Tax return : the basics

Other than fitting the description of a constant liability, what other qualifying attributes must one have, to be classed as a dependent, and how do you determine this for tax purposes? The following paragraphs explain the qualifying tests for determining dependency as it relates to your tax status, liability and available credits. First, we need to make you aware that there are two different types of dependents.

There are several “qualifying tests” an individual must pass, in order to be qualified as a dependent on a US 1040 tax return. The tests for dependency are centered around the actual support tests that the candidate must pass; first, the qualifying individual must be the taxpayer’s child, stepchild, foster child, sibling or stepsibling, or a descendent of one of these (such as a niece or nephew), second the qualifying individual must have the same principal residence as the taxpayer for more than half the year and there are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year, third the qualifying individual must be under the age of 19, or 24 if a full-time student and fourth, the qualifying individual must not have provided for more than one-half of their own support during the year. There are some additional rules that a dependent must pass, that really have nothing to do with the amount of support provided, but do determine their eligibility as US citizens and the ability to be considered for dependency. First, the qualifying individual must be a US citizen or national, and their marital status must be single, unless the are married but did not file a joint return for that year, or there was no tax liability that existed for either spouse had they filed separately.

If the qualifying individual can pass all four of the above described qualifying tests, as well as the additional rules, then any of the deductions, exemptions, and credits that are available can be used. For instance, child care expenses, child tax credits, dependent care expenses, earned income credit, and any associated itemized deductions may be claimed if the qualifying individual is determined eligible.

Determining eligibility in many cases means the difference between owing tax on your return, and the eligibility to file as head of household, and receive a refund that would include earned income credit. The earned income tax credit is a negative tax, and an attempt by the government to provide lower and poverty level income families with the opportunity to receive much needed assistance with caring for and supporting their families. Today, however, the earned income credit is becoming an opportunity for some segments of the public to abuse the goodwill of their government and falsify claims of dependency qualifications.

The child and dependent care expenses cover things like daycare, after school care programs, and any other form of paid care that is necessary for the qualifying individual to receive while the taxpayer is away at work. The only thing to watch here is that all qualifying individuals for the child and dependent care expenses must be under the age of 13.

The child tax credit is comparable to the earned income credit, in that it is a straight credit, dollar for dollar deduction of your tax liability. The child tax credit may only be taken by individuals with a qualifying dependent that is under the age of 17.

As you undertake the task of determining if your dependent meets the qualifying tests, and can actually provide some benefit in tax reduction at the end of the year, remember that it may take a little work, but the potential payoff could be well worth the time it takes to determine if you are single with no dependents, or head of household with a dependent and the opportunity to claim earned income credit, child care expense deductions, as well as file for the child tax credit. The result could be amazing!

Dassana Jayalath is the author of WebSuperTips newsletter. Download Free eCourse : Newbie’s Guide To Profitable Internet Home Business

Outsourcing is gaining wide acclaim all over. This is due to the fact that it lowers your workload and allows you to pay attention to other important sectors of your business. Giving appropriate attention to other working areas will prove to be highly beneficial for your business. The tax filing firms are loaded with work in the session of tax filing. The firms have to keep a track of work flow management, staff management and various other issues.

Outsourcing work has become a daily walk of life for tax return firms. It is always better for them to outsource their tax filing tasks to other companies, who are better equipped to handle the work and complete the work faster. The professionals in these outsourcing firms are trained to provide efficient services. In the matter of tax return outsourcing, the tax filing firms hires a third party to enter the data into tax software and give them the relevant printouts. This will lower the burden of workload and enable the firm to work more efficiently in other areas such as tax consultation, to reap excellent profits.

The tax return outsourcing firms have qualified certified public accountant, whose main aim is to decipher tax laws and help their clients in solving their tax return related problems. They assist the clients in filing their tax returns in time, so as to escape the wrath of tax raids. Tax return outsourcing enables the firms to increase the business valuation of their clients and help them to develop systems for effectively managing the business. The professionals at tax return outsourcing firms are quite professionals in managing their tasks. They give excellent quality results to their clients.

