usually it’s a no brainer, you can get done. Although we are dealing with the tax professional, and I require these tax professionals should always ask for birth certificates and proof of these things due diligence. Because one of the issues that I have really deal with is due diligence and that’s a hefty responsibility from the IRS to make sure that what’s being claimed on a tax return is accurate, is particular with dependents, and various credits that are being claimed.
So, to make sure that you’re having the proper documents and make sure those support, you’re the positions, you’re taking on the tax return in particular with a dependent. Because whether you work with the tax professional, or you choose to do them on your own, relying on software. It’s vital to have this information available because you get that letter from the IRS. How many of us just love getting a letter from the IRS? Does anybody loves getting a letter from the IRS unless it’s a refund check of some sort, they know yeah we’re really happy.
But usually if it’s a thick envelope, it has two copies of a letter in there saying oh by the way. Someone else either claimed your dependent on a tax return, and now you need to prove to us that you can claim this dependent and so the documentation is absolutely essential to be able to do that. So certainly, we encourage you to do that. And then as you do it, make sure you got the correct filing status that you’re claiming.
Which could be a head household in which various people can be eligible for that depending on circumstances. If you’re married, usually married filing joint, the best route to go with your dependents. And if you’re living with your parents well that’s a whole, that’s a whole other ballgame. Just got to make sure all the facts and circumstances add up together for you. Just keep in mind if you’re planning tips if you’re in any of these special situations that I described during this, I definitely recommend talking to your tax professional.
Now, get the forms and find out whatever forms you may need, get prepared now. Because last minute stuff is just getting in a hurry, time runs out, it’s just not good. So certainly, you’re going to do, you’re dealing with the situation as I mentioned, if you’re a divorced parent the special a situation, get your tax professional, talk to them now. Get it out there, get it done that way you have all your documents ready for tax seasons.
Now next week, we’re going to talk about the business side. Many people, even these rough times are in right now, maybe thinking about starting a business. So there’s some exploration work that needs to be done on that, as well as important information that needs to be considered about what type of business entity you want to be? How is the tax situation, and each entity? Who should I talk to? All of these are some of the questions we’re going to discuss next week in helping you to understand on the type of business entity, and how the taxes can affect your business in the interest that you’re interested in developing.
Again, I thank you so much for listening today and I appreciate all listeners as we’ll look forward to next week, another edition of The Tax Answers Advisor. I’m Marcelino Dodge here on The Voice America Business Channel.
Thank you for listening to The Tax Answers Advisor with host, Marcelino Dodge. We’ll be back again next Wednesday at 6pm Eastern Time, and 3pm Pacific Time, on The Voice America Business Channel, we’ll have more to share next week.