Kids' Day Camp Expenses May Qualify for a Tax Credit

 

Day camps are common during school vacations and the summer months. And their cost may count towards the child and dependent care credit.

Here are five things parents should know:

1. Care for Qualifying Persons. You may qualify for the credit whether you pay for care at home, at a daycare facility, or a day camp. Your expenses must be for the care of one or more qualifying persons, such as your dependent child under age 13.

2. Work-Related Expense. In other words, you must be paying for the care so you can work or look for work.

3. Expense Limits. The total expense you can claim in a year is limited. The limit is generally $3,000 for one qualifying person or $6,000 for two or more.

4. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.

5. Excluded Care. Certain types of care don’t qualify for the credit, including:

• Overnight camps, Summer school tutoring,
• Care provided by your spouse or child under age 19 at the end of the year, and
• Care given by a person you can claim as your dependent.

Remember that this credit is not just a school vacation or summer tax benefit. You may be able to claim it at any time during the year for qualifying care. For more information, please call the office at 816-220-2001 or visit us online at www.AFITonline.com

Tax Withholding for Seasonal and Part-Time Employees

 

Many businesses hire workers for only part of the year, especially in the summer. The IRS classifies these employees as seasonal workers, defined as employees performing labor or services on a seasonal basis (i.e., six months or less). Examples of this kind of work include retail workers employed exclusively during holiday seasons, food service and other workers at sports events, or laborers employed during the harvest or commercial fishing season.

Seasonal employees are subject to the same tax withholding rules that apply to other employees, and all employees should fill out a W-4 when starting a new job. Employers use this form to determine the amount of tax to be withheld from an employee’s paycheck. Taxpayers (including students) with multiple summer jobs will want to ensure all their employers withhold adequate taxes to cover their total income tax liability.

Using the Withholding Calculator

If you've recently started a seasonal job, now is an excellent time to perform a paycheck check-up using the Withholding Calculator, a special tool on the IRS website that can help taxpayers with part-year employment estimate their income, credits, adjustments, and deductions more accurately. It also checks to see whether a taxpayer is having the correct amount of tax withheld for their financial situation.

• First, the calculator asks about a taxpayer's employment dates and accounts for a part-year employee's shorter employment rather than assuming that their weekly tax withholding amount would be applied to a full year.
• Next, the calculator makes recommendations for part-year employees accordingly. If a taxpayer has more than one part-year job, the Withholding Calculator can also account for this.

Taxpayers should have a completed prior-year tax return and need their most recent pay stub before using the Withholding Calculator.

Calculator results depend on the accuracy of information entered. When circumstances change during the year, taxpayers should return to the calculator to check whether they should adjust their withholding. For taxpayers working for only part of the year, it's best to do a paycheck check-up early in their employment period so their tax withholding is most accurate.

The Withholding Calculator does not request personally identifiable information, such as name, Social Security number, address, or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, taxpayers should watch out for tax scams, especially via email or phone, and be alert to cybercriminals impersonating the IRS. Remember, the IRS does not send emails about the calculator or the information entered.

If You Need To Adjust Your Withholding

If the calculator results indicate a change in withholding amount, taxpayers should complete a new Form W-4 and submit it to their employer as soon as possible. Employees with a change in personal circumstances that reduces the number of withholding allowances should submit a new Form W-4 with corrected withholding allowances to their employer within 10 days of the change.

As a seasonal worker, you may not be required to file a federal or state return if the wages you earn at a seasonal job are less than the standard deduction; however, if you work more than one job, you may end up owing tax.

As you can see, seasonal workers have unique tax situations. If you have any questions about your tax situation, don't hesitate to call the office today.

Saving for Education: Understanding 529 Plans

 

Many parents are looking for ways to save for their child's education, and a 529 Plan is an excellent way to do so. Even better is that, thanks to the passage of tax reform legislation in 2017, 529 plans are now available to parents wishing to save for their child's K-12 education as well as college (two and four-year programs) or vocational school.

The SECURE Act of 2019 expanded the 529 Plan to include fees, books, supplies, and equipment for apprenticeship programs and repayment of principal and interest on student loan debt for the designated beneficiary or the beneficiary's sibling, up to a lifetime limit of $10,000.