Many a times, it happens that the CPAs lose their clientele because of heavy workload. The firms don’t get spare time to handle the new clients, due to the overload of work. This can have an adverse effect on the business of the tax return filing firms. After outsourcing their tax return filling work, firms will be able to handle the new clients and other areas of management to expand their business. Apart from this, they will be able to save a lot of money by outsourcing as the amount paid to the internal team would be more than the amount paid to the outsourcing firms.

Tax return outsourcing enables higher degree of efficiency and speedy completion of tasks. It is because their aim is to make the tax return filing firm burden free. In fact, tax return outsourcing has become the need of the day. Daily, the ratio of tax return filers is increasing with the time because more and more people wish to escape the tax-raid problems. Another advantage of tax return outsourcing is that it ensures a tight security on the tax return information. The e-filing system has spurred a tight control on the data facilities, private networks, data encryption and firewalls.

Michelle Barkley is a CPA working for IFRWORLD.She specializes in Accounting Outsourcing ,Bookkeeping Outsourcing and Tax Return Outsourcing. To know more and to use the services visit http://www.ifrworld.com.

You’ve been feeling uneasy (perhaps even guilty) because
you’ve failed to report your under the table business
income. Perhaps you’ve never filed a tax return, even
though you know you owe money. Finally, you contact an
accountant to resolve the situation.

Although it is commendable that you are trying to correct
matters, hiring an accountant to do these delinquent
returns could be a big mistake. The reason why is because
tax evasion is a criminal offence or felony. You might
also be subject to civil action.

Would you hire an accountant to defend you in a criminal
proceeding? Not likely. You would be wise to hire a
qualified attorney.

First of all, lawyers have something called
solicitor-client privilege (also known as attorney-client
privilege or legal advice privilege). This basically means
that things you tell your lawyer when seeking legal
advice are confidential and can’t be used against you.
Even written records can be covered by this privilege.

On the other hand, your accountant can be compelled to
testify against you and all records in his possession can
be demanded by the authorities.

Second, your lawyer can prepare a legally binding
agreement that can protect you. In return for your coming
clean, the tax authorities may agree not to charge you
criminally and, in some cases, even reduce penalties or
tax liability.

If your accountant tried to do the same thing, they could
demand all information about you. Your accountant would
not be protected by solicitor-client privilege.

If, say, your accountant filed your tax return from ten
years ago on your behalf, the tax authorities could still
charge you with tax evasion, despite the fact that you
are obviously trying to rectify matters (albeit a bit
late).

It is even possible that your accountant could get into
trouble for failing to report your delinquency. On the
other hand, your lawyer can’t be compelled to testify
against you, being protected by solicitor-client
privilege. Your lawyer may also have his own in-house
accountant in order to protect you.

Your lawyer (specializing in criminal and tax law) will
likely negotiate an agreement with the tax authorities
before filing any tax returns.

Therefore, if there is a good chance you could be
charged criminally for your failure to file tax returns
or properly report income or expenses, don’t see your
accountant. Instead, consult a lawyer specializing in
such matters before you file or amend any returns.

RESOURCE BOX:

J. Stephen Pope, President of Pope Consulting Inc.,
has been helping clients to earn maximum business profits
for over twenty-five years.

For profitable Work at Home Small Business Ideas, visit
http://www.yenommarketinginc.com/

To learn more about income taxes, visit
http://www.yenommarketinginc.com/income-taxes.html

Should we file joint or separate tax returns?

Should we file joint or separate returns?

You may only file a joint return if you are married at the end of the tax year (December 31) and both of you agree to file and sign a joint return.1 The box you check on your return is “Married filing jointly.” Same sex couples and domestic partners cannot file joint returns. You qualify as married even if you are separated as long as there is no final decree terminating your marital status. A temporary pendente order does not affect your marital status. However, if the divorce is final and your marital status is terminated by the end of the tax year your filing status is either “single” or “Head of household.”

