Archive for the ‘$3000’ Tag
Back to Basics Part XIV – Form 2441 – Child and Dependent Care Expenses
Filed under: Back to Basics | Tags: $3000, $5000, $6000, 13 years, Child and Dependent Care Expenses, childcare, cleaning, clothing, cooking, day camps, daycare, dependent care benefits, Education, Flexible Spending Account, food, Form 2441, Form W-10, FSA, kindergarten, lodging, overnight campts, summer school, tutoring
Leave a comment Originally published in the Cedar Street Times
May 15, 2015
Question: I am the bread winner in our household. My wife is a homemaker and is the primary caregiver for our children, but we still send them to daycare once a week so she can have some uninterrupted time to go shopping, have a quiet lunch, and do some other chores. Can we claim the childcare expenses and get the childcare credit?
Answer: No. One of the requirements for claiming childcare expenses is that it is enabling you to go to work, or actively job search (or you are disabled or a full-time student). If your wife had a part-time job, or a self-employment activity and worked one day a week, then you could claim the childcare for the day you work each week, but you would still not be able to claim the childcare for the non-working day, even though you paid for childcare. This would also be why you cannot claim your Friday night babysitter when you go to dinner and a movie – nobody is working!
This week we are talking about Form 2441 – Child and Dependent Care Expenses. If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .
As our Q&A clearly pointed out, the intent of the credit is to allow people to earn more money…which the IRS can then tax. But there are a host of other rules. First of all, who qualifies? If it is for childcare, the child has to be under 13 years old. If the child turns 13 during the year, you can claim expenses up until the day the child turns 13. You can also claim dependent care expenses for a physically or mentally disabled spouse or any other disabled person you can claim as a dependent. You can even claim it for disabled individuals that would be a dependent except their income was too high (there are a few other exceptions as well).
Divorced or legally separated parents can generally only claim the credit if the child lives with them the majority of the nights of the year. Even if you are allowed to claim the child as your dependent per your divorce agreement (such as in alternating year agreements), you still cannot claim the childcare expenses you pay unless the child spends the majority of the nights of the year with you. If your status is Married Filing Separate, you can only claim the credit if you meet the requirements already discussed, plus, you must not have lived with your spouse at any time during the last six months of the year, and you must have paid more than 50 percent of the costs of maintaining your household.
Second, what expenses qualify? Clearly the normal child or dependent care expenses paid to the provider while you work are deductible. You can also deduct the cost of day camps for children during the summer, for instance, but not overnight camps, tutoring, or summer school. You can claim the cost of household expenses such as cleaning and cooking if the individual is also caring for your child and the benefit is partly for your child (such as a nanny that cleans, cooks, and cares for your child). You cannot deduct the cost of education, food, entertainment, lodging, or clothing unless the expenses are incidental to the care provided and not separated out on the care provider’s bill. However, for children younger than kindergarten, you can deduct education expenses as childcare.
Third, how is the credit calculated? The most in childcare expenses that you can claim is $3,000 for one qualifying individual. If you have more than one qualifying individual you can claim up to $6,000. The expenses do not cap out at $3,000 per person either, meaning that if you had only $1,000 of expenses for one child but had $8,000 for the other child, you could still claim $6,000. The credit is then multiplied by a factor of 20 to 35 percent based on your adjusted gross income. If you had over $43,000 in adjusted gross income, which most people do in California, you will be limited to 20 percent. So the 20 percent times $6,000 would be a $1,200 maximum tax credit. Remember that tax credits are much better than tax deductions as they are a dollar for dollar reduction of tax. There are some other limitations as well. For instance, the amount of the credit is limited to the amount of tax you owe (meaning that it is not a refundable credit). Also, the aggregate amount of expenses you can claim are limited to the lower of your earned income or your spouse’s earned income.
Some people get dependent care benefits through their work. For instance an employer may pay the childcare provider directly or actually provide childcare onsite. Or, the employee may make pre-tax contributions from his or her paycheck and put the money into a Flexible Spending Account (FSA) through work to be used for childcare expenses. The amount or value of these items cannot exceed $5,000 each year. Several limitations to this amount are applied on Form 2441. If some of it is disallowed it is added back as an adjustment to wages. There is also the possibility of getting the credit pertaining to the extra $1,000, since $6,000 of expenses are allowable with multiple children, and the dependent care benefits are capped at $5,000.
