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Family Tax Opportunities and Traps to Look For
Tax and Financial News
August 1999
Family Tax Opportunities and Traps to Look For
New tax laws in 1999 can be generous if you know what to look for. The IRS gives you a break if you put your child to work or send them to school. The IRS will give you a tax credit if you adopt a child or help an elderly parent. Following are opportunities and traps to look out for on your 1999 tax return.
Income - Tax-Free
Own a vacation home? If you rent your vacation home for fewer than 15 days during the year, you can exclude the money received from taxable income. You must use the home for more than 14 days during the year and you cannot deduct depreciation and other expenses normally associated with rental property.
Have an IRA? IRA earnings, if certain conditions are met can be excludable from recipients' income at tax time. Also excludable are life insurance proceeds, workers' compensation payments, money received in a lawsuit for physical injuries, disability payments and tax refunds, inheritances and lump-sum pension distributions if rolled over into an IRA within 60 days.
Have children? If you own a business, put your children to work and deduct the salary paid and the income taxable to the child at his/her rate - up to $4,300 is tax free in 1999. Up to $2,000 more can be deferred from taxes if the child opens a traditional IRA or you open one yourself for him. Forgo the deduction and put the $2,000 in a Roth IRA. If you provide over half the child's support, you may still claim him as a dependent.
If your business is unincorporated, you do not have to pay Social Security tax on wages paid to children under age 18. If you employee your spouse, he or she may participate in any retirement plans you have available for your employees, and may also qualify for deductible IRA contributions.
If you have an elderly parent unable to be self-supporting, two or more relatives may provide more than half the support. If no one person provides more than half the support, one may still take a dependency exemption, if the person paid more than 10% of the support. If not for the support test, the person could claim the exemption. The person attaches to his tax return a Form 2120 signed by the other persons who provided the support, waiving the right to claim the exemption. Some families rotate the exemption from year to year. Some families assign it to the person who will get the greatest tax bebefit.
Children in school? If tax payers or their dependent children are college freshmen or sophomores, they may qualify for Hope education credits of up to $1,500 per student. That is 100% of the first $1,000 of tuition and fees and 50% of the next $1,000. The credit is phased out for single taxpayers with modified AGI of $40,000 to $50,000 and for joint returns with $80,000 to $100,000.
Lifetime Learning credits of up to $1,000 per return (20% of expenses for tuition and fees) may be taken if taxpayers or dependents are enrolled in either undergraduate or graduate classes and there is no limit to the number of years it may be taken. Hope credits and Lifetime Learning credits may not be claimed for the same student.
Education IRA's allow annual nondeductible contributions of up to $500 per beneficiary. Upper-income taxpayers may not contribute. The phase-out range is $150,000 to $160,000 modified AGI for joint filers and $95,000 to $110,000 for single returns. If parents are too affluent to contribute, grandparents or another relative may be able to do so. Distibutions for qulified education expenses are tax free, but Hope and Lifetime Learning crdits may not be claimed in the same year the Education IRA makes a distribution.
Adopt a child and you may be entitled to a $5,000 credit or $6,000 for a special-needs child. The credit is phased out as modified AGI rises from $75,000 to $115,000 (for both joint returns and singles). Unused credits may be carried forward for up to five years. A couple who would not qualify due to high income might be able to claim the credit in the next year if one spouse quits working to look after the baby.
If your AGI exceeds $28,000 and are working or looking for work, you may be able to claim a credit of up to $480 for expenses of caring for one dependent or $960 for two or more. That is 20% of the costs (of up to $2,400 for one or $4,800 for two or more) of care for children under 13 or for a spouse or other dependent who is mentally not capable of caring for himself. You must remember if you receive sick pay, you cannot take the credit.
Last but so many times overlooked, you can divorce to lower your taxes. Two single taxpayers earning roughly the same amount have a lower combined tax liability than if they were married. You can even divorce, live in the same house and qualify for lower taxes. The IRS has ruled that a couple who gets a year-end divorce in order to file as single taxpayers and then remarries in the following year will have to pay as married taxpayers. Property transferred between former spouses pursuant to a divorce are generally not taxable.
