Does Your Child Need to File an Income Tax Return?

As parents, we encourage our children to work so they can learn important values about work and independence. At what point, if at all, do children need to file an income tax return for the money they earn?

The IRS does not exempt anyone from the requirement to file a tax return based on age, even if your child is declared as a dependent on your tax return.¹

Your dependent children must file a tax return when they earn above a certain amount of income.

Dependent children with earned income in excess of $6,300 must file an income tax return.² This threshold may change in 2017 and years after, so please consult a professional with tax expertise regarding your individual situation.

Even if your child earns less than the threshold amount, filing a tax return may be worthwhile if your child is eligible for a tax refund. The standard deduction for a child is different from that of an adult: It is the greater of $1,050 or earned income plus $350, with the maximum equal to the regular standard deduction.³

The rules change for unearned income, such as interest and dividend payments. When the annual total of unearned income exceeds $1,050, then a return must be filed for your child. If your child’s unearned income only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income, though it may result in higher income tax to you.

If you decide to prepare a separate return for your child, the same reduced standard deduction rules detailed above will apply.

Contact Alliance Financial & Income Tax if you have questions or need assistance.

Mileage Deduction 101: Deducting Business Mileage for Taxes

If you drive your car or other vehicle for business purposes, you can take a mileage deduction of 54 cents for every mile you drive for work in 2016 (57.5 cents per mile for 2015). Here is everything you need to know in order to get the most out of your mileage write off.

When planning to take a mileage deduction on your taxes, know you can only deduct trips that are for business.

What Types of Business Driving Qualifies for a Mileage Deduction

		Travel between offices You can take a this deduction for travel from your office or work site and your drive to a second place of business.
		Errands/supplies Driving for business-related errands qualifies. This can include trips like going to the bank, office supply store or post office. Additionally, these small trips add up quickly. Many business owners forget to keep track of these drives.
		Business meals and entertainment Trips you make to meet with clients or vendors qualify for this deduction. This can include drives for dinner, coffee, drinks, etc.
		Airport/travel The miles you drive to and from the airport for a business trip.
		Odd jobs Drives to and from odd job locations can be written off. These can include side-gigs like babysitting, pet care, lawn work or more.
		Customer visits Driving from your office or other work site to meet with customers or clients for business qualifies.
		Temporary job sites Driving from home to a temporary work location that you expect to last (and does in fact last) less than one year.
		Job seeking If you’re looking for work, you may deduct the drives to find a new job in your current occupation. Yet, you cannot take this deduction if you’re looking for a job in a new industry for the first-time.

Commuting is Not Business Mileage

The IRS has some strict rules on what makes up deductible business driving. The one that most people get in trouble with is commuting. This is never deductible because the IRS considers it to be a personal expense. Commuting occurs when you go from home to a permanent work location—either your:

• Office or other principal place of business
• Another place where you have worked or expect to work for more than one year.

Even if a trip from home to your office (or other principal place of business) has a specific business purpose—for example, to meet with a client at your office—it is still considered commuting and is not eligible for a mileage deductible if you start out from your home.

Working during a commuting trip doesn’t make it a business drive. Even if you make business calls on your cell phone, listen to work-related tapes or have a business discussion with an associate or employee, it’s still considered commuting.

Avoiding the Commuting Rule If You Have a Home Office

One way to avoid the harsh commuting rule is to have a home office that qualifies as your principal place of business. In this event, you can take a mileage deduction for any trips you make from your home office to another business location.

For example, you can deduct the miles you drive from home to your second office, a client’s office or to attend a business-related seminar. The commuting rule doesn’t apply if you work at home because, with a home office, you never commute to work (you’re there already). Your home office will qualify as your principal place of business if it is the place where you earn most of your income or perform the administrative or management tasks for your practice.

Avoiding the Commuting Rule If You Go to a Temporary Work Location

You can avoid the commuting rule and still have your drives qualify for a mileage deduction if you travel between your home and a temporary work location. A temporary work location is any place where you realistically expect to work less than one year. It can be inside or outside of the metropolitan area where you live. However, if the location is inside your metropolitan area, this exception applies only where you have an outside office or other regular work location away from your home.

