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Deciding if Someone Qualifies as a Dependent on Your Tax Return
How Do I Know if I Can Claim Someone as a Dependent?
To start, there are a few basic requirements that need to be met to claim someone else as a dependent:
No one else can claim you, or your spouse if you’re filing a joint return, as a dependent. Even if the person chooses not to claim you as a dependent, the fact that they could makes you ineligible.
You generally can’t claim anyone who is married and files a joint return. However, there are exceptions if the person only files a joint return to get back income taxes that were withheld from paychecks or estimated tax payments.
The person you’re claiming must be a U.S. citizen, resident alien (which can include undocumented residents), U.S. national, or resident of Canada or Mexico. There are also some exceptions for adopted children who lived with you in the U.S.
These general rules apply to everyone. Additionally, the person you’re claiming must meet all the requirements to be your qualifying child or qualifying relative.
The Two Types of Qualifying Tax Dependents
Children and relatives can qualify as tax dependents—but their definitions are broader than you may suspect.
In addition to your birth child or an adopted child, your foster child, siblings, half-siblings and step-siblings (along with all the siblings’ descendants) can be qualifying children. And your son-in-law, mother-in-law, parents, grandparents and in-laws could all be qualifying relatives.
A person doesn’t even need to be a relative to count as a qualifying relative. A girlfriend, boyfriend or roommate could be your dependent as long as the person is a member of your household for the entire year and meets all the other requirements.
The IRS’ Publication 17, chapter 3, has a complete list of which relationships can qualify someone as a child or relative for dependent purposes.
In addition to the relationship requirement, the qualifying child or qualifying relative has to pass a series of “tests.”
There are four tests for qualifying children:
The child must be 19 or younger at the end of the tax year and younger than you (and your spouse if you file a joint return). Qualifying children can be up to 24 years old if they’re also full-time students for at least five months of the year, or they can be any age if they’re permanently and totally disabled.
The child has to live with you for at least half the year. There are exceptions for temporary absences, such as when you or the child are away from home for school, business, vacation or military service.
The child can’t provide more than half of his or her own support during the year (scholarships don’t count as support).
The child can’t file a joint tax return unless the only reason for filing is to get back the taxes that were withheld from his or her pay or were part of estimated tax payments.
The rules for who can claim a qualifying child can get fairly complex when both parents can claim the child as a dependent but they aren’t married, or they file their tax returns using the married filing separately status.
Some parents switch off, letting one person claim the child one year and the other parent claim the child the next. The IRS also has an official series of tiebreaker rules (see page 30 of Publication 17) to determine who can claim the child if you can’t come to an amicable agreement.
There are three additional tests for your qualifying relatives:
The person can’t be anyone’s qualifying child.
The person’s gross income must be below $4,150. Income could include money, property, goods or services they received, and it may include Social Security benefits. However, there are exceptions for people with disabilities who received income from certain tax-exempt schools.
You have to provide more than half of the person’s support for the year.
If working through all the tests sound like too much work, you could also try the IRS’ interactive tool, which can help you determine if you can claim someone as a dependent.
DISCLAIMER: Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular
circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisor regarding your specific situation.
Have further questions? Please contact our office and make an appointment.
Self-employment can bring more flexibility, but often it brings more pressure as well. You are both employee and employer, which means you can set your own hours and decide which projects you feel like taking on. It also means that if you don’t have any cash flow coming in, there’s no one to blame but yourself.
As taxes can get more complicated as self-employed, you must pay them quarterly and you owe a lot more in Social Security and Medicare tax, which in traditional jobs is split between employee and employer. But there is one big plus to being a self-employed person around tax time, and that’s all the deductions you can claim to lower your bill. Here’s a look at 7 that you don’t want to miss out.
1. Home office deduction
The home office deduction is one of the most popular self-employed tax breaks and also one of the most abused. You’re allowed to deduct expenses like electricity, heating, property taxes, and even your homeowners insurance as they relate to your home office. So if, for example, your home office takes up 10% of all the square footage in your home, you could deduct 10% of all the bills listed above as business expenses.
The big catch here is that you can only deduct home office expenses if that room is solely or primarily used for business. You cannot consider your living room as your home office just because that’s where you work from. You probably use it just as much, if not more, for personal purposes so it would not qualify as a deductible expense.