There are pros and cons to filing a joint tax return which you should discuss with your tax advisor and your attorney. Generally, your tax burden will be lower although this will not always be the case depending on your respective incomes, deductions and credits. The main disadvantage of filing jointly is that both of you are jointly and severally liable for taxes on the return, including any tax deficiencies, interest and penalties. This exposure can be partially mitigated by executing a Tax Indemnification agreement discussed below. Also the IRS may allow relief to a spouse who files jointly. The three types of IRS relief (”innocent spouse,” “separation of liability” and “equitable relief”) are discussed in IRS publication 971.

My spouse said they would sign a joint return but they are now refusing to do so?

Spouses often use tax returns as a bargaining tool. Generally, a joint return can only be filed where both parties agree and both sign the return. 2. A court will not order unwilling spouses to file a joint return. 3. However, in rare circumstances the IRS will accept a joint return signed by only one spouse where there is evidence of a clear intent to file a joint return and the non-signing spouse does not file a separate return. 4.

Effect of filing status upon child and spousal support

In calculating guideline child and spousal support, the Court has to take into account “the annual net disposable income of each parent” which is computed by deducting from annual gross income, state and federal income tax liability after considering the appropriate filing status, all available exclusions, deductions, and credits. 5. Therefore, your filing status as “Married filing jointly,” “Separate” or “Married filing separately” will have an impact on the amount of support you pay or receive. In one case, the California Court of Appeal overturned the trial court’s decision where guideline support had been incorrectly based on husband’s status as “Married filing jointly” instead of “Married filing separately.” 6. If the parties calculate guideline child and spousal support using a certified program such as “Dissomaster” and incorrectly input that the parties will be filing jointly when the Husband payor should have been filing as “Married filing separately” and the Wife as “Head of household,” the Husband may well end up paying less in child and spousal support because the program makes allowances for tax liability.

If we file a joint return what precautions should we take?

First, make sure that any tax refunds are paid to both of you. If you decide to have any refund sent to you by check make sure that the check is paid to both of you jointly. If a direct deposit is sought make sure the refund is routed to a joint account. You should reach a clear agreement as to how tax liability will be apportioned. A common approach is to prorate tax liability using a ratio based on both spouses separate incomes. Another approach could be based upon what each spouse would have paid if they had filed separate returns. Then to the extent a spouse’s share exceeds what he or she has already paid by way of salary or withholding or estimated tax, that spouse would pay the difference.

Second, if you are going to file taxes jointly, it’s a good idea to get your spouse to sign a Stipulation regarding Tax Indemnification since both spouses will be jointly and severally liable taxes on the return, including any tax deficiencies, interest and penalties. Even if the divorce (dissolution decree) states that one spouse will be liable for any amounts due on previously filed joint returns, the IRS may still hold both spouses jointly and severally liable and go after either spouse.

Example of a Tax Indemnification Agreement

IT IS HEREBY STIPULATED by Wife and Husband as follows:
1. Wife shall immediately provide the Husband with copies of all records and documents necessary for the preparation by Husband and his accountant of Joint Federal and State Tax Returns (”the Tax Returns”) for the year ending _____. Parties acknowledge that the Tax Returns will be prepared soley under Husband’s direction and control.
2. Wife shall immediately respond to any reasonable requests for information from the Husband or his accountant in the preparation of the Tax Returns.
3. Wife shall sign the Tax Returns immediately upon presentation to her. Such signing does not constitute an admission by Wife as to the accuracy of the Tax Returns.
4. In the event that the parties shall receive a Federal or State tax refund, the _____ shall immediately endorse the full amount of the tax refund check to the ______.
5. The Husband agrees to release, indemnify and hold harmless the Wife from any Federal or State claims, fines, liabilities, penalties and assessments arising out of the filing of the _____ Tax Returns, with the exception of any unreported income to the Wife that she failed to provide to Husband and his accountant in preparing the Tax Returns.
6. The Husband shall pay all costs and fees of any administrative or judicial proceedings in connection with the filing of the Tax Returns.

