Archive for the ‘child tax credit’ Tag

Back to Basics Part XXVII – Schedule 8812 – Child Tax Credit

Originally published in the Cedar Street Times

November 13, 2015

I believe the IRS was having an off-day when they created the “Schedule 8812 – Child Tax Credit.”  First, why did they call it a “Schedule?”  Anyone who grew up with Sesame Street during the past 40 years inevitably knew the song, “One of these things is not like the others…” and then you would have to pick out the one thing that was different on the TV screen.  Okay, it’s time for you to play: Form 1045, Form 2106, Form 3903, Form 6251, Schedule 8812, Form 8829, Form 9465.  Did you figure it out?  In my tax software there are well over 100 four-digit forms to choose from, and I believe the 8812 is the only one called a “Schedule.”   Schedules, on the other hand, all start with letters, such as Schedule A, Schedule B, Schedule C, etc.

The second reason I think the IRS was having an off-day, is that the name of the form – “Child Tax Credit,” is somewhat of a misnomer.  There are two related, but distinct credits, the “Child Tax Credit,” and the “Additional Child Tax Credit.”  For the vast majority of people the Child Tax Credit is determined on the Child Tax Credit worksheets in Publication 972.  The Additional Child Tax Credit is the one generally figured on the double poorly named, “Schedule 8812 – Child Tax Credit.”

So what are these credits and how can you get them?  The child tax credit is a nonrefundable tax credit up to $1,000 per child, and the Additional Child Tax Credit is a refundable tax credit that may be available if you qualified for the child tax credit but could not use some or any of the credit because you did not owe much or any tax.  Whenever you hear of a refundable tax credit, think fraudulent returns – because lots of them are filed whenever scammers figure they can get something for nothing.  Also remember, that tax credits are much more valuable than tax deductions.  Credits are a dollar-for dollar reduction of tax, whereas deductions just reduce the income upon which the tax is calculated.  So credits could be three to ten times more valuable than deductions depending on your tax bracket.

I know many of you are thinking, “What a deal! At an annual $1,000 a pop, where can I get more kids?”  Well, you can certainly birth them, adopt them, or foster them (through a court or qualified agency).  You could also get one or both of your parents to have another child and give it to you, or you could even have a step-parent give you his or her children to raise, or any of the decedents of these two categories.  The reverse is also true…parents, you can sweet talk your kids into having their own children to give to you, or if you are already a grandparent, just keep the grandkids the next time they are dropped off and don’t give them back!  There are so many wonderful options!  Please make sure the children are under 17; make sure they are U.S. citizens, U.S. nationals or U.S. resident aliens; and make sure that you meet all the tests to claim them as dependents as well.

You also cannot make too much money in order to qualify for the credit.  If you are Married Filing Joint you start to lose the $1,000 per child tax credit when your combined incomes hit $110,000.  By $130,000 it has been ratably phased-out.  If you are filing head of household, your phase-out range for the credit is $75,000 – $95,000 of modified adjusted gross income.

As mentioned earlier, if you qualify for the child tax credit, but you have more credit than tax owed to offset, you may be able to pick this difference up through the Additional Child Tax Credit and actually get a refund for money you never paid in to begin with.  In order to qualify for the Additional Tax Credit you do need to work.  The calculations are such that you need to have at least $3,000 of earned income (not investment or retirement income) to get anything.  You need to have about $10,000 of earned income to max out the credit if you have one child, and approximately an additional $7,000 for each additional child in order to max out the $1,000 per child credit.

There are lots of nuances to these rules depending on your circumstances, but they are fairly well addressed in the worksheets and the instructions when you actually go to fill them out.  Again, Publication 972 houses the Child Tax Credit worksheets (about 5-6 pages of worksheets) to see if you qualify for the Child Tax Credit.  Then, if you cannot utilize all of the credit for which you qualify due to income tax liability limitations, then you go to Schedule 8812 Child Tax Credit to see if you can qualify for the refundable Additional Child Tax Credit.

The Schedule 8812 is only 1-1/2 pages long.  Part I of the schedule is only used if your children do not have Social Security Numbers, and have ITINs instead.  Part II is the section where most people will go to calculate the Additional Child Tax Credit.  Part III is a special section for super humans that have three or more qualifying children.