2. Self-employment tax deduction
Everyone pays Social Security tax and Medicare tax, as mentioned earlier. Social Security tax is 12.4% of your income and Medicare tax is 2.9%, for a total of 15.3%. You’re only responsible for half of that when you have an employer. Your company pays the other half. But when you’re self-employed, you must pay it all on your own.
The good news is that the government enables you to write off half of what you pay in these taxes (your employer portion) so you don’t have to pay income tax on this amount. This puts self-employed workers on an equal footing with traditionally employed workers.
3. Travel expenses
Whether driving to see a client in your local area or flying across the country to attend a conference, you can deduct any travel expenses you incur on behalf of your business. This includes flights, rental cars, hotel stays, and even ride-sharing fees. If you’re driving your own vehicle, you can deduct 58 cents for every mile on your 2019 tax bill. In 2020, this drops to 57.5 cents per mile.
The government isn’t just going to take your word on these expenses, so keep documents to prove what you spent. The same goes for the home office deductions you plan to claim above: Keep receipts or else the government could disallow them if it audits you.
4. Office supplies
Simple things like paper and pens, all the way to expensive pieces of equipment you buy for your business, can be tax-deductible, as long as you use them primarily for business and you keep all receipts to prove your expenses. Go back through your bank and credit card statements for the last year and note any business-related expenses you may have forgotten about. Highlight them or record them on a separate sheet of paper so you have all the numbers you need when you’re ready to file your return.
5. Professional education
Attending conferences, taking a professional development course, or pursuing an advanced certification to improve the quality of service you offer your customers are all deductible expenses as long as they relate to the business you’re currently running and you have the documents to prove your expenses.
Courses to help you branch out into a new, unrelated business wouldn’t count, though. It’s fine to write off a course in graphic design if you’re already a graphic designer, because it can help you improve your skills and the services you offer. But if you run a bakery and just decide to take a graphic design course on a whim, you can’t count this as a business expense.
Paid advertising, like ads online or a TV or radio commercial, is a deductible business expense. The same goes for maintaining a business website and any billboard space your company pays for. Keep track of how much you spend on advertising throughout the year and hold on to those receipts.
7. Health insurance premiums
Self-employed workers don’t have an employer to help them cover the cost of their health insurance, so the government enables them to write off their premiums. This only applies to health insurance that you’re paying for on your own. If you get health insurance through your spouse’s company, you cannot write this off even if you’re self-employed. But you can write off premiums for yourself, your spouse, and any dependents if you pay the full cost of the health insurance premiums yourself.
This isn’t a comprehensive list of all possible self-employed business deductions, but it should give you a sense for what you can and cannot write off. Only expenses that are primarily or solely for your business are tax-deductible and you must have documents to prove all of these deductions.
And remember this list as you move into 2020, so you can start keeping records of all tax-deductible expenses to make next year’s tax season go much smoother.
- “Don’t ever give out personal information to anyone you don’t know over the phone.”
- The IRS will never make initial contact with taxpayers via an unsolicited phone call or e-mail. (The agency generally only contacts people by mail.) It doesn’t call about unexpected refunds, ask for personal information like credit or debit card numbers over the phone or make threatening payment demands. If suspicious, taxpayers can request that the caller send a letter.
- Beware of e-mails or other communications posing as the IRS, promising a big refund or personally threatening you. Don’t open attachments or click on links in suspicious e-mails.
- If a tax refund promised by a tax preparer seems too good to be true, it probably is. Ask some questions: Why is the refund coming out this way? Why am I getting such a large refund?
1. No individual mandate penalty
Most of the tax code changes stemming from the Tax Cuts and Jobs Act of 2017 took effect in 2018. One exception is the change to the shared responsibility payment, which took effect in 2019.
The shared responsibility payment — commonly referred to as the individual mandate penalty — had applied to folks who were required to have health insurance under the Affordable Care Act but who didn’t get coverage and didn’t qualify for an exemption.
If you owed the penalty, it was due when you paid your taxes.
Starting with 2019, however, there is no longer a penalty. So, folks who didn’t have health insurance in 2019 will not owe the penalty when they file their taxes in 2020.