How Much is a Mileage Deduction Worth?

You have two options for deducting your vehicle expenses: You can use the standard mileage rate or you can deduct your actual expenses. The standard mileage rate is by far the easiest to use.

With the standard mileage rate, you take the deduction of a specified number of cents for every business mile you drive. The IRS sets the standard mileage rate each year. The 2016 Mileage Rate is 54 cents per mile. To figure out your mileage deduction, simply multiply your business miles by the standard mileage rate for the specific year.

Example: Ed, a salesperson, drove his car 20,000 miles for business during 2016. To determine his mileage deduction, he simply multiplies his business miles by the applicable standard mileage rate (54 cents per mile in 2016). This gives him a total mileage deduction for the year of $10,800 (54 cents × 20,000 = $10,800).

The big advantage of the standard mileage rate is that it requires less record keeping. You need to keep track of how many miles you drive for business and the total miles you drive, but you do not need to record actual expenses for your car, such as gas, maintenance, and repairs. However, keeping an accurate mileage log can be tedious, and the IRS requires those logs to be fairly detailed. To save yourself time and headache, be sure to review mileage logs the IRS didn’t accept and don’t make the same mistake. You can also use a mileage tracking app, like MileIQ, to make the process easy and ensure you’re in compliance.

Restrictions On The Standard Mileage Rate

If you choose the standard mileage rate, you cannot deduct actual car operating expenses—for example, maintenance and repairs, gasoline, taxes, oil, insurance and vehicle registration fees. All of these items, as well as depreciation, are factored into the standard mileage rate set by the IRS. However, you can deduct the interest you pay on a car loan, as well as parking fees and tolls for business trips (but you can’t deduct parking ticket fines or the cost of parking your car at your place of work).

There are some important restrictions on who can use the standard mileage rate. If you don’t qualify to use it, you must use the more complicated actual expense method. First, and most important, you must use the standard mileage rate the first year you use a car for business. If you fail to do so, you are forever stuck using that method for that car.

If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, and then switch back and forth between the two methods after that, subject to certain restrictions. For this reason, if you’re not sure which method you want to use for, it’s a good idea to use the standard mileage rate the first year you use the car for business.

If you have questions call your Blue Springs tax preparer. 

Tax Benefits for Single Parents

 

If you are a single parent dealing with the complicated tasks of working and raising a family, there are some tax benefits and issues you should be aware of. 

Filing Status – Just because you are single or widowed does not mean you have to file your tax returns using the single filing status. Tax law provides two far more beneficial filing statuses that you might qualify for. These statuses provide higher standard deductions and more beneficial tax rates: 

Head of Household – If you are unmarried and pay more than half the cost of maintaining a household that is the principal place of abode for your qualified child or children for more than one-half of the year, then you qualify for the head of household status. Qualified children generally include your children, grandchildren, foster children or stepchildren under the age of 19 or a full-time student under the age of 24 who is not self-supporting. This is true even if you allow the other parent to deduct the dependency exemption for the child. 

Qualified Widow – If you are widowed, you may qualify for the head of household status discussed just above. However, if your spouse passed away in one of the two prior years, you have a child or stepchild (not including a foster child or grandchild) whom you can claim as a dependent and who lived with you the whole year, and you paid more than half the cost of keeping up the home, you can use the higher standard deduction for married individuals filing jointly. In comparison, in 2016, the standard deduction for marrieds filing jointly is $12,600, which is twice the amount for a single individual.

Child Support – Any child support you receive from the non-custodial parent is tax-free to you. Child support is also not included in household income for the purposes of determining the premium tax credit if you are otherwise qualified and obtain your health insurance through a government marketplace. 

Alimony – In most cases alimony payments received from your former spouse must be included in your income and are subject to tax. However, you can treat the alimony as earned income for purposes of making an IRA contribution of as much as $5,500 ($6,500 for those age 50 and over). 

