Tips for Resolving Disputes over Dependents
Quite frequently readers will ask how they can resolve disagreements among family members over who get's to claim a dependent. It's helpful to start with some ground rules, and my number one rule here is to prevent (if at all possible) the IRS from getting involved in family disputes. Now the IRS will get involved only if two or more people attempt to claim the same person as a dependent. So if at all possible, it's best to resolve your differences before anyone has filed their tax return.
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Differences between Dependents, Head of Household, and Earned Income Credit
People often ask me about whether they can claim dependents, whether they qualify for the head of household filing status, and whether they qualify for the earned income credit. These three tax benefits are very closely related, as are designed to help minimized the tax burden for working families. The rules in this area often cause confusion, because each tax benefit has its own, separate requirements.
The first thing to start with is dependents, for that is a common element is all three tax incentives. Both head of household and the earned income credit require that a taxpayer claim (or be eligible to claim) dependents. Dependents are, roughly speaking, persons who depend on another for their financial support, and the usual example here are children. But sons and daughters aren't the only types of relationships that can exist between a taxpayer and a dependent. Parents, grandparents, nieces and nephews, and other family relations can also qualify. The important thing to remember about dependents is there are two ways to qualify as a dependent: either under the qualifying child criteria or under the qualifying relative criteria. Claiming a dependent opens several tax saving benefits to a taxpayer: the taxpayer gets to claim one personal exemption for each dependent, and may also be eligible for the earned income credit, child tax credit, child care tax credit, education tax credits or deductions for that dependent, and medical expenses for that dependent. (By eligible to claim a dependent, I am referring to the situation where a custodial parent may waive the dependent's personal exemption in favor of the other parent, but retain eligibility for head of household and the earned income credit, a situation I call sharing the dependent-related tax breaks.)
Head of household is a separate tax benefit, one that functions by widening the income brackets to which each tax rate applies. For example, compare the income brackets for single and head of household filers found in the 2011 tax rates. To be eligible for head of household status, a taxpayer must have at least one dependent and be unmarried. So, this tax benefit is particularly well-suited for single parents. Now dependents can be of any number of family relations, but for Head of Household, the dependent must be closely related to the taxpayer by birth or marriage, such as children, parents, grandparents, nieces and nephews. There's a further restriction for Head of Household in that the dependent person must actually reside with the taxpayer, and the taxpayer must actually provide more than half of the total financial support of the dependent person. These two requirements are not always the case for dependents. For example, parents can be claimed as dependents under the qualifying relative criteria, and the parents don't necessarily need to reside with the taxpayer. But for head of household purposes, parents would need to reside with the taxpayer if the taxpayer wants to use them as their qualifying person.
The earned income credit is a refundable tax credit for lower-income families that in many cases results in the taxpayer having a negative effective tax rate, in other words that the taxpayer receives more back from the IRS than they paid in through income tax withholding. For the purpose of the earned income credit, only closely-related dependents will qualify. Specifically, children, grandchildren, brothers and sisters, nieces and nephews can qualify a taxpayer for the earned income credit. But parents, grandparents and other types of relationships won't qualify due to the age test, in which the dependent person must be under 19 or under 24 and a full-time student.
What often causes frustration are situations in which a taxpayer is caring for a younger person, but there's no relation by blood or marriage. In such cases, taxpayers might find they are eligible only for the single filing status and the dependent's personal exemption, but not head of household or the earned income credit.
Tax preparation software often includes questionnaires to help taxpayers determine whether they are eligible to claim a dependent, eligible for head of household, and eligible for the earned income credit. Many of these interview questions may seem repetitive, but that's because in each case the criteria are slightly different. The IRS has a Web tool for helping taxpayers figure out if they qualify for the earned income credit, called the EITC Assistant. But the IRS does not have (as far as I'm aware) similar Web tools for evaluating dependents and head of household situations.
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When to Expect Your Federal Tax Refund
The Internal Revenue Service issues federal tax refunds on a schedule, which they call the "refund cycle." For tax returns accepted by the IRS by 11 am on Wednesday, the IRS issue refunds the following week, with direct deposits issued on Wednesdays and checks mailed out on Fridays. By accepted, we mean that the IRS's computers have acknowledged the receipt of an electronically filed return.
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Tips for Finding the Right Tax Professional For You
Consumers have a wide range of choice when it comes to preparing their tax return. You can prepare a tax return using forms downloaded directly from the IRS, use tax preparation software from independent software publishers, or hire a professional tax preparer. You can even combine these choices, for example you could draft out your tax return on paper forms or using software before seeking out professional help.
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Tips for Preparing Form 1099-MISC
Self-employed persons and businesses of any size are required to report payments for services rendered by independent vendors by using Form 1099-MISC. For the year 2011, Form 1099-MISC reporting has become more complex, so I'll attempt to clarify the situation.
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4th Estimated Payment Due on January 17
The fourth and final estimated tax payment for the year 2011 is due on Tuesday, January 17th. (See: Publication 505.) For independent contractors, this is a perfect opportunity for you to draft out your 2011 tax return to get an idea of how much federal and state tax is due to be paid (your total tax liability), review how much as been paid in so far through previous estimated tax payments, and determine how much extra is due for 2011.
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How Soon Can You File Your 2011 Tax Return?
Generally speaking, you can file a tax return for 2011 as soon as you have received all your relevant tax documents, such as Form W-2 reporting wage income, Forms 1099 reporting interest, dividends and other types of income, and so forth.
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Organizing Your Tax Documents
January is a good time to review your finances for the previous year and start organizing the documents and information you'll need for preparing your tax return. One technique I've been using with some of my clients is to make a list of various types of income and tax-deductible expenses you had for 2011. When your tax documents arrive in the mail, you can check them off your list. In this way you'll know when all your documents have arrived, and then you'll be ready to file your tax return.
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2011 Federal Income Tax at a Glance
The following is a brief overview of tax items that are new, different or substantially revised for 2011.
The deadline to file personal tax returns is April 17, 2012. The extended deadline is October 15, 2012. This year's primary tax deadline falls on a Tuesday due to the Emancipation Day holiday in the District of Columbia, which is a federal holiday celebrated this year on Monday, April 16th. The traditional tax deadline of April 15th falls on a Sunday, and so the deadline is pushed to the next non-holiday, which this year is Tuesday, April 17th.
Capital gains and losses are reported on new Form 8949, with totals from that form reported on the Schedule D. This new reporting format coordinates with the new cost basis reporting requirement by brokers.
Standard mileage rates for 2011 are split into two amounts, each covering half the year, as follows:
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2012: A Preview of the New Tax Year
The year 2012 is likely to be a contentious year when it comes to taxation. I've put together a short list of what I think will be the key tax issues that we'll be dealing with this year.
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