You may open a Section 529 plan in any state, and there are no income restrictions for the individual opening the account. Contributions, however, must be in cash, and the total amount must not be more than is reasonably needed for higher education (as determined initially by the state). A minimum investment may be required to open the account, such as $25 or $50.

Each 529 Plan has a designated beneficiary (the future student) and an account owner. The account owner may be a parent or another person and typically is the principal contributor to the plan. The account owner is also entitled to choose (and change) the designated beneficiary.

Neither the account owner nor beneficiary may direct investments. Still, the state may allow the owner to select a type of investment fund (e.g., fixed-income securities) and change the investment annually as well as when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalties (more about this topic below).

Unlike other tax breaks for higher education funding, such as the American Opportunity and Lifetime Learning Tax Credits, 529 plans aren’t limited to funding only tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. However, individual state programs could have a more narrow definition, so check with your particular state.

Tax-Free Distributions

Distributions from 529 plans are tax-free as long as they are used to pay qualified higher-education expenses for a designated beneficiary. Distributions are tax-free even if the student claims the American Opportunity Credit, Lifetime Learning Credit, or tax-free treatment for a Section 530 Coverdell Education Savings Account (ESA) distribution - provided the 529 plan distributions aren't covering the same specific expenses.

Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. Room and board also qualify for someone who is at least a half-time student. Also, starting in 2018, qualified expenses include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

Qualified expenses also include computers and related equipment used by a student while enrolled at an eligible educational institution; however, software designed for sports, games, or hobbies does not qualify unless it is predominantly educational in nature.

Federal Tax Rules

Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes, but many states offer deductions or credits. Earnings on contributions grow tax-free while in the plan. Distributions for a purpose other than qualified education are taxed to the one receiving the distribution. In addition, the taxable portion of the distribution will incur a 10 percent penalty, comparable to the 10 percent penalty that applies to Coverdell ESAs. Also, the account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them - thus, they qualify for the up-to-$17,000 annual gift tax exclusion in 2023 ($16,000 in 2022). One contributing more than $17,000 may elect to treat the gift as made in equal installments over that year and the following four years so that up to $85,000 can be given tax-free in the first year.

Estate Tax. Funds in the account at the designated beneficiary's death are included in the beneficiary's estate - another odd result since those funds may not be available to pay the tax. Funds in the account at the account owner's death are not included in the owner's estate, except for a portion where the gift tax exclusion installment election is made for gifts over $17,000 ($16,000 in 2022). Here is an example: If the account owner made the election for a gift of $85,000 ($80,000 in 2022), a part of that gift is included in the estate if the owner dies within five years.

A Section 529 plan can be an especially attractive estate-planning move for grandparents. There are no income limits for contributing, and the account owner giving up to $85,000 ($80,000 in 2022) avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.

State Tax. State tax rules are all over the map. Some reflect the federal rules, and some are quite different. For an overview of each state's 529 plan, see: College Savings Plans Network (CSPN).

Looking Ahead

Starting in 2024, 529 college savings plans maintained for at least 15 years can be rolled over to a Roth IRA. Any contributions (and earnings on those contributions) to the 529 plan made within the last five years are not eligible. The rollover must be trustee to trustee, with a lifetime limit of $35,000 per account beneficiary. Rollovers are subject to Roth IRA annual contribution limits.

Seek Professional Guidance

Considering the differences among state plans, the complexity of federal and state tax laws, and the dollar amounts at stake, please call the office and speak to a tax and accounting professional before opening a 529 plan.

PAY YOURSELF FIRST!!

 

Automate a % of your income toward savings/investments.

If you only save/invest the leftover scraps, then don’t be surprised when you only have leftover scraps to retire on!!

What To Do if You Missed the Tax Deadline

 

Tuesday, April 18, 2023, was the deadline for most taxpayers to file their tax returns. If you haven't filed a 2022 tax return yet, it's not too late.

First, gather any information related to income and deductions for the tax years for which a return is required to be filed, then call the office. If you are owed money, the sooner you file, the sooner you will get your refund. If you owe taxes, file and pay as soon as you can, which will stop the interest and penalties you owe.

Some taxpayers filing after the deadline may qualify for penalty relief. Those charged a penalty may contact the IRS by calling the number on their notice and explaining why they couldn't file and pay on time.