Getting married, having children, getting a divorce or taking care of your aging mother are all part of life but knowing the rules can make it a little softer on the checkbook. Contact your CPA to exercise opportunities when making major changes in your life such as sending your children to work or giving that first marriage a second chance.
Income - Tax-Free
Own a vacation home? If you rent your vacation home for fewer than 15 days during the year, you can exclude the money received from taxable income. You must use the home for more than 14 days during the year and you cannot deduct depreciation and other expenses normally associated with rental property.
Have an IRA? IRA earnings, if certain conditions are met can be excludable from recipients' income at tax time. Also excludable are life insurance proceeds, workers' compensation payments, money received in a lawsuit for physical injuries, disability payments and tax refunds, inheritances and lump-sum pension distributions if rolled over into an IRA within 60 days.
Have children? If you own a business, put your children to work and deduct the salary paid and the income taxable to the child at his/her rate - up to $4,300 is tax free in 1999. Up to $2,000 more can be deferred from taxes if the child opens a traditional IRA or you open one yourself for him. Forgo the deduction and put the $2,000 in a Roth IRA. If you provide over half the child's support, you may still claim him as a dependent.
If your business is unincorporated, you do not have to pay Social Security tax on wages paid to children under age 18. If you employee your spouse, he or she may participate in any retirement plans you have available for your employees, and may also qualify for deductible IRA contributions.
If you have an elderly parent unable to be self-supporting, two or more relatives may provide more than half the support. If no one person provides more than half the support, one may still take a dependency exemption, if the person paid more than 10% of the support. If not for the support test, the person could claim the exemption. The person attaches to his tax return a Form 2120 signed by the other persons who provided the support, waiving the right to claim the exemption. Some families rotate the exemption from year to year. Some families assign it to the person who will get the greatest tax bebefit.
Children in school? If tax payers or their dependent children are college freshmen or sophomores, they may qualify for Hope education credits of up to $1,500 per student. That is 100% of the first $1,000 of tuition and fees and 50% of the next $1,000. The credit is phased out for single taxpayers with modified AGI of $40,000 to $50,000 and for joint returns with $80,000 to $100,000.
Lifetime Learning credits of up to $1,000 per return (20% of expenses for tuition and fees) may be taken if taxpayers or dependents are enrolled in either undergraduate or graduate classes and there is no limit to the number of years it may be taken. Hope credits and Lifetime Learning credits may not be claimed for the same student.
Education IRA's allow annual nondeductible contributions of up to $500 per beneficiary. Upper-income taxpayers may not contribute. The phase-out range is $150,000 to $160,000 modified AGI for joint filers and $95,000 to $110,000 for single returns. If parents are too affluent to contribute, grandparents or another relative may be able to do so. Distibutions for qulified education expenses are tax free, but Hope and Lifetime Learning crdits may not be claimed in the same year the Education IRA makes a distribution.
Adopt a child and you may be entitled to a $5,000 credit or $6,000 for a special-needs child. The credit is phased out as modified AGI rises from $75,000 to $115,000 (for both joint returns and singles). Unused credits may be carried forward for up to five years. A couple who would not qualify due to high income might be able to claim the credit in the next year if one spouse quits working to look after the baby.
If your AGI exceeds $28,000 and are working or looking for work, you may be able to claim a credit of up to $480 for expenses of caring for one dependent or $960 for two or more. That is 20% of the costs (of up to $2,400 for one or $4,800 for two or more) of care for children under 13 or for a spouse or other dependent who is mentally not capable of caring for himself. You must remember if you receive sick pay, you cannot take the credit.
Last but so many times overlooked, you can divorce to lower your taxes. Two single taxpayers earning roughly the same amount have a lower combined tax liability than if they were married. You can even divorce, live in the same house and qualify for lower taxes. The IRS has ruled that a couple who gets a year-end divorce in order to file as single taxpayers and then remarries in the following year will have to pay as married taxpayers. Property transferred between former spouses pursuant to a divorce are generally not taxable.
Getting married, having children, getting a divorce or taking care of your aging mother are all part of life but knowing the rules can make it a little softer on the checkbook. Contact your CPA to exercise opportunities when making major changes in your life such as sending your children to work or giving that first marriage a second chance.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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