2. No alimony deduction
Elimination of the alimony deduction is another Tax Cuts and Jobs Act change that took effect for tax year 2019 rather than 2018. For divorce and separation agreements made or modified this year or thereafter, alimony payments will not be deductible, says IRS Publication 5307.
So, a spouse who got divorced this year and paid alimony in 2019 cannot write the payments off on a tax return in 2020. That also means that a spouse who got divorced in 2019 and received alimony this year cannot count the payments as income.
3. Higher Health Savings Accounts contribution limits
Health savings accounts are another type of tax-advantaged account for which the contribution limits generally increase as the years roll along.
HSAs are not strictly for retirement savings, although you can effectively use them as retirement accounts, as we explain in “3 Reasons to Get a Health Savings Account.”
The 2019 contribution limits for people who are eligible for an HSA and have the following types of high-deductible health insurance policies are:
Self-only coverage: $3,500 (up from $3,450 for 2018)
Family coverage: $7,000 (up from $6,900)
4. Higher standard deductions
Standard deductions are somewhat higher for tax year 2019 on account of inflation. The IRS reports that they are:
Married filing jointly: $24,400 (up $400 from last year)
Married filing separately: $12,200 (up $200)
Head of household: $18,350 (up $350)
Single: $12,200 (up $200)
The standard deduction reduces the amount of your income that’s subject to federal taxes. So, if a married couple filing a joint tax return are eligible for and choose to take the standard deduction on their 2019 return, they would not be taxed on the first $24,400 of their taxable income from 2019.
5. Higher income brackets
Income tax brackets are also somewhat higher for tax year 2019 than they were for 2018 on account of inflation.
The IRS reports that the tax rates and corresponding income brackets for 2019 are as follows for folks whose tax filing status is single:
37% tax rate: Applies to incomes of more than $510,300
35%: More than $204,100 but not more than $510,300
32%: More than $160,725 but not more than $204,100
24%: More than $84,200 but not more than $160,725
22%: More than $39,475 but not more than $84,200
12%: More than $9,700 but not more than $39,475
10%: $9,700 or less
2020 Tax Season Dates
Alright, it’s time bust out your calendars and circle some important dates so that you won’t make the mistake of waiting until the last minute to file your taxes.
While Tax Day isn’t until April, waiting until then is a recipe for disaster. Not only is waiting until April 15 more stressful than going Xmas shopping on Christmas Eve, but you’ll miss out on some of the benefits of filing your taxes early.
With that in mind, here are some important dates to keep in mind as tax season rolls around:
- Late January 2020: The IRS hasn’t confirmed a specific date yet, but this will be the official start of tax season—the day the IRS begins accepting and processing your 2019 tax returns. So, if you have all your tax forms and information in order by then, you can get your taxes out of the way before the snow in your front yard melts.
- January 31, 2020: You should have online access to your W-2 form—the form employees use to report their income—or have it delivered to you by your employer by this date. So, check your mailboxes! If you did freelance or contract work for a business or client, then you might get a 1099-MISC form that you’ll use to report your self-employment income. If you haven’t received your forms by the end of January, reach out to your company’s HR department to get that sorted out.
- April 15, 2020: This is the dreaded “Tax Day”—the day your 2019 income tax return is due to Uncle Sam. It’s also the last day to request a six-month extension if you need more time to file your taxes. But an extension to file is not an extension to pay—you still need to pay the IRS what you owe in taxes to avoid paying a late penalty and getting charged interest on your unpaid taxes.
- June 15, 2020: If you live overseas or you’re on military duty outside of the United States, your taxes are still due on April 15—but you’re given an automatic two-month extension to file your taxes (without needing to request one). However, if you file later than April 15, interest will be charged on the taxes you owe starting from April 15.
- October 15, 2020: Got a six-month extension to file your 2019 taxes? This is the deadline to file those tax returns.
What if you’re self-employed and pay quarterly taxes (or estimated taxes) throughout the year? Here are the deadlines for your 2020 estimated taxes:
|First Payment||April 15, 2020|
|Second Payment||June 15, 2020|
|Third Payment||September 15, 2020|
|Fourth Payment||January 15, 2021|
The Internal Revenue Service (IRS) issued the 2020 optional standard mileage rates used to calculate the deductible costs of operating an automobile (including vans, pickups and panel trucks) for business, charitable, medical or moving purposes.