For 2022 tax returns due April 18, 2023, some taxpayers automatically qualify for extra time to file and pay taxes due without penalties and interest, including:

• Some disaster victims. Individuals living or working in a federally declared disaster area have more time to file and pay what they owe.
• Taxpayers outside the United States. U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico, including military members on duty who don't qualify for the combat zone extension, may qualify for a two-month filing and payment extension.
• Members of the military who served or are currently serving in a combat zone may qualify for an additional extension of at least 180 days to file and pay taxes.
• Support personnel in combat zones or a contingency operation in support of the Armed Forces may also qualify for a filing and payment extension of at least 180 days.

The military community can also file their taxes using MilTax, a free tax resource offered through the Department of Defense. Eligible taxpayers can use MilTax to file a federal tax return electronically and up to three state returns for free.

If You Don't File, You May Miss Out on a Refund

Every year, more than 1 million taxpayers choose not to file a return and miss out on receiving a refund due to potential refundable tax credits. The most common examples of these refundable credits are the Earned Income Tax Credit and Child Tax Credit. For example, the IRS estimates nearly 1.5 million people did not file a tax return for 2019 and missed out on an estimated average median refund of $893 (i.e., half of the refunds are more than $893, and half are less).

Taxpayers usually have three years to file and claim their tax refunds. If they don't file within three years, the money becomes the property of the U.S. Treasury. However, the three-year window for 2019 unfiled returns was postponed to July 17, 2023, due to the COVID-19 pandemic emergency.

How To Make a Payment

If you owe money but cannot pay the IRS in full, pay as much as possible when you file your tax return to minimize penalties and interest. The IRS will work with taxpayers suffering financial hardship. Taxpayers with a history of filing and paying on time often qualify for administrative penalty relief. A taxpayer usually qualifies if they have filed and paid promptly for the past three years and meet other requirements. However, if you continue to ignore your tax bill, the IRS may take collection action.

There are several ways to make a payment on your taxes: credit card, electronic funds transfer, check, money order, cashier's check, or cash. If you pay your federal taxes using a major credit card or debit card, there is no IRS fee for credit or debit card payments, but processing companies may charge a convenience or flat fee. It is important to review all your options. The interest rates on a loan or credit card could be lower than the combination of penalties and interest imposed by the Internal Revenue Code.

What To Do if You Can't Pay in Full

Taxpayers who cannot pay the full amount owed on a tax bill are encouraged to pay as much as possible. By paying as much as possible now, the interest and penalties owed will be less than if you pay nothing. Based on individual circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, a temporary delay, or an offer in compromise. Don't hesitate to call if you have questions about these options.

Direct Pay. For individuals, IRS Direct Pay is a fast and free way to pay directly from your checking or savings account. Taxpayers who need more time to pay can set up either a short-term payment extension or a monthly payment plan.

Payment Plans. Most people can set up a monthly payment plan or installment agreement that gives taxpayers more time to pay. However, penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan. You should pay as much as possible before entering into an installment agreement.

Cash Payments. Individual taxpayers who do not have a bank account or credit card and need to pay their tax bill using cash can make a cash payment at participating PayNearMe Company payment locations (places like 7-Eleven). Individuals wishing to take advantage of this payment option should visit the IRS.gov payments page, select the cash option in the "Other Ways You Can Pay" section, and follow the instructions.

What Happens if You Don't File a Past Due Return

It's important to understand the ramifications of not filing a past-due return and the steps that the IRS will take. Taxpayers who continue not to file a required return and fail to respond to IRS requests for a return may be considered for various enforcement actions, including substantial penalties and fees.

Need Help Filing Your 2022 Tax Return?

If you haven't filed a tax return yet, don't delay. Call the office today to schedule an appointment as soon as possible.

Pay Off Your Debt...

 

"Yep, I want you to pay off debt as quickly as possible, but I want you to make sure you go about it in a wise way. Please don't take from any existing retirement investments. It may seem like that money is just sitting there waiting to be used, but what it's really doing is growing. If you withdraw it early, you'll owe a ton in taxes and fees, not to mention what that investment would have grown into.

You also need a $1,000 emergency fund set aside BEFORE you begin paying off debt. Keep that separate and use it only for true emergencies.

Also, don't use things like home equity lines of credit (HELOCs) or debt consolidation. Long story short, those only move the debt around and keep you in debt longer.