Exemptions – You are entitled to an exemption allowance of $4,050 for yourself and each of your children and others whom you claim as dependents on your tax return. Generally, the custodial parent will be the one eligible to claim a child’s exemption allowance. The value of the exemptions you claim is subtracted from your gross income when you are figuring out the amount of your taxable income. For example, if you are in the 25% tax bracket, each exemption allowance you deduct saves you $1,013 of tax. However, if you allow the non-custodial parent to claim the exemption of a qualified child, then you forego the $4,050 exemption allowance for that child. 

Releasing the exemption of a child to the noncustodial parent must be done in writing and to IRS’s specifications as to required information. The noncustodial parent must then attach the written form to his or her return. The release can be for one year, for specified years or for all future years. If the exemption for the child is released, then the noncustodial parent will be able to claim the child tax credit (discussed below). Note: If a child is older and attending college, keep in mind when relinquishing the child’s exemption that the partially refundable tuition credit goes to the one who claims the child. 

Child Care Credit – If your child or children are under age 13, and you are working or attending school, you may qualify for the non-refundable child and dependent care credit, which is based upon the amount of your earnings from working (or imputed income if attending school) and the amount of child care expenses, up to $3,000 for one child and $6,000 for two or more children. The credit can be as much as $1,050 for one child and $2,100 for two. 

Child Tax Credit – You are also entitled to a non-refundable tax credit of $1,000 for each child under the age of 17 that you claim as a dependent. However, this credit begins to phase out for those filing as head of household with incomes in excess of $75,000. Some taxpayers with lower income may qualify for some portion of this credit to be refundable. 

Earned Income Tax Credit (EITC) – If you are working, you may also qualify for the EITC. This refundable credit is available to lower-income taxpayers and is based on your income and the number of children you have, up to three. The maximum credits for 2016 are $506 with no children, $3,373 with one, $5,572 with two, and $6,269 with three or more. The credit is totally phased out at incomes of $14,880 with no children, $39,296 with one, $44,648 with two, and $47,955 with three or more. 

As you can see, there are a number of tax benefits that apply to single parents. Please contact Alliance Financial & Income Tax to be sure you are not missing out on one or more of the benefits available to you. If you are a custodial parent, before releasing your child’s exemption to the noncustodial parent, you may wish to contact this office so the tax impact on your return(s) can be determined.

ONLY 10 DAYS LEFT FOR 2016 TAX DEDUCTIONS

Just a reminder that the last day you may make a tax-deductible purchase, pay a tax-deductible expense, or make tax-deductible charitable contributions for 2016 is Saturday, Dec. 31, just 10 days away. 

That still gives you time to make charitable contributions, pay deductible taxes, and make business acquisitions before year-end. However, making a last-minute purchase of business equipment isn’t enough to be able to deduct the cost of the equipment – you also must place that equipment into service before year’s end. This means you can’t take a deduction on your 2016 return if you take delivery of the equipment after the end of the year, even if you paid for the item in 2016. 

A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. Contributions you make by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution. 

If you pay your taxes by check and your financial institution honors the check, the day you mail or deliver the check is the date of payment. If you use a pay-by-phone account (such as electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of the tax payment. 

Purchases, tax payments or contributions charged to your credit card are deemed purchased when the charge is made, regardless of when you pay the credit card company. 

Wishing you a happy New Year and looking forward to assisting you with your tax preparation needs during the coming tax season.

A Holiday Prayer for All of Us

I came in to the office this morning, and I noticed that traffic is already a little lighter around town. Many of us are still working, but I have plenty of friends who have already taken time away from work, starting today.

Whatever your faith background, it's hard to ignore the holiday clamor. In my opinion, it's a crying shame that a season of reflection and prayer would become transformed into something so... busy. It's almost as if we now have to rush around to purchase or artificially create these nostalgic moments, when they probably would have earlier happened on their own.

Now look -- as a proud business owner, I have no problem with people earning money during this season...I just wonder when it's time to say "enough"?

Maybe it really is the holidays, because as I've been meeting with clients recently, I've discovered that many of you are worried and stressed -- about finances, family, personal circumstances, etc. It's not my job to save the world on your behalf of course, but I do get to be somebody in your world who can encourage you to slow down, take a breather and keep your perspective on what's really important. 

