Along with Tax Season Come the Scams; Don’t Be a Victim

One thing we can count on when tax season begins is the scammers coming out from under their rocks with schemes to try and trick you so they can steal your ID and file returns under your Social Security number (SSN). Or, they may even email or call you pretending to be IRS or state tax agents and attempt to intimidate you into sending them money to pay fabricated tax liabilities. These crooks take advantage of individuals’ natural fear of the IRS and use it to coerce their marks into making payments without first verifying the validity of the liability.

Don’t be a victim of these unscrupulous predators. The only way to protect yourself is to understand their tricks and what to do (actually, what not to do). This article includes a variety of plots that have been employed in the past. But, keep in mind these lowlifes can be very clever, intimidating, and aggressive, and come up with new schemes all the time, so you need to be vigilant.

ID thieves prize three things: your name, Social Security number, and birth date. You should always be very careful about divulging your birth date and SSN. Don’t use them unless absolutely necessary, and always question the requester’s need to know.

You should also be aware that the IRS never initiates contact in any way other than by U.S. Mail. So, if you receive a phone call from out of the blue demanding payment, you can be assured it is a scam. Simply hang up the phone without providing any information. If you receive an email from the IRS, do not click on embedded links or attachments. That could cause malware to be installed on your computer, allowing scammers to access your computer. The first thing you should do is call this office.

Additionally, it is important for taxpayers to know that the IRS:

  1. Never asks for credit card, debit card, or prepaid card information over the telephone.
  2. Never insists that taxpayers use a specific payment method to pay tax obligations.
  3. Never requests immediate payment over the telephone.
  4. Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement actions involving IRS tax liens or levies.

Email Scams & Phishing – Every tax season, the scammers become very active. They create bogus emails disguised as authentic emails from the IRS, your bank, or your credit card company, none of which ever request information that way. They are trying to trick you into divulging personal and financial information that they can use to invade your bank accounts, make charges against your credit card, or pretend to be you to file phony tax returns or apply for loans or credit cards. Always be skeptical! If the email is related to taxes, call this office before doing anything. If it is supposedly from your credit card company, your bank, or another financial institution, call the organization to verify the authenticity of the email.

One scam last year was an email sent to taxpayers requesting that they click on a link in the email to verify their identity before their tax refund could be released. The link took them to the ID thief’s website, made to look like the IRS’s, where victims entered their names, SSNs, and birthdates. Others used the same scheme, pretending to be an individual’s bank or credit card company.

Phone Scams – Very aggressive scammers will call, claiming to be an IRS agent, and tell the person answering the call that they owe money that must be paid immediately or their home will be seized, their wages will be attached, or even that they will be arrested. After threatening the victim with jail time or driver’s license revocation, the scammer hangs up. Soon, someone else calls back pretending to be from the local police or DMV, and the (rigged) caller ID supports their claim.

These are frequently thieves from outside the U.S., and once the money is transferred, there is no chance of getting it back.

In 2016, the police in Mumbai, India, busted a phone center that was calling U.S. taxpayers with just such a scheme and bilking U.S. taxpayers to the tune of $150,000 a day. They demanded payment by credit card, debit card, or gift card.

ID Thieves – These rip-off artists file phony tax returns using stolen IDs and counterfeit W-2s and have the refunds directly deposited into their bank accounts, which they then clean out before the victim or the IRS discovers what happened. If the IRS rejects your return because a SSN on your return was previously used to file, that is a good indication your ID has been stolen, and you should contact this office for instructions on notifying the IRS. Once your ID has been compromised, the IRS will issue a special six-digit Identity Protection number that can be used in conjunction with your SSN to file your return.

If your ID has been compromised, or you suspect it might have been, contact this office immediately so we can assist you in notifying the IRS, so that they block returns filed with your SSN but without the special six-digit filing number.

We also urge you to educate others in your family who could be scammed.

If you have questions, please give this office a call.

Small Business — The future of pass-through entities and taxes

According to the Tax Foundation, 90% of United States (US)-based businesses are pass-through entities, such as S corporations, partnerships, and sole proprietorships. These businesses employ the majority of the private-sector workforce and provide nearly half of all business income. Income from these entities is passed through to the owner’s individual tax returns. With the change in leadership in Washington, several proposals will most likely change the way in which these entities are taxed, making it more advantageous to be a small business owner.

