theconfidenttaxpayer

Claiming A Parent On Your Tax Return

There are three ways in which claiming a parent can benefit your tax return, provided you meet a few requirements.

Regardless of your filing status you can claim a parent as a dependent as long as that parent is not filing a joint return with someone else. The only exception is if that parent is only filing a return to receive a refund from taxes withheld. That parent must be a U.S. Citizen, U.S. National, U.S. Resident or a resident of either Canada or Mexico (with either a Social Security Number or ITIN).

Your mom or dad must have under $4,400 in taxable income for the year. If their only income comes from Social Security none of that income is taxable. More than half of your parent’s total support must come from you. The following example shows how to calculate for such support.

If you’re unmarried or considered unmarried and provided over half of your parent’s support, then you qualify as Head of Household. Filing as Head of Household earns you a higher standard deduction, which helps lower taxable income. Your parent does not have to live with you to qualify you for Head of Household.

Aside from being able to claim your parent as a dependent, and qualifying as Head of Household, you might be able to claim the Credit for Other Dependents for a maximum of $500 per parent. This credit is nonrefundable. It will only lower your tax by the amount of the credit. For example, if your tax on line 16 of your 1040 is $900 and you’re only claiming one parent and qualify for the full $500 credit, your tax will come down to $400.

The Credit for Other Dependents is reduced for those filing a joint return if their AGI is over $400,000; and for all other filers whose AGI is over $200,000. In order to qualify for the credit your parent must be a U.S. Citizen, U.S. Resident, or U.S. National- only.

Should You Be Making Estimated Tax Payments?

The US tax system is a pay-as-you-go system. Meaning that you must pay taxes as you earn income.

There are two ways of paying taxes. You can pay either through withholdings or by making estimated payments.

Individuals employed by others fill out Form W-4 to indicate how much should be withheld from their paychecks. Freelance individuals, however, are solely responsible for making those tax payments. They do this through estimated tax payments.

Should you be making estimated payments?

If you have decided to earn extra income on the side through one of the many gigs available, you might have to.

The following is a hypothetical tax scenario for a single person with one W2. The numbers used for wages and withholding are made up to simplify the tax calculation.

In this example the individual had enough withheld and will receive a refund. In a different example, however, this individual earned extra income through ridesharing.

In this second scenario estimated payments would have prevented a tax liability at tax filing time.

So how do you make estimated payments?

The first step is to estimate how much you will earn in the year. This will help you estimate the tax you will owe. Once you have this information you can break the estimated tax into four payments. Each payment has its due date.

Typically, the first payment is due April; second payment is due in June; third payment is due September; the fourth payment is due in January and can be paid along with the tax return.

Form 1040-ES provides worksheets to help calculate estimated taxes. The form also provides payment options accepted by the IRS.

https://www.irs.gov/forms-pubs/about-form-1040-es

Can You Deduct Gambling Losses?

Gambling winnings are reported on Form W-2G. Depending on the game, you’ll get it once you pass the winning threshold.

The chart below shows the minimum you must win to trigger a W-2G form from the following games.

It’s possible this additional income will lower your refund or increase a tax liability. This leads to the question: Can I deduct any gambling losses?

Taxpayers are allowed to deduct gambling losses up to their winnings. Meaning that if someone has winnings of $5,000, they can deduct losses up to $5,000 only.

Not everyone is able to claim losses, however. Losses are reported on Schedule A, the form used to claim itemized deductions.

Itemized deductions include mortgage interest, medical expenses, charitable contributions, certain personal taxes.

By default, most tax preparation software will give you the highest of either standard deduction or itemized deduction. So, if your itemized deductions are not more than your standard deduction the software will give you the standard deduction.

If you have enough itemized deductions to file Schedule A and decide to deduct your gambling losses, you have to keep accurate records of both winnings and losses.

The IRS suggests keeping a diary of winnings and losses. As well as keeping copies of records issued by the gambling establishments.

The diary should contain the following information:

The date and name of wager played.
The name and address of the gambling establishment.
Amounts won and lost.
Names of persons with you at the time of your wager.

The following IRS publications offer more information on the topics discussed above.

https://www.irs.gov/publications/p529

What To Know About Deducting Business Miles

If you’ve started a business (or side gig), and use your car, you may be able to deduct the miles driven. If you use your car for both business and non-business purposes, you can only deduct the miles driven for business purposes.

Business miles are considered miles driven from your main place of business to other work locations. For example, if you rent an office and have to visit a client, you’re allowed to deduct the miles driven from your office to your client and back to your office. Miles driven from your home to your office are not deductible. These are considered commuting miles.

If you operate your business from your home, however, and visit clients, you’re allowed to deduct miles driven from your home to your clients.