In the meantime, I will be eagerly awaiting to see if a reader can enlighten me on some history that might explain the anomaly naming convention of Schedule 8812 – Child Tax Credit!

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. 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.

What Are Your Chances of Being Audited? Part III – Red Flags

Originally published in the Cedar Street Times

June 13, 2014

Four weeks ago I discussed some of the statistics regarding your chances of being audited by the IRS, and two weeks ago I discussed audit selection methodology.  A few of the high points from the articles were: 1) on the average, audit rates for individuals are generally less than one percent each year, and increase as you make more money, 2) about 75 percent of audits are actually mail correspondence audits focused on a narrow request of information for specific items on your return rather than a full-blown in-person, field audit, 3) the IRS does not release its exact methods of selecting audits, and many people have incorrect notions about this process, 4) the IRS does tell us audit selection is aided by a computer scoring system to help find returns that will likely yield a change; it uses computer matching to ensure information reported on 1099s by third parties matches what you report; it uses publicly available information; and it uses statistical random sampling.  The rest of this article will be devoted to “red flags.”

So what are these “red flags” everyone talks about?  One fairly obvious assumption we can make from the audit statistics released by the IRS is that they follow the money!  You are three times more likely to be audited if you make over $200,000 a year and over eleven times more likely to be audited if you make over $1,000,000 a year.  C-corporations face a similar dynamic of increasing audit rates on larger corporations – for instance, one out of every three corporations with assets over $250 million are audited.

Not reporting all your income even when it is reported to the IRS should not be a surprising red flag, but it happens frequently.  I see this most commonly with stock sales reported on a 1099-B when people prepare their own returns – they either forget, or do not understand the form.  I also see this with contract work where a 1099-Misc is issued and the individual forgets to report it.

There are a number of issues related to small businesses that raise eyebrows.  Keep this in mind – anytime there is an easy path for someone to pass-off personal expenses as business expenses, you are going to have a higher level of scrutiny.  For instance – relatively high amounts of: business automobile mileage (or claiming 100% business use on your vehicle – very rare in reality), home office deductions, meals and entertainment, or travel expenses.  All of these can be easily abused, so they are highly scrutinized.  If you are beyond the norms, you are a clearer target.

Here is another golden nugget – if your job is one that millions of people do for fun as a hobby (although perhaps not nearly as well!), then you have a higher level of audit risk, particularly if you are losing money.  Think of the arts – photography, video, music, drawing, painting, performing, etc.  Also, think of horse racing and breeding for the wealthier set.

That brings us to another “red flag,” businesses that lose money every year.  The IRS is trying to determine which of these three describes your nonprofitable business situation: 1) Are you really trying to make this successful and genuinely feel it will be profitable overall?  2)  Are you trying to deduct your personal expenses, your hobby, or keep up appearances? or 3) Are you just plain nuts?  By allowing people to continue businesses circumscribed in two and three, the rest of the country is having to foot the bill for the lost tax revenues.  This is because the “losses” generated are offsetting the person’s other income that would otherwise be taxable.  With no realistic future expectation to recuperate the losses, the IRS is ready to pounce.

Claiming rental losses in California is fairly common due to the high cost of our real estate, but claiming a real estate professional designation in combination with these losses is an area of greater concern.  If your main occupation is in the real estate related field, and you work at least 750 hours in this trade, you are allowed to deduct all of your rental losses in the year they are incurred.  Everyone else get to deduct $25,000 at most, and are rapidly phased out to no deductions for the losses based on income levels.  The losses get suspended until the property is disposed of or until there is passive gain to offset.  There are a lot of challenges when it appears the person has substantial earned income from a trade or business unrelated to real estate or if there is very little income from real estate related trades.

Refundable tax credits such as the Earned Income Tax Credit, Child Tax Credit, American Opportunity Credit (for education), and Health Care Tax Credit can also be a point of concern, particularly when the total refund on your return is higher than the tax paid in to the system!  The IRS receives thousand of fraudulent returns each year that use refundable credits to steal money from the government.