Types of Business Structures
A number of pros and cons exist for each type of business structure depending on the owner’s area of expertise and personal needs. But here are the basics:

  • Sole Proprietorship – This is the simplest business form and is not a legal entity. It is an unincorporated business owned by one individual. There is no distinction between the business and the owner, meaning the owner includes profit or loss, credits, etc., on his or her individual return and is responsible for all of the debts and liabilities of the business. A sole proprietor may register his or her businesses with his or her state as a Limited Liability Company (LLC), which generally limits the owner’s liability to the business assets of the sole proprietorship. However, the Internal Revenue Service (IRS) does not recognize LLCs, so for federal purposes, it remains a sole proprietorship.
  • Partnership – Partnerships are similar to sole proprietorships except that there are multiple owners, including individuals or other businesses. Many forms of partnerships exist, such as general, limited, publically traded, etc., each with its own set of tax and accounting rules. A partnership’s income, loss, credits, etc., are passed through to each individual or entity partner via a K-1. Like sole proprietorships, partnerships may opt for LLC status for state purposes.
  • S Corporation – An S corporation is a U.S. domestic corporation that has filed a timely S election (Form 2553) to be treated as a pass-through entity. This means the S corporation is generally exempt from federal taxes. Instead, the corporation’s income or loss, credits, etc., are included on the individual shareholders’ personal tax returns. An S corporation is limited to 100 individual shareholders, files its own tax return (1120-S), and distributes the results to each shareholder via a form K-1.
  • C Corporations – A corporation is a business entity unto itself. Unlike sole proprietorships and pass-through entities, a corporation pays taxes on its income at the entity level, and shareholders receive dividends, which are again taxable on their personal tax returns.

What are the possible tax changes?
One of President Trump’s goals was to make sure that “no business of any size, from a Fortune 500 corporation to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes.” If this proposed change comes to fruition, this will reduce the top corporate rate from 25% to 15%, and the top business income tax rates for sole proprietorships and pass-through entities from 39.6% to 15%.

In Republican leader and House Speaker Paul Ryan’s “A Better Way” tax reform proposal, the tax rate for a sole proprietorship or a pass-through entity would be reduced to 25%. “A Better Way” proposals also include the ability of businesses to write-off investments in tangible and intangible property immediately.

What’s next?
There is much debate on how these tax changes will affect the economy. In 2014, 28.3 million U.S. businesses were pass-through entities. The most common by far, making up 69.8 percent of small businesses, are sole proprietors. So any changes in the tax code will have major repercussions in the entity choices that new startups make when establishing their businesses. Understanding the advantages of each business type can have heavy tax implications. According to the Tax Foundation, the 2016 state marginal tax rates for pass-through entities are close to 50%, with California having the highest at 51.8%. Compare this to Texas, which came in at #41 with 42.6%.

We will continue to monitor the developments in the coming months. It is imperative that you seek our advice before you decide to start a business or perhaps change your current business entity. A number of opportunities might help you to lessen your tax burden. But a careful discussion beyond just the tax issues needs to take place before any decisions are made.

What Does the Future Hold for Taxes?

One topic that is frequently being discussed is what the future holds for individual taxation under President Trump. Numerous blog entries have been posted on the issue; many proclaim that the wealthy will be the beneficiaries of Trump’s tax policies, and some declare that lower-income taxpayers will see tax increases.

Those predictions are based upon his proposal to consolidate the individual income tax rates from seven to three: 12, 25 and 33 percent. These are the same three rates that were included in the “Better Way” tax-reform blueprint that Republicans in the House of Representatives released in June 2016.

Under Trump’s plan, the two highest current rates, 39.6% and 35%, would be eliminated, which generally favors higher-income taxpayers. However, the tax brackets alone do not tell the whole story.

Trump is also proposing more than doubling the standard deductions, which would generally benefit lower-income taxpayers. Because the marginal tax rates apply only to taxable income (which is currently defined as adjusted gross income minus personal exemptions and deductions—either standard or itemized), the increase in the standard deduction will tend to neutralize the higher marginal rates for lower-income taxpayers.