You’re allowed to deduct business miles (also called the Standard Mileage Rate) if you choose this method the first year your car is available for business use. Meaning that you must use this method the first year you claim your car on your tax return.

You must also own or lease your car in order to use the SMR.

The following situations disallow the use of business miles:

Using 5 or more cars at the same time (as in fleet operations).
If you claimed a depreciation deduction for the car using any other method than the straight-line method.
If you claimed a Section 179 deduction on the car.
If you claimed the special depreciation allowance on the car.

If any of the previous situations apply, you must deduct actual expenses.

The burden of proof is always on the taxpayer, which makes mileage logs extremely important when it comes time to substantiate deductions taken.

A mileage log should include the following:

-Date and time of the business trip.

-Purpose of the trip.

-Miles driven on that trip.

Mileage can be tracked on spreadsheets, notebooks, apps, or any method the taxpayer chooses.

4 Things To Do When Using A Paid Tax Preparer

Verify the personal data of everyone listed on the return. An incorrect social security number or a misspelled name might cause a delay to your return. Also check that your address is correct so that you receive IRS correspondence on time. Tax preparers are human after all, and mistakes are possible.

Many tax preparers will review taxpayers’ returns with them, but if they don’t, ask to see a summary of the return. See that the numbers seem reasonable, especially wages and refunds. A very high refund might sound great, but if you’ve never received such a high amount, you should investigate why you’re getting one.

Verify the forms being filed. If you only have W2s, there is no reason for there to be a Schedule C in the return. There have been instances of tax fraud in which tax preparers file unnecessary Schedule Cs to either pump up income to qualify for credits, or to deduct non-deductible expenses to decrease a tax liability.

A paid tax preparer is required to have a PTIN (preparer tax identification number). Several states, like California, also have their own requirements. A preparer’s name and PTIN should be at the bottom of the 1040. A paid tax return should never say, “Self-Prepared.”

Is Alimony Deductible?

Alimony or separate maintenance payments are only deductible if executed under a divorce or separation instrument before 2019. Payments executed after 2018 are not deductible by the payer, nor are they taxable to the recipient. It’s possible for divorce or separation instruments executed before 2019 to be later modified to state that alimony is no longer deductible by the payer or taxable to the recipient.

For those allowed to deduct alimony payments, they can do so on Schedule 1, line 19a.

For those having to report alimony payments received, they do so on Schedule 1, line 2a.

Both payer and recipient must include the social security numbers of their spouse or former spouse. If a taxpayer pays alimony to multiple individuals, the social security numbers of all individuals must be included. The same goes for a recipient receiving alimony from more than one individual.

Early Retirement Distribution Penalty- Explaining The Medical Exemption

A retirement distribution is considered early when it is distributed before the taxpayer turns 59 ½. In this case there is no 10% tax penalty attached to this distribution.

If a distribution is taken before turning 59 ½, not only is the amount taxable but there is an additional 10% tax penalty. The 10 percent penalty is calculated as 10 percent of the distribution. So, if you take out $5,000 from your 401K before turning 59 ½, you will have to include that amount to your other taxable income, as well as pay an additional $500 as penalty.

There is a list of exemptions that release taxpayers from that 10% penalty. One of those exemptions is the medical exemption, which is the subject of this post.

The 10% penalty is not imposed on taxpayers if early retirement distributions were used to pay for qualified medical expenses of the taxpayer, spouse, or dependent. Such medical expenses must not have been reimbursed at any point.

According to the Internal Revenue Code (72(t)2(B)), distributions must “not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).”

Section 213 is the section that tells us that we can only itemize the medical expenses that exceed 7.5% of our adjusted gross income. For example, a taxpayer with an AGI of $45,000 can only itemize medical expenses in excess of $3,375.

As 72(t)2(B) states though, a taxpayer doesn’t have to itemize to qualify for the medical exemption to the early distribution penalty.

Using our previous example, let’s assume the taxpayer with an AGI of $45,000 had medical expenses of $7,000 (and did not itemize). According to section 213, she can only claim $3,625 in medical expenses ($7,000-$3,375).

In order to qualify for the medical exemption, her distribution must not have been more than $3,625.

As with any other claim on the 1040, burden of proof lies with the taxpayer. Records must be kept for every medical expense that qualifies you for the exemption.

The American Opportunity Tax Credit

If you, your spouse, or dependent(s) attended postsecondary school and have not completed the first four years, you might be eligible to claim the American Opportunity Credit. This credit is per eligible student. If there are two eligible students on the return, then the credit can be claimed for both students.

The credit must be claimed for expenses paid during the relevant year. For example, you cannot claim the credit on your 2023 tax return if the expenses paid were for an academic period in 2022. The only exception is if expenses paid in 2022 were for an academic period that began in the first 3 months of 2023.