(By the way, we are still meeting with clients to help them with year-end issues, so feel free to email me back or call us at (816) 220-2001 for help.)

Anyway, thanks for your friendship, and for your business in 2016, and (hopefully) in 2017.

This week's Note is to help us all keep perspective, this week...and into next year.

Mike Mead's 

"Real World" Personal Strategy Note

A Holiday Prayer for All of Us

"People travel to wonder at the height of the mountains, at the huge waves of the seas, at the long course of the rivers, at the vast compass of the ocean, at the circular motion of the stars, and yet they pass by themselves without wondering." -St. Augustine

"God, help us remember that the jerk who cut us off in traffic last night is a single mother who worked nine hours that day and is rushing home to cook dinner, help with homework, do the laundry and spend a few precious moments with her children.

"Help us to remember that the pierced, tattooed, disinterested young man who can't make change correctly is a worried 19-year-old college student, balancing his apprehension over final exams with his fear of not getting his student loans for next semester.

"Remind us, Lord, that the scary-looking bum, begging for money in the same spot every day (who really ought to get a job!) is a slave to addictions that we can only imagine in our worst nightmares ...

"Help us to remember that the old couple walking annoyingly slowly through the store aisles and blocking our shopping progress are savoring this moment, knowing that, based on the biopsy report she got back last week, this will be the last year that they go shopping together.

"Father, remind us each day that, of all the gifts you give us, the greatest gift is love. It is not enough to share that love with those we hold dear. Open our hearts not to just those who are close to us, but to all humanity. Let us be slow to judge and quick to forgive, show patience, empathy and love. "

Amen.

Warmly,

Tax Planning Tips for New Home Buyers

In the first year of home ownership, applying the right tax credits and deductions is crucial in offsetting your expenses. To take advantage of the available programs, you will likely need to make big changes to the way you approach your tax calculations, especially if you routinely apply the standard deduction. In the end, you will likely see a marked decrease of your tax burdens upon claiming the right elements on your taxes. Here are four tax planning tips you can utilize to take the sting out of buying your first home.   

Smartly Utilize IRA Funds

If you need a little bit extra money for a down payment or closing costs, you can take up to $10,000 out of your individual retirement account, or IRA, to cover those expenses. Although you are normally subject to a penalty for early withdrawals, applying the funds to the purchase of your first home relieves you of this obligation. You will lose the potential for increased compound interest gains, however, so restore your IRA balance as soon as you can to continue building wealth for retirement.

Complete Wise Home Upgrades

You can dramatically decrease your tax obligations, and potentially receive a refund, by making key improvements to your home before the end of the tax year. If you invest in energy efficient upgrades, for example, you can apply federal tax credits that will offset those costs and decrease your tax burdens. If you run your own business, or complete certain work tasks at home, you can carve out a dedicated space for those activities to claim the home office deduction at the end of the year.

Even if you cannot immediately apply credits or deductions for home improvements, it is important to keep receipts for your renovation projects. When you sell your home in the future, you may be able to deduct a portion of those expenses, but only if you have the receipts on hand.  

Itemize Your Deductions

You may be eligible for a multitude of home ownership deductions in the first year after buying your home and beyond. You will need to skip the standard deduction, and itemize, to claim the full range of programs. You may be able to claim a portion of your mortgage interest and points, private mortgage insurance premiums and real estate taxes by itemizing each of your deductions for the year.

Apply Applicable Credits

Home ownership credits offered by way of the Mortgage Credit Certificate Program will offset your tax burdens even further. This program starts in the first year of home ownership and continues through the life of the loan. Upon electing to participate in this program, you will receive up to 30% of your mortgage interest back in the form of a federal tax credit. You must acquire a mortgage credit certificate from your local government office to apply this credit to your taxes.

Preparing Your Taxes After Purchasing a Home

If you want to maximize your deductions and apply the right credits, work with a tax expert at Alliance Financial & Income Tax.  Your MO tax professional will apply all of the right elements to your tax calculations to help you reduce your obligations and maximize your refund potential. With a tax expert by your side, you will be able to smartly offset your home purchase costs and fully enjoy the benefits of home ownership.

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