According to an estimate by the nonpartisan Tax Policy Center, of the 45 million filers who would itemize their deductions in 2017, 27 million (60 percent) would opt for the standard deduction under the proposed rules.

To see how the proposal’s combination of new tax rates, higher standard deductions, and cap on itemized deductions (discussed below) could affect your taxes, pull out your 1040 tax return from either 2015 or 2016 and complete the worksheet below. Then compare line 6 (your tax computed using Trump’s proposed three-tier tax rates and standard deductions) to line 7 (your tax as computed on a prior 1040) to get a rough idea of how these tax proposals could impact you.

Trump also proposes capping itemized deductions at $100,000 for single filers and $200,000 for joint filers. This will generally affect wealthy taxpayers. Under current law, certain itemized deductions phase out for high-income taxpayers. It is unclear whether that provision will be replaced by the proposed cap on itemized deductions or whether both will apply. If the cap is adopted, the amount entered on line 2c of the worksheet above will be limited based on the proposed cap amounts.

Although this is not clear, Trump’s proposals may include the elimination of personal exemptions. If true, this change would have the greatest effect on lower-income taxpayers because these exemptions are already phased-out for higher-income taxpayers. Those with large families could be impacted the most. If the personal exemptions are eliminated, the amount on line 3 of the worksheet above would be zero.

Not the Whole Picture – The tax-rate changes, higher standard deductions, and limitations on itemized deductions don’t paint the whole picture of the proposal. It is unclear what will happen to the numerous credits available to lower-income taxpayers under the current tax system. Approximately 48% of all U.S. taxpayers pay no tax at all, and most of them actually receive money back on their returns as a result of refundable tax credits such as the earned income tax credit, the additional child tax credit, and the American Opportunity Tax Credit (a tuition credit).

The Republicans have started the process of appealing the Affordable Care Act (also referred to as the ACA or Obamacare), and now that they have majorities in both houses of Congress and control of the White House, we are bound to see some changes in this area. The health care marketplaces have already accepted insurance coverage for 2017, so it is doubtful that there will be any changes until 2018. However, Trump has vowed to overturn the ACA’s 3.8% excise tax on net investment income; eliminating this tax would greatly benefit higher-income taxpayers.

It is probably too early to have a clear picture of future tax reforms, but change is sure to come. If you have questions about how your tax situation may be impacted, please give this office a call.

10 Questions to Ask Your Financial Team When Starting Up

Starting up your business is an exciting time, but it is also a time with many questions. While it may seem initially very easy to create a product, open a store, and start selling, the financial aspects of being successful are a bit more challenging. As you consider the process of starting up, work with a local financial planning team and tax professional to ensure you get your financial footing in place now. Ask these questions.

#1: What should be in a basic business plan?
A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.

#2: Who will you need to pay taxes to?
Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.

#3: What is a projected cash flow for the business?
How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.

#4: How much of an investment do you need to put into your company right now?
Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.

#5: What is your break-even analysis?
This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.

#6: What liability insurance do you need?
While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.

#7: What will interest cost you?
Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.

#8: How will you manage payroll?
This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).

#9: How can you reduce your taxes?
Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.

#10: What’s the right profit margin?
Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.

Working with tax and accounting professionals is the most important decision any startup founder needs to take long before any commitments are made. It is here that you will formulate the success for your company.

Use Recurring Transactions in QuickBooks Online

Save time and ensure that repeating transactions are processed as scheduled.

You know how much time QuickBooks Online already saves you. Customer, vendor, and item records need never be entered again once they’re created for the first time. Pre-built forms use your record data to complete transactions quickly and accurately. Customizable report templates provide real-time overviews of your financial status in every area.

There’s another way QuickBooks Online can reduce the time you spend on accounting chores: recurring transactions. If you have invoices, bills, and other transactions that occur on a regular basis, you can save all or part of their data to use again. You can even choose to have them dispatched automatically.

Here’s how it works. You need to create a template, a type of model, for each recurring transaction. To do this, simply create the transaction you want to repeat. Say it’s an invoice for a service you provide monthly to a company or individual. You’d fill in all the required fields, then click Make recurring in the horizontal toolbar at the bottom of the screen. This window will open:

When you click Make recurring at the bottom of a transaction, this window of options will display.