Although harder to catch, unreported foreign income is an area worth mentioning due to the extremely high penalties by the Treasury Department for failure to report foreign accounts, and it has been a hot-button issue that has raised billions in revenues.

The above is not an exhaustive list, but it does describe many commonly seen areas of concern.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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.

Unmarried with Children – Head of Household

Originally published in the Cedar Street Times

March 8, 2013

Article on Unmarried People Living Together with Children

I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate.  With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!

When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married.  Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.

Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children.  This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.

For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.

A qualifying child is someone who must generally be under 19 (24 if full-time student).  The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child.  The child cannot provide over half of his or her own support, and the child cannot file a joint return.

Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption.  (If they cannot decide, tie-breaker rules exist.)  Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household.  You cannot split up the benefits between parents.

If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent.  Or maybe one or both have children from prior partners that live with them and could qualify them as well.  (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B.  This also qualifies B for head of household.)

Let us assume both unmarried people living together each have a qualifying child.  Can they both claim head of household?  If their households are maintained in separate dwellings, the answer is almost always yes.  But what if they live under the same roof?  Can you maintain separate households in the same house?

The answer to this depends on whether they are acting as a family unit or not.  IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts  and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single.   But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household.  If you share a biological child as well, it will be nearly impossible for you to make this argument.  But never say never!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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.

American Taxpayer Relief Act of 2012

Originally published in the Cedar Street Times

January 11, 2013

The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013.  There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people.  I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers.  That patch has been kicked down the road for years.  The indexing will certainly alleviate concerns of a similar problem down the road.  Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.

The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property.  In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it.  Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust.  Family dynamics may of course still dictate a B trust is prudent.

Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.

Quite a few things were extended but not made permanent.  A big one was extending the exclusion from income of cancelled debt on personal residences for another year.  This could be a lifesaver for those still struggling with mortgages that are “underwater.”  Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013.  More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs.  Enhanced provisions of the child tax credit were also extended through 2018.

Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179.  This was slated to return to $25,000, but has been extended through 2013 at $500,000.  Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.

Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy.  For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%.  There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000.  Itemized deduction phaseouts have also returned for high income earners.

Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result.  Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%.  Individuals 65 and up will still enjoy the 7.5% rate for another three years.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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.

Your Future Tax Return: Romney Versus Obama

Originally published in the Cedar Street Times

November 2, 2012

If tax positions would sway your Tuesday vote, here is what Obama and Romney would like to see.  Keep in mind, however, you don’t always get what you want!

Tax brackets: Romney reduce to 80% of current levels. Obama keep the same as 2012 except allow top bracket to split into two higher brackets like pre-2001. (Romney, Current 2012 Rates, Obama, 2013 rates if no congressional action ) (8%, 10%, 10%, 15%), (12%, 15%, 15%, 15%), (20%, 25%, 25%, 28%), (22.4%, 28%, 28%, 31%), (26.4%, 33%, 33%, 36%), (28%, 35%, 36% and 39.6%, 39.6%)

Capital gains, interest, dividends: Romney reduce tax rate to zero for AGI below $200K.  15% max if AGI above $200K. Obama increase long-term capital gains rate to 20% max and up to 39.6% on dividends – leave interest taxed at ordinary bracket rates.

2013 3.8% Medicare surtax on net investment income and existing 0.9% medicare surtax for married filers over $250K AGI and others over $200K: Romney repeal.  Obama keep.

Itemized deductions: Romney cap itemized deductions (maybe $17,000-$50,000 cap) and maybe eliminate completely for high income.  Obama reduce your itemized deductions by 3% of your AGI in excess of $250K married, $225K HOH, $200K single, and $125K MFS (up to 80% reduction of itemized deductions) and limit the effective tax savings to 28% even if you are in a higher bracket.

Income exclusions: Romney keep as is. Obama cap the effective tax savings to 28% on exclusions from income for contributions to retirement plans,  health insurance premiums paid by employers, employees, or self-employed taxpayers, moving expenses, student loan interest and certain education expenses, contributions to HSAs and Archer MSAs, tax-exempt state and local bond interest, certain business deductions for employees, and domestic production activities deduction.