Beginning January 1, 2020, the standard mileage rates are:
57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019,
17 cents per mile driven for medical or moving purposes, down three cents from the rate for 2019, and
14 cents per mile driven in service of charitable organizations.
It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than five vehicles used simultaneously.
Tax season is just around the corner. It’s not something most of us enjoy thinking about or dealing with — indeed, 16% of respondents to an AARP survey said they’d rather spend a night at the airport than prepare their taxes, while 36% would just as soon visit the DMV.
If you approach tax season prepared, though, and you’re able to shrink your tax bill via some savvy moves, then maybe it won’t be so bad. Here are five valuable tax tips you can use in 2020 and in the years ahead.
Tip No. 1: Be organized
It’s a little late to do a great job with this tip, but it’s not too late. Ideally, have a folder or box where you place tax-related receipts and documents throughout the year. (After all, you might spend some money on a tax-deductible medical expense in May — and you don’t want to forget about it.) Once you’re sitting down to prepare your return, all the papers you need will be in one place. Even if you’re using a tax professional to prepare your tax return, it will be very helpful to be able to hand over all your necessary documentation instead of having to hunt for it.
Tip No. 2: Take advantage of IRAs and 401(k)s
It’s vital for most of us to be saving and investing for retirement, and it’s very helpful to do so using tax-advantaged accounts such as IRAs and 401(k)s.
There are two main kinds of IRAs and 401(k)s: traditional and Roth. Traditional accounts offer an up-front tax break: You contribute money on a pre-tax basis, thereby reducing your taxable income for the year of the contribution. If you contribute, say, $5,000, you deduct that from your taxable income and avoid paying taxes on it. With a 24% tax bracket, you could shrink your tax bill by $1,200.
Roth accounts offer a back-end tax break: You contribute money on an after-tax basis, so your taxable income isn’t reduced and your tax bill for the year of contribution doesn’t shrink. But, if you follow the rules, when you withdraw money from the account in retirement, it will be tax-free income.
Tip No. 3: Keep up with changes to tax laws
Next, it’s important to keep up with developments in tax law. Otherwise, you might not realize that the amount you can contribute to various accounts has changed or that certain deductions are no longer allowed. Some years offer more changes than others — the Tax Cuts and Jobs Act of 2017 ushered in lots of change, such as doubling the standard deduction and reducing various tax rates — rules that are in effect now, for your 2019 tax return that you’ll prepare in 2020 and for future years.
Tip No. 4: Be thorough and report all your income
It can be tempting or easy to omit some income when preparing your taxes — if only because you forgot some income. That can be a costly blunder, however, and one that can be prevented if you’re organized and keep good records of all your earnings. You might have a small job on the side, for example, or you may be earning a little extra income making and selling things online.
Many sources of income will send you end-of-year documents, such as the W-2 form from your employer or 1099 forms from your bank and/or brokerage detailing income from sources such as dividends or interest. That information also makes its way to the Internal Revenue Service, which is expecting you to report it. Failure to do so will likely be noticed.
Tip No. 5: Consider hiring a tax pro
Finally, because tax laws are so complicated and subject to change, consider not preparing your tax return on your own. If your situation is very simple, such as if you’re single, with no dependents, no investments, and no income other than a salary, you could do well to use a tax preparation software package.
But those with more complicated financial lives should consider using a good tax pro’s services. After all, he or she spends a lot of time keeping up with tax laws and knows about available strategies that can minimize your taxes. But don’t just sign up with a stranger at a kiosk you run across — ask for strong recommendations from friends or family or look into nearby enrolled agents (those who are authorized to represent you before the IRS) and interview a few before selecting who to hire.
Need more info or need a question answered? Feel free to contact us and give us a call.
Here are 10 things to consider as you weigh potential tax moves between now and the end of this year.
Set some time aside to plan
Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31st, so don’t wait till the last minute.
Defer income to next year
Consider opportunities to defer income to 2020, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2020) could make a difference on your 2019 return.
Factor in the AMT
If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT, effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2019, prepaying 2020 state and local taxes probably won’t help your 2019 tax situation and could hurt your 2020 bottom line. Taking time to determine whether you may be subject to the AMT before you make any year-end moves could help you avoid a costly mistake.
Bump up withholding to cover a tax shortfall
If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (on Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments. With all the recent tax changes, it may be especially important to review your withholding in 2019.
Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2019 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.
Take any required distributions
Once your reach age 70 ½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required – the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
Weigh year-end investment moves
You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
Beware the net investment income tax
Don’t’ forget to account for the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (AGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).
Get help if you need it
There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation and help you determine if any year-end moves make sense for you.
Need more help? Please contact or make an appointment with us here, we are here to help.
There are several reasons why it makes sense to hire a tax consultant. Even when it might represent an additional expense on our budget, the advantages are more. Firstly, they are experts in the matter, they have to stay updated with IRS tax code changes, and they could even help you get a higher tax return.
Tax Consultants Are the Pros
Tax advisers are accounting professionals who must obtain different certifications in order to provide guidance and consultation services. They must pass different annual regulatory tests to keep their licenses, too. This means tax consultants are more familiarized with the IRS Tax code, they know how the system works, and you might benefit from such knowledge.
Just like you would hire a professional contractor for your home improvements, or a professional doctor for your medical needs, you want should want to hire a professional tax adviser to take care of your tax duties.
Tax Consultants Are Updated with IRS Tax Code
The IRS Tax Code is over 2000 pages long, without including additional explanations and resources. Every year, there are different Tax Law changes and reforms. Tax consultants must keep up to date in regards to those modifications. This is particularly important if you’ve been doing your taxes yourself. There might have been updates you were not aware of until now.
If you worry about making a mistake when filing your taxes, tax consultants will give you the peace of mind you needed.
You Might Be Able To Get A Higher Tax Return
Getting back to what we mentioned before, tax consultants know how the system works, and this can benefit you. Since most consultants also provide financial advice, they can guide you year-round so you can make smarter monetary decisions. This, in turn, can ensure that, when the time is due, you get a higher tax return.
Hiring a tax consultant can have great benefits in the long run. Whether you want it for your business or for your personal expenses, choosing the right consultant for you will definitely show results.
Managing company finances can feel like a huge task. That’s why it’s sometimes a good idea to get back to the fundamentals. For example, the more your company saves, the more your company makes.
But cutting costs isn’t always that easy. Every company has to navigate different types of expenses.
Where can you save money, and where should you leave things as they are?
You’re ready to save money for your business. Read on and discover 4 surefire ways to cut company costs and improve your bottom line.
1. Cut Unnecessary Types of Expenses
What kind of incentives are you dishing out for your employees? If things are getting tight, it may be time to re-examine that luxury coffee machine in the kitchen. Nobody likes their perks being taken away, but it’s better than having to downsize the company and let people go.
And it’s not just about incentives. Cut your power bill by hooking all electronics to power strips. At the end of the day, you can turn these off to avoid losing money to standby power.
Anytime you make a payment, ask yourself if the service is necessary. And if it is, ask yourself how you can find ways to cut costs.
Over time, these small changes can lead to big savings.
2. Negotiate Better Rates
Every business works with a variety of vendors, whether they’re selling office supplies or product materials. You should know that your rates are never set in stone. One of the best ways to cut company expenses is to head to the negotiation table.
You have more power than you might think. Many vendors are willing to lower their rates. For them, making less money is better than making no money.
Do your research beforehand to see what others are paying. Renegotiating doesn’t carry a large risk, but you don’t want to insult your vendors with a ridiculous request.
3. Reduce Your Job Requirements
Experienced workers expect larger salaries. And that experience doesn’t always translate into additional profits for your company. When you’re filling a vacancy in your business, ask yourself if you really need an employee with five years of in-person training.
By hiring recent graduates, for example, you can afford to pay them much less. Although they’re lacking in real-world knowledge, they’ll have the education they need to fulfill the role. Just be sure you choose candidates who excel at learning on the job.
4. Use Low-Cost Advertising Methods
Traditional advertising is expensive. Whether you’re running a PPC campaign or buying space in relevant magazines, the costs add up quickly. The truth is most small businesses can’t afford the level of advertising necessary to see worthwhile results.
That’s why many are turning to more cost-effective advertising solutions. If you rely on your website to convert customers, then turn your attention to search engine optimization. By improving your site’s ranking, you’ll get more eyes on your business and thus more customers.
Even brick-and-mortar locations can benefit from inbound marketing, such as creating informative articles and YouTube videos.