New parents have their work cut out for them. Not only are they dealing with lost sleep, they also face the extra cost of raising a child. At least there are a lot of potential tax breaks available to them. Check out this list and share it with any new parents you know.
Child Tax Credit
Tax law changes this year not only double the size of the Child Tax Credit, they make it available to more parents than ever before. The credit increases to $2,000 from $1,000 (with $1,400 of it being refundable even if no tax is owed). Meanwhile, the eligibility phaseout threshold increases sharply to $400,000 from $110,000 for married joint filers (and to $200,000 for single taxpayers).
Child and Dependent Care Credit
If you pay a nanny, babysitter, daycare or a relative to take care of your child while you and your spouse are at work, you can claim the Child and Dependent Care Credit. It’s up to $1,050 on $3,000 in expenses for one child and twice that for two or more children. The key is that you and your spouse (if you are married) must both be working, and you can’t claim expenses for overnight care.
Below the kiddie tax threshold
If you have property that produces income, such as bonds, stocks, mutual funds, interest or realized capital gains, you can lower your tax by transferring a certain amount of that income to your children. Why? Your child has a lower tax rate than you do on unearned income. This works up to a certain dollar limit before “kiddie tax” rules come into play.
Adoption Credit
About 135,000 children are adopted in the U.S. each year. If you are welcoming an adopted child into your family, the Adoption Credit can be claimed on up to $13,840 in expenses, such as fees, legal counsel and court costs.
Educational benefits of a 529 plan
There are many provisions in the tax code to help cover the high cost of education. Consider establishing 529 college savings programs for your new addition. While contributions are made with after-tax dollars, any investment gains are tax-free as long as they’re used to pay qualified education expenses. The tax reform passed last year now also allows you to use these funds to pay private elementary and secondary school tuition as well as college.
Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data.
Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be hard to make. Here are some elements that good business partnerships require:
Compatible strengths
Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
Defined roles and limitations
Before going into business, outline who will have what responsibilities. Agree which things need consensus and which do not. Having this understanding upfront will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fulfill a skill gap in your partnership.
A conflict resolution strategy
Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
A goal-setting system
Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action, and the expected date of completion.
An exit strategy
It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship. This should outline how you exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.
Whether it makes sense to amend your return depends on which of these situations you’re in:
If you owe the IRS
If you discover an omission on your tax return that results in you owing additional tax, you need to correct it with an amendment and provide the tax due.
Don’t delay if this is your situation. If the IRS discovers the omission before you do, they may add interest and penalties to your bill.
If you are due a refund
If you find a mistake that should result in getting a larger refund check, you can claim it by filing an amended return. But there are several reasons it may not be worth it.
It may open a can of worms. In many cases, amending your federal return means also amending your state returns. Multiply the hassle if the error spans across two or more years.
It puts a spotlight on you. While your original return may have passed through the IRS’s automated system without a hitch, now that it’s amended you can virtually guarantee it will get a closer look. If you have anything else in your return that can trigger an audit, like business deductions, charitable donations, or other credits, this can be a concern.
It may take a long time to get a refund. The IRS tries to process your original return within three weeks. No such luck for an amended return. It can take several months to get an amended return processed and see that extra refund, even as long as 1½ years in rare cases.
It stretches out the audit window. The IRS generally has a three-year window to audit returns and request changes. When you file an amendment, you extend the audit time frame.
It may be too late. Depending on when you notice an error and how far it goes back, it may be too late. The deadline to file an amendment is generally the later of three years after the original return was filed, or two years after the tax for that year was paid.
Ultimately you have to weigh the extra money you could get from amending against the potential problems it could cause. If it’s worth it, get an amendment filed.
Call to get help with an amendment or if you have other tax questions.
There’s a new student loan repayment program that forgives some student loan debt if other payments are made. This new debt forgiveness is creating a tax surprise for the unsuspecting student. Here is what you need to know.
The debt forgiveness program dilemma
To combat the hardship of high student loan debt, a popular new repayment option is the income-based repayment plan. These plans limit monthly payment amounts to a percentage of discretionary income. They also limit the number of repayment years. If your loan is not paid by a predetermined future date and you’ve been making the payments as agreed, the balance of the loan is forgiven.
While the prospect of having a portion of the debt canceled is enticing, it can create an unexpected tax burden if you are not prepared. Here’s why it may be a problem:
Canceled debt is considered taxable income. When a portion of a loan is forgiven, that amount is considered taxable income in the year in which the debt is cancelled. While there are exceptions, this is the general tax rule.
