Tax Primer for 2015

 

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This post may be posted on April 1st, but it’s no joke -tax season is here, and clock is ticking. Did you remember that this year you need to file your tax return before April 18, 2016?

If you can’t make it before that deadline, you may request an automatic extension of time to file. But, if you owe any tax, you must still pay it by April 18, 2016. If you owe taxes and do not pay them on or before April 18, 2016, you may end up owing a late payment penalty in addition to the taxes already owed. If you do not have the money to pay the taxes you owe, file your return anyway. If you do not file your return when you are legally obligated to do so, the IRS has the right to collect the tax you owe and interest and penalties. There are collection alternatives available to you if you cannot pay your taxes, but these alternatives are not available if you do not file your return. These alternatives include installment plans, offers-in-compromise, and placing IRS collection activities regarding your tax account on hold until your financial situation improves.

Whether you need to file depends on your income, you filing status, and your age.

What income is taxable?

Some types of taxable income are:

  • Compensation for services, such as wages, fees, commissions, fringe benefits
  • Gross income from your own business
  • Internet
  • Dividends
  • Rent received
  • Tips
  • Alimony received
  • Annuities
  • Advanced earnings for services to be performed in the future
  • Back pay awards, from settlements or judgments (also includes unpaid life insurance premiums and unpaid health insurance premiums)
  • Severance pay
  • Income from an interest in an estate or trust
  • Pensions
  • Income from discharge of indebtedness (such as reaching an agreement with a credit card company to pay less than what is due).

If you work and earn wages, your income is generally taxable income. Many times, your employer has already withheld taxes for you and submitted these taxes to the federal and state governments. Often, the amounts withheld are too high, and the government will return the excess amount to you in a refund when you file a tax return.

If you receive unemployment compensation, you will receive a Form 1099-G showing the total amount you received in 2015. Unless you have elected to have taxes withheld from your weekly checks, you are responsible for reporting the income and paying income tax on the amount received.

What income is not taxable?

Non-taxable income includes:

  • Value of accident/health insurance plan coverage paid by employer
  • Contributions by your employer for long-term health care
  • Amount of salary reduction due to contributions for FSA or HSA
  • $5,250 of qualified employer-provided educational assistance
  • Retirement plan contributions by employer.

Generally, you do not pay taxes on benefits that you receive from a public welfare fund, such as TANF, GA, child care grants, and housing assistance programs. SSI is also not taxable income.

If you receive Social Security retirement benefits or disability benefits, your income is not taxable if it is the only income you received throughout the year. If you had other sources of income, from work to investments, some Social Security or disability benefits may be taxable. About 1/3 of people who get Social Security have to pay income taxes on their benefits. At the end of each year, you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. You can use this statement when you complete your federal income tax return to find out if you have to pay taxes on your benefits.

Filing Status

In most cases, but not all, you marital status on the last day of the year determines your filing status for the whole year. For example, if you were married on December 31, 2015, you are considered married for the entire year. If you are divorced on December 31, 2015, you are considered unmarried for the whole year.

There are five filing statuses: (1) single, (2) married filing jointly, (3) married filing separately, (4) head of household, and (5) qualifying widow(er) with dependent child. The definitions of these terms for federal tax purposes are listed below.

SINGLE (UNMARRIED). To be single (unmarried), you must be unmarried on the last day of the year or legally separated from your spouse under a divorce or separate maintenance decree. State law governs whether you are married or legally separated or divorced. If you obtain a court decree of annulment, which hold that no valid marriage ever took place, you are considered unmarried. You must also amend (correct) returns for the past three years (or whatever years are not barred by the statute of limitations), changing you filing status to single or head of household.

What are the conditions for filing as married?

For federal tax purposes, marriage means only a legal union. One of the following conditions must also be met:

  • You are married and living together as spouses;
  • You are living together in a common law marriage that is recognized in the state where the common law marriage began;
  • You are married and living apart, but not legally separated under a decree of divorce or separate maintenance; or
  • You are separated, but not under a final court decree of divorce.

If your spouse died during the year, you are considered married for the whole year of filing purposes.

MARRIED FILING JOINTLY. If you are married, you and your spouse can choose to file as married filing jointly. One a joint return, you report your combines expenses and deduct your combined expenses. You can file your joint return even if only one of you had income. If you and your spouse decide to file a joint return, you taxes may be lowered than if you choose a different filing status. Also, your standard deduction may be higher, and you may qualify for tax benefits and credits that do not apply to all other filing statuses.

If we file as married filing jointly, who is responsible for taxes owed?