DO make a strict budget, and stick to it! Keep an emergency fund in place, find other sources of income, and sell things you don't need. Throw all of that extra money at the debt and use the debt snowball method to speed up the process. (If you're not sure what that is, just Google "Dave Ramsey Debt Snowball".)

Debt is a TRAP. Without a ton of payments, you can make your own decisions about what to do with your money. Without payments, you get to make your own decisions about what to do with your LIFE."  Dave Ramsey

A tax professionals observations from this tax season.

 

The following post was written by Keith Schroeder

I published this over on the FB page for my blog. It should prove of interest to folks here.

Some observations from this tax season.

When I started this experiment (the blog and hence any social media presence I have) it wasn't to fill in all that free time I wanted to fill. Instead, the goal was to show the world the view from my side of the desk. 

Every tax season is different in its own way. 

Last week a guy walks into the office and demands we take him on as a client. He was informed we are not taking new clients. He blows up saying, "You were taking new clients last week!"

Well. no. No we were not.

He persisted so I told him a short story before kicking him out. The story: You are filling the tank on your car. When it is full do you keep pumping more fuel, allowing it to spill on the ground, while saying, 'I was filling my tank 10 minutes ago so my tank is obligated to take more fuel now?' He got more angry so out the door he went. 

Moral of the story? Even if I were starving I would not have taken him on as a new client. Not everyone is a potential client.

Of course that is the normal part of tax season every year. Some "no's" are easier than others.

Here is the new twist for this tax season. (Well, not exactly new, but from a new source.)

Several local tax firms have closed their doors the past few years without new ones opening to replace them. That adds stress to the remaining crowd.

I closed my door to new clients for some time now, but did allow a few to sneak through if they were local. Two or three came from a larger accounting firm. The story was their fee was doubling, or nearly so. The firm sent them a letter informing them of this.

My first thought was they were cutting the size of the firm over staffing problems. But then the initial requests dried up. Hmmm?

Two or three of these returns snuck into my book. Then I realized what really happened. The firm sent the letter informing of the fee increase to PITA clients only. This became obvious when completing the return was followed by 8-10 calls over the remainder of tax season.

(I am well aware several clients are in this group/on this page. I am doing my best to be polite about the situation.)

There is a massive shortage of tax professionals/accountants and the shortage is getting worse by the day. It no longer takes a lot to become a PITA client. Time is at such a constraint that anything that  wastes that precious commodity needs to be eliminated or billed accordingly.

Mind you, the PITA client (only one sticks out) from the other firm did nothing egregious. It's just that the onslaught of follow-up questions were very basic. (Where do I send my balance due? It on the coupon we gave you. When is it due? It says on the coupon. Should I send it certified? Your call. Each question, and more, were from separate phone calls. They should have allowed electronic funds withdrawal.)

Lesson: Every tax pro I know works hard to be very nice. But every tax pro I know is sleep deprived this time of year. And they all have the same complaints. For example: missing documents are a scourge that saps precious personal time, time that could be used to sleep or pay attention to a significant other and the kids.

Don't accidently become a pain in the. . . 

And it is easy to do. It isn't your fault. It isn't the tax pros fault either. And yes, respect needs to work both ways.

Rules:

1.) It will take work finding a competent tax pro. Be polite and accept a decline from a tax firm. They want to say yes, but you don't want a firm that says yes too much.

2.) Think before calling the tax office. Some questions answer themselves. Tax pros no longer have the luxury of keeping slots of time open to hand hold during tax season.

3.) But, most tax pros are open to hand holding outside tax season. Consulting, too (for a fee (guy has to eat)).

4.) But! That doesn't mean the day after regular tax season closes. The sleep deprived are going to take a nap! For three days! And then check to see if they still have a family or if they left for fertile grounds elsewhere!

5.) More and more firms will downsize as the staffing shortage grows worse. Technology will not cover all the lost ground. 

6.) The best time to look for a tax pro is outside tax season with the promise (and one you keep) to bring ALL your tax docs in early. Then expect a long wait for completion, even an extension. (From my side of the desk: This allows for triage, where we can finish the maximum amount of work in a day, but not necessarily in the order received.) 

7.) Enough bullet points. You get the picture. Be nice to your tax pro. They only sleep 8 months of the year and that has a serious health cost for them. Show appreciation. Always understand, we care. There just is no way to deliver on all the demands made of us.

Thank you.