The IRS has four requirements that must be met by the qualifying student.

The student must not have completed the first four years of postsecondary education.
The credit must not have been claimed by you or anyone else for the student for any 4 tax years before the given tax year in which the credit is being claimed.
The student must have been pursuing a degree, certificate, or recognized educational credential; and, must have been enrolled at least part-time as determined by the educational institution.
As of the end of the tax year in which the credit is being claimed, the student must not have been convicted of a federal or state felony for possessing or distributing a controlled substance.

Once it’s been determined that the student and the educational institution are eligible for the credit, it’s time to add up the qualified expenses.

Qualified education expenses include any student activity fee that must be paid to the institution as a condition of enrollment. Books and supplies required for any course, whether paid to the institution or not, are also qualified expenses.

There are two important things to know when claiming this credit.

Form 1098-T is mandatory. This form is issued to the student by the educational institution. So, whether you self-file or go to the a tax preparer, make sure you have access to this form.
The taxpayer bears the burden of proof whenever a credit is claimed. This means that the taxpayer must keep records to substantiate the eligibility of the student and institution, as well as the qualified expenses paid.

How To Withhold More From Your Job To Pay Your Side Gig Tax.

Starting a new job means filling out a new Form W4. It’s easy to forget about that form if you stay at the same job longer than a year. It’s important to know that you can always go back and update your W4 whenever a change happens.

A change, for example, is signing up for a side gig that will report your earnings on a 1099. A side gig such as Uber or Doordash. In a situation like this, you’ll be solely responsible for paying your taxes directly to the IRS. This is a burden freelance workers must deal with.

Freelance workers are responsible for making quarterly payments to the IRS to cover their income tax and self-employment tax.

Another way to pay that tax is to increase your withholding at your current job. A common reaction to this advice is, “But they already take so much!” True, but the reality is, if your income is expected to increase so will your tax. You’ll owe that tax, whether you pay it now or later. The best course of action is to take control now.

One way to take control is to fill out a new Form W4, so that payroll can withhold enough to cover your side gig. You’ll need to include the expected freelance income and self-employment tax on the form.

The following example shows how a single person with no dependents might fill out a new W4.

Step 1 is complete, and the single box has been checked off.

We’re going to skip steps 2 and 3, and complete Step 4.

This individual estimates that he will make $7,000 through his side gig, so he includes that amount on line 4(a). Payroll will add this amount to his earnings when calculating withholdings.

He ignores line 4(b) and completes line 4(c). The $7,000 side gig will be subject to the Self-Employment Tax. Extra withholding is meant to take care of that.

In this example, 7,000 is multiplied by 14.13% (SE Tax). The SE Tax on those $7,000 is roughly $989. Let’s assume John is halfway through the year and only has 13 more pay periods left. We divide 989 by 13 and get 76.

John is going to have an extra $76 withheld from his paychecks.

Although basic, this example is meant to take away the mystery out of Form W4 and give you more control over your tax planning.

Are You An Employee or Independent Contractor?

Willfully or through mistake, an employer can categorize an employee as an independent contractor. There are tax implications that result from this. To prevent this error, find out what makes an employee. If you’ve been miscategorized, there’s a few things you can do to stop this from happening again.

There are 3 main factors that determine the category a person falls in at work. Keep in mind these factors are not black and white. The thing to look for is which category these factors lean towards the most.

Behavioral control: an employee’s work is to a great extent controlled by the company. As opposed to an independent contractor who’s in charge of the work process.
Financial control: if you’re an independent contractor you’re in charge of providing your own supplies and resources to get the job done. If you’re an employee your company should provide what you need.
Relationship: the most important aspect of employer-worker relationships is the permanency of the relationship. Is the worker expected to continue working for the company after a specific project is over? Contracts also factor in; however, a contract may classify a worker as an independent contractor even though every other factor points to employee status.

Consequence of being miscategorized:

Of the two, employees tend to be put in the wrong category the most. Employers might do so out of ignorance or a desire to avoid payroll taxes. Aside from missing out on timely tax payments, employees also miss out on certain benefits like overtime and vacation days.

Things to look out for:

Most companies hire payroll companies to handle employee paychecks. There are employers who choose to do their own payroll. Regardless of who handles payroll each check should have a breakdown that includes gross pay, employee taxes, and net pay.

What to do if you’ve been miscategorized:

Speak with your employer so that the issue can be corrected.
If employer disagrees on status, you can file Form SS-8 with the IRS. The IRS will review the issue then decide.
If the issue isn’t resolved, you can always contact your state’s labor department. In California, the Labor Commissioner’s Office oversees wage disputes.

If you start a job and are given form W-9 but suspect that it should be form W-4, discuss your doubts with your employer. It’s possible the employer isn’t aware of the mistake.