If you choose this filing status, you and your spouse are both jointly and individually responsible for any taxes that are owed. This means that, even if your spouse earned the money, the IRS can seek payment of any taxes due not just from your spouse, but from you as well. There are ways to be relieved of this responsibility – known as innocent spouse relief, relief by separation of liability, and equitable relief.

Finally, if you file a joint return with your spouse and are due a refund, but think that the refund may be applied to a past-due debt of your spouse (such as child support arrears or old tax liabilities), you may file an Injured Spouse Form 8379. The IRS will then divide the refund and send your share of the refund to you while keeping only your spouse’s share to apply to your spouse’s debts.

MARRIED FILING SEPARATELY. If you are married, you and your spouse can choose to file as married filing separately. This filing status may benefit you if you only want to be responsible for your own tax or if it results in a lower tax rate. If you and your spouse cannot agree to file a joint return, use this status unless you qualify as head of household.

Usually, if you are married and you choose this filing status, you tax is higher than if you file jointly. Also, you can only report your own income, personal exemptions, and credits. You can only claim an exemption for your spouse if your spouse had no income and was not the dependent of another person. Finally, there are certain restrictions if you choose this filing status: in most cases, you cannot take the credit for child and dependent care expenses; you cannot take the earned income tax credit, you cannot take the education credits; if you lived with your spouse during any part of the year, you cannot claim the credit for the elderly or disabled – you will have to include as income any Social Security or equivalent railroad retirement benefits you received and you cannot roll over amounts from a traditional IRA into a Roth IRA. If your spouse itemizes deductions, you cannot claim the standard deduction.

The following credits and deductions are reduced at income levels that are half of those for a joint return: the child tax credit, the retirement savings contributions credit, itemized deductions, and the deduction for personal exemptions

HEAD OF HOUSEHOLD. The head of the household filing status can be used if you are unmarried or considered unmarried on the last day of the year, you paid more than half of the cost of keeping up a home for the year, and a “qualifying person” lived with you in your home for more than half of the year. If the qualifying person is your dependent parents, he or she does not have to live with you.

The tax rate for head of household will generally be lower than rates for single or married filing separately. The standard deduction will be higher as well.

QUALIFYING WINDOW(ER) WITH DEPENDENT CHILD. You may be eligible to use qualifying window(er) with dependent child as your filing status for two years following the year your spouse died. For example, if you spouse died in 2015 and you have not remarried, you may be able to use this filing status for 2016 and 2017. Using this filing status allows you to use the lower joint return rates and the highest standard deduction amount, but you cannot file a joint return. To use this filing status, the child or children must live in your home all year, and you must have paid more than half the cost of keeping up the home (rent, electricity, etc.).

If you cannot use any of the above listed filing statuses, you must file as single.

Can I change my filing status?

 Once you file a joint return, you cannot change your mind and change the return to a separate return. But if you file a separate return, you can generally change to a joint return any time within three years of the due date of the returns.

It is important to select the correct filing status, since it affects your exemptions, standard deductions, and other credits.

Exemptions

Personal exemptions reduce your taxable income. Generally, you can deduct $4,000 for each exemption you claim. You are generally allowed one exemption for yourself, one for your spouse and one for each of your dependents. (If you are a nonresident alien, other than a resident of Canada or Mexico, you can only use an exemption for yourself. You are not allowed to claim exemptions for dependents.) If you can be claimed as a dependent by another person, you cannot take a personal exemption, even if the other person does not actually claim you as a dependent. You spouse is never considered you dependent.

A dependent is a “qualifying child” or “qualifying relative.”

If you can claim an exemption for your dependent, the dependent cannot claim his or her own exemption if he or she files a tax return. You cannot claim a married person as a dependent if he or she filed a joint tax return.

You must list the Social Security number for any dependent for whom you claim an exemption. Without a Social Security number, the exemption may be disallowed and your refund may be reduced. If the dependent does not have a Social Security number, you should apply for one with the Social Security Administration. If you do not have the Social Security number by the time you need to file your return, file for an automatic extension of time to file the return. If your dependent is not eligible for a Social Security number, your dependent must apply for an individual taxpayer identification number.

Deductions

Deductions reduce your taxable income and reduce the tax you must pay. Itemized deductions include mortgage interest paid throughout the year, real property taxes paid, charitable contributions, and unreimbursed business expenses.

You should use the standard deduction if it is higher than the total of your itemized deductions. The standard deduction depends on your filing status and whether you are 65 or older or blind. The standard deduction is $12,600 for married filing joint return; $9,250 for head of household; $6,300 if you file married filing separately or single. The amount of the deduction you can use is listed on your tax return form.