AMT: Romney repeal. Obama keep but set exclusion to current levels and index for inflation.

2009 expanded Child Tax Credit, increased Earned Income Credit, and American Opportunity Credit: Romney – Allow to expire as scheduled 12/31/12.  Obama – Make permanent.

Buffett Rule: Romney “Not gonna do it.” Obama households making over $1 million should not pay a smaller percentage of tax than middle income families.  This is accomplished by raising the rates on capital gains and dividends as discussed earlier.

Temporary two percent FICA cut you have been enjoying in 2011 and 2012: Both candidates favor allowing to expire at 12/31/12.

Estate tax: Romney repeal.  Obama set at $3.5 million and index for inflation with top rate of 45% on excess.

Top corporate tax rates: Romney 25%. Obama – keep at 35% for 2013 but maybe reduce to 28% in the future.

Corporate international tax: Romney don’t tax U.S. companies on income earned in foreign countries. Obama discourage income shifting to foreign countries.

Corporate tax preferences: Romney extend section 179 expensing another year, create temporary tax credit, expand research and experimentation credit. Obama increase domestic manufacturing incentives, impose additional fees on insurance and financial industries, reduce fossil fuel preferences.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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.

I’m Having a Baby!

Originally published in the Pacific Grove Hometown Bulletin

Decembery 7, 2011

Well, not me, technically, but my wife is.  After 12 years of wedded bliss, we are entering the baby business.  Like most future parents we are excited, but being a CPA takes it to a whole new level of joy!  There are so many planning opportunities around children.

Planning can start well before birth or even years before conception.  For example, the highly tax savvy high school senior could think, “Someday, I am going to have a family of my own.  Knowing the high cost of college I am about to incur, I should really start saving for my future child’s education now to maximize tax-deferred growth!  That raucous week in Cancun is really a waste of money, anyway.”  Instead this high schooler opens a section 529 plan and names his older sister’s child as a beneficiary.  After four years in a frat house, a year traveling after school, a few years bouncing around finding himself, falling in love, getting married, and finally having a child, this new parent then renames the beneficiary to his own child with a ten-year jump start on tax deferred education saving!

What about the expense of having the child?  This natural process which has gone on quite successfully for a few million years or so at no cost, mostly outdoors in the dirt, can now be quite pricey, and sterile.  It may cost $5,000 if you use a midwife or $25,000 in a hospital!  You will likely go over your deductible and insurance will pick up the rest.  A great option is to have a high deductible health plan going forward with a health savings account.  This setup makes virtually all of your family medical expenses deductible whereas people with traditional plans are stuck itemizing with a 7.5 percent of AGI floor – meaning most people do not get any tax benefit.  It also allows the deductibility of more types of expenses and alternative care.

Next, there is the additional exemption deduction to get excited about – we are talking $3,700!  You are also eligible for child tax credits – up to a $1,000 per child.  And if you are low income, the child may help qualify you for a larger earned income credit: up to $3,094 with one child or $5,751 with three or more!  Child tax credits and earned income credits can be refundable – meaning, even if you do not pay a dime in tax, the federal government will “refund” the money to you anyway – but having children is not a great way to get rich.   For advanced tax planning, you aim to have your child near the end of December and still receive the exemption and credits for the whole year.  No expense, but full benefit – brilliant!

Do not forget about dependent care credits and education credits either.  Dependent care credits will save you up to $1,050 for one child or $2,100 for two or more children.   Education credits for college age children such as the Hope credit can save you up to $2,500 in tax.

My favorite planning opportunity which I have yet to implement with a client is baby modeling.  If you can get your baby into print or TV commercials, then I feel you would have a strong case to say the baby has earned income.  Maybe the “talent’s” agent, a.k.a. mom or dad, would need to be paid out a heavy agent fee since it really required a lot of work on their part – but then again, I am sure that many famous actors and actresses have to be babied by their agents too!  Once your baby has earned income, you can establish a Roth-IRA for retirement!  Think about 18-22 years of additional investment compounding!  (Call me if you have a child in this situation – I want to put this in action!!)

So when is our baby due – LATE April…we hope!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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.