Be warned. Even if you have a Tax Indemnification Agreement it may not help you if your spouse files for bankruptcy. If you have doubts about the accuracy of your spouse’s, file separately.

If you are still married at the end of the tax year (December 31) but separated and your spouse will not file a joint return how should you file?

You must file either “Married filing separately” or as “Head of household” depending on your circumstances. Filing as “Head of household” has the following advantages:

You can claim the standard deduction even if your spouse files a separate return and itemizes deductions.
Your standard deduction is higher.
Your tax rate may be lower.
You may be able to claim additional credits such as the dependent care credit and earned income credit that you cannot claim if your status is “Married filing separately.”
There are higher limits for child care credit, retirement savings contributions credit, itemized deductions.

If you are still married by the end of the tax year you can file as “Head of household” if you satisfy the following requirements:

You paid more than half the cost of maintaining your home for the tax year. Maintaining a home includes rent, mortgage, taxes, insurance on the home, utilities and food eaten in the home.
Your spouse did not live with you for the last 6 months of the tax year.
Your home was the main home of your child, step child or eligible foster child for more than half the year.
You could claim a dependent exemption for the child.

The other non-custodial spouse must then file as “Married filing separately.” Once you are divorced you may still file as “Head of household” if you paid more than half the cost of maintaining your home for the tax year and your children lived with you for more than half the tax year. There are different rules for filing as “Joint Custody of Head Household” and receiving a credit against California State taxes.7.

If one spouse files “Married filing separately” do we take the standard deduction or can we itemize deductions?

Consider this example. Bob who separated from Jackie but is still married at the end of 2005 decides to file “Married filing separately” in his 2005 taxes. He decides to itemize deductions which are considerable. Jackie his wife does not have large deductions and wants to take the standard deduction. The rule is that if Jackie qualifies as “Head of household” she can elect to take the standard deduction or itemize.8 If she does not qualify as “Head of household” and Bob itemizes she must also itemize even if she has limited deductions.9. This is true even if she files before Bob and claims a standard deduction. She will have to file an amended return when Bob claims itemized deductions.

When the parties file separately who gets the mortgage interest deduction and property tax deductions?

If the marital home is the separate property of one spouse they can claim the deductions. If the property is jointly owned, the spouse that actually pays the mortgage interest and property taxes is entitled to take the deductions. 10. Other expenses are deductible to the spouse to the extent that they are paid out of separate funds. If they are paid out of community funds each spouse can deduct one half of the interest and taxes.

Who can claim the dependency exemption and the Child Tax Credit and the Child Care Credit?

Generally, where the parties file separately it is the parent with whom the children have resided for the longest period of time during the tax year that can claim the dependency exemption and the Child Tax Credit ($1,000 for each child under 17).11. If the child lived with both parents for the same amount of time, the parent with the highest annual adjusted gross income gets to claim the child. It can therefore be important to keep a log of the actual amount of time the children spent with you. However, the non-custodial parent may take the exemption and the credit if the custodial parent signs an IRS Form 8332 “Release of Claim to Exemption of Divorced or Separated Parents” or a divorce decree or separation agreement releases the exemption and satisfies the wording of Form 8332. In California the court has the power to allocate the dependency deduction to the non-custodial parent. 12. It may do this to maximize support. The Child Tax credit can only be claimed by the parent who claims the dependency exemption. 13. Generally, whichever spouse is in the higher bracket should claim the exemption and compensate the other spouse for the shortfall.

The Child Care credit can only be claimed by the custodial parent if the other parent is not a member of the household for the last 6 months of the tax year. 14. Unlike the dependency exemption it cannot be traded although you may claim the credit even if the dependency exemption has been allocated to the other parent.

Footnotes
1. Generally see IRS Pub 504 “Divorced or Separated Individuals” at www.irs.gov
2. IRS Pub. 17, p.21. Available at www.irs.gov. 26 C.F.R.