Credits

Credits may increase your tax refund and lower the amount of tax you owe the IRS. Each credit has different rules and works differently. Some credits simply reduce and possibly eliminate the tax you owe. Other credits may actually put money in your pocket. You must file your tax return to claim credit.

The Earned Income Tax Credit is a refundable credit that is only available to you if you are a United States citizen or resident alien with a Social Security number and if you have earned income. Your earned income credit may either eliminate any tax you owe the IRS or may result in an increased refund to you. If you receive a Social Security number after you file your tax returns and you qualify for the credit, you may go back up to three years to claim the credit by filing an amended tax return. This is true even if you used an Individual Taxpayer Identification Number (ITIN) or invalid Social Security number on your previous returns.

You must have earned income to apply for this credit. This includes income from wages, tips, and self-employment. The following are not considered to be earned income: unemployment benefits, child support, Social Security benefits, pension, alimony, welfare benefits, food stamps, job training benefits, and interest.

You must use the filing status single, married filing jointly, head of household, or qualifying widower. You cannot use married filing separately. You must file a form 1040 to claim this credit. You are not allowed to use Form 1040EZ or 1040A.

You cannot claim the Earned Income Tax Credit if you have investment income, such as dividends, interest, or rents, of more than $3,400 for the taxable year 2015.

A qualifying child for an Earned Income Tax Credit is not the same as a qualifying child for purposes of filing status. A qualifying child for the EITC must meet each of the following relationship, age, residence, self-support, and citizen/resident tests. All of these tests must be satisfied in order for a child to qualify.

  • The relationship test is satisfied if the child you are claiming is your son, daughter, adopted child, stepchild, grandchild, or great-grand child. You may also claim your brother, sister, step-brother, step-sister, niece, nephew, or descendants of these relatives, or an eligible foster child, as long as the child was placed with you by an authorized placement agency.
  • The age test is satisfied if the child is under age 18 at the end of the year or full-time student under age 24. To be full-time student the child must be enrolled in school full-time for at least five months of the year.
  • The residence test is satisfied is the child lives with you in the United States for more than half the year.
  • The self-support test is satisfied if the child cannot provide more than half of his or her own support.
  • The citizen/resident test is satisfied if the child has a valid Social Security number.

The Child Tax Credit may be available to you if you have a child who was under the age of 17 at the end of 2015. You must use a Form 1040, 1040A, or 1040NR (not Form 1040EZ). The child tax credit will not affect your ability to receive food stamps, public housing, welfare, or SSI.

To qualify for the credit, you must be raising the child as your own. The child can be your son. Daughter, stepson, stepdaughter, adopted child, brother, sister, niece, nephew, grandchild, or eligible foster child (one placed with you by a court or authorized placement agency). You must be able to get a dependent exemption on your return for the child and the child must be a citizen or resident alien with a Social Security number. If the child does not have a Social Security number when you file the return, you should apply through the Social Security Administration for a number and use Form 4868 to request an automatic extension of time to file your tax return until you get the child’s Social Security number.

For each child you claim, $1,000 is deducted from the taxes owed to the government. Generally, the credit does not pay you a refund; it simply lowers your taxes. However, depending on your income, you may qualify for the Additional Child Tax Credit. If you qualify for this credit, you will receive a refund if the child tax credit reduced the taxes you owe and generates a refund. You must use IRS Form 8812 to claim the additional child tax credit.

The Child and Dependent Care Tax Credit provides a credit to you by reducing your taxes by a percentage of the money you spent on child and adult care because you needed to go to work. You must have at least one dependent under the age of 13, or a dependent spouse or child who is physically or mentally disabled. The amount of the credit will depend on your income and the amount of money you spent on eligible care during the year. The child or adult for whom you are claiming the credit needs to be a U.S. citizen or resident alien with a Social Security number. You also need a Social Security number to claim the credit. If you file your return using an ITIN, you are not able to claim this credit, You cannot use Form 1040EZ to claim this credit.

Summary

Read and understand your return before you sign and file it! You are ultimately responsible for everything on your return, whether you had it prepared for you or you prepared it yourself. When you sign and file your return, you are stating that you have reviewed every line of the return and you agree with everything on the return. Be careful! If you do not understand an entry made by a preparer, make sure you ask questions until you understand how and why the preparer completed the return, and only sign the return if you agree with it.

About teperlaw

I am an attorney practicing family law, immigration and wills and estate planning. You can find out more about me and my firm by visiting my website at: www.teperlaw.com 106 W. Franklin Ave. Pennington, NJ 08534 (609) 737-3030
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