The Form 2441 itself is a two page document. The first part requires information about the care provider such as name, address, taxpayer identification number and amount paid. Your safest course of action is to provide a Form W-10 to the daycare provider, for the daycare provider to fill out and give back to you. This is a special form just for daycare providers to fill out to provide their correct taxpayer identification information and certification to you. You can then safely rely on that document and not be concerned about the denial of your deduction if you have incorrect information in this regard. Part II of the Form 2441 requires information on the individuals receiving the care and then calculates the tax credit. Part III deals with dependent care benefits and plays into Part II as well.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics – Part VIII – Schedule D
Filed under: Back to Basics | Tags: $3000, 1099-DIV, adjusted cost basis, bonds, business, capital assets, Capital Gains, capital losses, carryover, cost basis, distributions, Form 4797, Form 8949, gift, holding period, inherited, investments, long-term, mutual funds, personal, Schedule D, short-term, stocks
Comments (1) Originally published in the Cedar Street Times
January 23, 2015
Imagine yourself on Antiques Roadshow and they tell you that an old porcelain mug you found in your attic last summer is worth $8,000-$10,000 dollars! You are of course elated, and decide to sell the mug. Fast forward to February, and your accountant starts asking you questions about this sale, such as your adjusted cost basis and your holding period. You really have no idea how you even got it. You know it was in the family for a long time, and you think that maybe it was in a box of things your mom left for you when she moved to Palm Springs where she now resides. What do you do? I don’t know exactly, but I know this much – it will go on your Schedule D in some form.
In this issue, we are discussing Schedule D – Capital Gains and Losses. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
Schedule D is used to report gains or losses from the sale or exchange of capital assets. Capital assets consist of a variety of things. The personal use items you own – such as your home, your vehicles, household items etc. are capital assets. Gains from the sale of personal items are taxed. Losses, however, are generally disallowed. Your personal investments such as stocks, bonds, or real property held as an investment are also capital assets. Gains and losses are allowed on personal investments.
The same types of items used in your trade or business, however, would be reported on a Form 4797 and would be taxed differently as well.
Assets that have a mix of personal use and business use can have elements reported on both forms.
To determine your gain or loss on a capital asset, you must know your cost basis in it. If it is something you bought, your cost basis is generally the amount you paid for it; if it is something you inherited, your cost basis is often the fair market value at the date of death; or if it was something given to you, your cost basis is generally the same as that of the prior owner.
There can also be adjustments to this basis, such as when you make improvements to your home – the money you spend would be an adjustment upwards. Once you know your adjusted cost basis, you simply subtract it from the sales price to determine your gain or loss. If you scrapped it, your sales price is zero. Sometimes it can be quite challenging to determine the cost basis, especially if records no longer exist. Technically, if you cannot prove your basis, the IRS can take the position that your basis is zero. This could be very unfavorable, especially if you just sold a $10,000 mug with unknown origins!
It is also important to know the length of your “holding period.” The date you purchase the property is generally the beginning of your holding period and the date you dispose of the property is the end of your holding period. For property received as a gift, you include the holding period of the person who gave it to you.
If your holding period is over a year, it is subject to favorable long-term capital gains rates – basically a 15 percent federal rate for most people. (Although it could be as low as zero percent or as high as 20 percent depending on your tax bracket and the amount of capital gains you have. Also, collectible items you sell such as old coins or antique vehicles are taxed at a 28 percent rate.) If your holding period for the asset is a year or less, it is considered a short-term holding and is taxed like ordinary income (a higher rate for most people). Inherited property is always considered to have a long-term holding period. California does not have a special rate for long-term holdings and treats all capital gains as ordinary income on its tax return.
As mentioned before, there is no deduction for losses on your personal use items. You can, however, take a loss on your personal investments. They would reduce any other capital gains, first, and then if there are still losses remaining, you can use $3,000 to offset any other type of income you have on your tax returns. The rest would get carried over to future years.
The Schedule D itself is essentially a summary of capital gain and loss activity that are mostly determined by other forms that feed into the Schedule D. Part I summarizes short-term gains and losses, and Part II summarizes long-term gains and losses. Form 8949 is the main supporting form used in both of these sections. It was added a few years ago after changes to broker cost basis reporting requirements occurred. The Form 8949 sorts out long-term and short-term transactions for which cost basis is reported to the IRS and not reported to the IRS, and handles the actual transactional reporting.
Parts I and II also have areas were short-term and long-term gains can be reported from other forms such as installment agreements, business casualty and theft losses, like-kind exchanges, as well as pass through entities such as partnerships, S-corporations, estates, and trusts. Long-term capital gains distributions from mutual funds on a 1099-DIV are reported in Part II. (Short-term capital gains distributions from mutual funds are actually included as ordinary dividends on the 1099-DIV, and are reported on Schedule B instead.) In addition, short-term and long-term loss carryovers from prior years are added into their respective parts on Schedule D.
Part III nets the short-term gains or losses against the long-term gains or losses. It then helps you determine the gain or loss to enter on the 1040. It also walks you through several worksheets to determine the amount of tax and tax rates you will pay on any gains.
So what would you do about the mug? Hopefully mom would have some recollection of the history. Maybe there was a somewhat recent time when it was passed by inheritance and would have received a step-up in basis. Of course, you should have figured that out before you sold it, and then had an appraisal done to support it! Otherwise, if it had just been gifted from one person to the next, the mug probably had very little if any cost basis, and you might be stuck with a big taxable gain.
In two weeks we will discuss Schedule E – Supplemental Income and Loss.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
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