A 1099-C is issued to you and the IRS. Upon the forgiveness of the student loan debt, the loan servicing company will issue a Form 1099-C titled “Cancellation of Debt”. A copy of the form will be delivered to both you and the IRS informing both parties of the amount of forgiven debt. This amount needs to be included on your Form 1040.
Taxes are due at filing. The entire amount will likely be taxed at the taxpayer’s highest marginal tax rate. This amount is due in its entirety at the annual tax-filing deadline. If a large amount is due, there may also be additional underpayment fees tacked on by the IRS.
Some exceptions apply
Before you begin to worry about a surprise tax bill, consider your other options:
Tax-exempt debt forgiveness programs: There are a few programs that consider the student loan canceled debt tax-exempt. The two most common are for students that become public service employees and teachers. So when you have canceled debt, conduct a review to see if your employment complies with the possible tax exclusion.
Insolvency exclusion: The IRS provides a way to exclude a forgiven debt from taxable income if you can prove you are financially insolvent. The IRS defines “insolvency” as when a taxpayer’s total liabilities exceed his or her total assets. To claim this exclusion, an additional form is filed with your tax return. Make sure you can back up any claims you make, because the IRS may request to see proof.
IRS repayment plan: If you have a balance due as a result of the canceled debt and cannot pay it in full by the deadline, the IRS has payment plans available. There will be additional penalties, interest and possibly setup fees that will be added to the amount due. This is not a great option, but it is better than not paying the balance at all.
Even with the additional tax liability that is realized, debt relief is generally a good deal for most. The hardship comes if you are not prepared for how to handle the tax payment that becomes due. Before signing an agreement that relieves debt, it makes sense to review your situation to avoid any surprises on your tax bill.
If not tracked and managed properly, capital gains tax can come as a large surprise at tax-filing time. In fact, many taxpayers don’t realize they have a capital gain until they get their 1099 form in January and see a capital gain distribution. Here’s what you need to know.
Understand capital gains and their taxability
Capital gains are recognized when you sell a capital asset for more than your basis in that asset. Capital assets are typically something of value like your home, a car and other investments. Basis is typically the original cost of the asset being sold. The difference between the sales price of the asset and your basis is the amount of the taxable capital gain.
The IRS taxes short-term capital gains for assets owned less than one year as ordinary income up to 37 percent, but taxes long-term capital gains at a maximum 23.8 percent (20 percent plus a potential 3.8 percent net investment tax).
Ways to manage capital gains tax
Hold investments for more than one year. Long-term gains (assets sold more than a year after acquisition) are taxed at the lower capital gains rate. If you are able to hold assets for more than a year, you will save tax dollars by avoiding the gain being classified as ordinary income.
Sell large gains in low-income years. If you expect lower income this year, it might be a good time to sell some of your capital gain investments. Since the capital gains tax brackets follow the marginal income tax brackets, if you are in a lower income tax bracket in a given year you may pay a lower capital gains tax. You can take advantage of this with both long-term and short-term gains.
Harvest large losses in high-income years. If you have a high-income year you can save taxes by selling investments that have lost money. Capital losses help reduce your capital gains with the tax liability calculated on the net amount. Be aware of IRS netting rules that require you to net long-term losses with long-term gains and short-term losses with short-term gains. If one results in a net loss and the other a net gain, they are then netted against each other. If the final amount results in a net loss, the most you can deduct against ordinary income in one year is $3,000. The excess losses must then be carried forward to future tax years.
Gift your investments to your kids. You are allowed to gift up to $15,000 per year to each of your kids ($30,000 per married couple). If you gift appreciated investments to a child under 19 and they then sell that investment, each child can receive favorable tax treatment on up to $2,100 from their taxes. Be careful if you go over the annual exemption. Higher levels of unearned income for children, including capital gains, is now subject to estate and trust tax rates.
Consider donating property. If you donate appreciated property to a qualified charity you can deduct the donation as an itemized deduction. Even better, if the property is owned by you for more than one year, you can deduct the current market value without being subject to capital gain tax.
Sale of primary residence exclusion. If you sell your home, you may qualify to exclude $250,000 of the gain from capital gains tax ($500,000 if married filing jointly). In order to qualify, you need to own the home and have occupied the home as your primary residence for at least two of the previous five years. The two years do not need to be simultaneous.
There are many factors that come into play when buying or selling an asset. Just make sure the tax implications are considered before you make the transaction.
As always, should you have any questions or concerns regarding your situation please feel free to call.
