Archive for the ‘Education’ 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.
Aren’t All Tax Returns Created Equal?
Filed under: General, Switching Preparers | Tags: Attorney, bond, California, California Tax Education Council, Certified Public Accountant, commodity, continuing education, CPA, CRTP, CTEC, CTEC Registered Tax Preparer, EA, Education, Enrolled Agent, exam, H&R Block, Jackson Hewitt, Liberty Tax Service, license, Registered Tax Return Preparer, requirements, RTRP, tax returns, TurboTax
Leave a comment Originally published in the Cedar Street Times
February 7, 2014
There is a belief by many people that a tax return is a bit of a commodity – basically you are going to get the same results no matter if you or anybody else prepares the return. If that were true, your only goal would be to find the absolute cheapest tax preparer in town (or do it yourself).
A number of years ago Money magazine used to annually send out the same hypothetical family’s tax return to be prepared by 45-50 tax preparers across the country. The surprising result was that it was rare in any year to have even two tax returns prepared the same way. The most recent one that I could find resulted in only 25 percent of the preparers coming within $1,000 of the theoretical correct answer. That means 75 percent missed the mark by more than $1,000. This certainly speaks to the complexity of the tax code, and why you really need to have someone with as much relevant experience, education, and training as possible to navigate the tax terrain. You may think you are being savvy by saving $200-$300 by getting a deal on your tax preparation, but what did you get? Maybe you overpaid your tax by a $1,000 in the process of saving $300. And how would YOU ever know.
When it comes to hiring someone to prepare your returns, credentials are not everything, but they certainly are a measuring stick of the education, training, testing, and commitment required. Here are your options:
Do-It-Yourself Software (i.e. TurboTax) – Tax software, whether for professionals or amateurs is certainly a requisite tool to bring any measure of accuracy or efficiency to preparing a tax return. Computers are quick at math and very accurate at crunching numbers (that is the part that is “guaranteed” to be accurate by do-it-yourself software providers), but if you provide the wrong input, or your software is not even programmed to ask you or accept all the variables you might need, then you will get a wrong answer every time (that part they don’t guarantee).
In addition, without an understanding of the forms and tax law, you will have no idea if there is a glaring error staring you in the face when you are ready to submit the forms. I have seen countless returns butchered through the use of tax preparation software over the years. I am currently amending three years of tax returns for a family that overpaid their taxes by $1,000 a year for the past twelve years due to a simple mistake that the software was not able to point out to them. Unfortunately the statute of limitations has run out on the first nine years and they cannot get a refund at this point.
RTRP -“Registered Tax Return Preparer” – This is the current basic credential required by the IRS to prepare tax returns for pay. There is no formal high school or college education required, no professional class and exam process to become licensed, and no continuing education requirement. You just pay $65 to the IRS and you can prepare tax returns professionally! This designation was created in the last few years with the intent of having a basic exam and some continuing education, but the testing and education requirements have been put on hold pending legal challenges to the requirements. RTRPs have limited practice rights before the IRS.
CRTP – “CTEC Registered Tax Preparer”– (CTEC stands for CA Tax Education Council) – This is the current basic credential required by California to prepare tax returns for pay. Again, there is no formal high school or college education required. There is a 60 hour professional class (equivalent to three or four semester units in college – one class) that is offered by many providers in person, on the internet or by self-study with an exam on the material covered. There is 20 hours of continuing education each year, and a $5,000 bond. This is the license that the vast majority of preparers hold in California at chains such as H&R Block, Liberty Tax Service, and Jackson Hewitt. CRTPs also have limited practice rights before the IRS.
EA – “Enrolled Agent” – This is the highest of the two designations offered by the IRS, and EAs can practice in any state. Again there is no formal high school or college education required, and there is no required professional class (although an intensive prep course is generally taken). There is a 10.5 hour proctored three-part exam with 100 question each – one on individual, one on business returns, and one on practice procedures and ethics with essentially 24 hours of continuing education each year. EAs have unlimited practice rights before the IRS.
CPA – “Certified Public Accountant” – Licensed by each state (although there is reciprocity to practice with nearly every state now). California requires a college degree with 150 semester units (five years) including 24 semester units of accounting and 24 semester units of business related courses in taxation, economics, finance, management, etc., 10 semester units of ethics, and another 20 semester units of accounting studies which a masters of taxation or masters of accountancy would satisfy. You must then work for a year under the direct supervision of a CPA. If you want to be able to sign audit reports, you have to have 500 supervised audit hours. You must also pass a 14 hour proctored four-part national exam and then a CA ethics exam. California also requires a LiveScan background check and fingerprinting of all applicants. There is essentially 40 hours of continuing education required each year for California CPAs. CPAs have unlimited practice rights before the IRS. Although CPAs are trained in, and can do a lot more than just your tax returns, most small CPA firms focus on tax preparation.
Attorney – Licensed by each state. We won’t discuss the requirements to become an attorney, as attorneys rarely prepare tax returns. Some attorneys that specialize in tax will prepare tax returns, although most of those are focused on estate tax returns. Attorneys that do prepare tax returns will often have obtained a CPA license also. Attorneys have unlimited practice rights before the IRS.
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
Filed under: General, Tax Rates | Tags: American Opportunity Credit, Buffett Rule, candidate, Capital Gains, child tax credit, corporate rates, dividends, earned income credit, Education, election, Estate Tax, FICA, foreign earnings, health insurance, HSA, income exclusions, interest, itemized deductions, Medicare, MSA, net investment income, Obama, retirement plans, Romney, student loan interest, Tax brackets, tax positions, tax-exempt interest, territorial tax system
Comments (2) 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.
Travis H. Long, CPA, Inc. Blog 