Select the Customer first by clicking the arrows to the right of the blank field. QuickBooks Online will fill in contact information and automatically display name that as the Template name. You can leave it there, or you can try to think of a phrase that describes the transaction, so you’ll remember it. Next, you need to decide how QuickBooks Online will handle the transaction. There are three options:

  • Scheduled. Be very careful with this one, since QuickBooks Online will automatically create and dispatch it. This only works if the information in the transaction—minus the date—is always exactly the same.
  • Reminder. This is safer. QuickBooks Online will display a reminder in time for you to complete and process the transaction.
  • Unscheduled. QuickBooks Online will do neither of the above, but the template will be available to use as you need it. This is good for infrequent transactions that share some common information.

Next, taking into account variables like delivery methods and due dates, enter a number in the field in front of days in advance. Then skip down to Options and click the box in front of all the statements that apply to that transaction. The bottom line in this window contains the fields that will let you specify the transaction’s Interval. Click the arrows next to each field to open its menu.

In the example above, we’ve indicated that the invoice occurs monthly on the first day of the month, starting on January 1, 2017. You don’t know how long this will recur, so we’ve left End set to None. When you’re satisfied with everything in the window, click Save template in the lower right corner.

To see a list of the repeating transactions you’ve defined, click the gear icon in the upper right corner of the screen and select Recurring Transactions. A table displaying them will open and display columns including Type, Interval, and Previous Date. Look toward the end of one of these lines. To modify the template, click Edit.

The Recurring Transactions screen gives you an overview of the templates you’ve created and provides links to action options.

There are other options here that vary depending on the type of transaction. In the screen shot above, the template is a bill. You can:

  • Use it to create a new transaction,
  • Duplicate it and modify it, to make a new template,
  • Pause it, to temporarily suspend its recurrence,
  • Skip next date and resume after the next interval, or
  • Delete it.

QuickBooks Online also includes a report that will display all the templates you’ve created. Click Reports in the left vertical pane, then All Reports (unless this list is already active), then Accountant Reports. You’ll find the Recurring Template List in the lower right corner.

Recurring transaction templates can save you a lot of time and increase accuracy. Conversely, they can result in unbilled revenue and past-due bills—or even duplicate transactions—if they’re not created with precision. We’d be happy to step in and guide you through the process for the first time.

Better to Sell or Trade a Business Vehicle?

As the new year begins, business owners may be thinking about replacing a business vehicle. Profits from the business may be up, so the timing may be right to acquire a new vehicle, or the current vehicle may finally be on its last legs. A question then comes up: Is it better to sell the current vehicle outright or trade it in for a new vehicle?

When replacing a business vehicle, it does make a difference for tax purposes if you decide to sell or trade it in for the replacement vehicle. If you sell a vehicle, the resulting gain or loss is reported on your tax return. As a result, it is generally better to sell a vehicle if the disposition of the vehicle will result in a loss. Since trade-ins are treated as an exchange and any gain or loss is absorbed into the replacement vehicle’s depreciable basis, it is generally better to trade in a vehicle that would result in a gain.

As an example, suppose you sell your business vehicle for $12,000. Your original purchase price was $32,000, and $17,000 has been taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better for you to sell the vehicle and deduct the loss rather than trading in the vehicle.

Sales price  $12,000
Cost   $32,000
Depreciation Taken -$17,000
Depreciated Basis -$15,000
Loss  -$3,000

On the other hand, had you sold the business vehicle for $16,000, the sale would result in a $1,000 taxable gain and trading it in would be a better option.

If the vehicle is used for both business and personal purposes, the loss or gain must be prorated for the business use. No loss would be deductible on the personal portion.

Since trade-in values are generally lower than the actual sales value of the vehicle, the trade-in decision must also consider whether the tax benefits exceed the additional money that might be received from selling the old business vehicle.

This concept can also be used when selling or disposing of other business assets.

If you are planning to replace a business vehicle and would like to discuss how its disposition and the purchase of a new vehicle will affect your tax situation, please give this office a call.

Thinking of Becoming a Real Estate Flipper? Here’s a Primer on the Tax Rules

With mortgage interest rates low and home prices finally making a comeback, flipping real estate appears to be on the rise. This activity is even the theme of several popular reality TV shows. House flipping is, essentially, purchasing a house or property, improving it and then selling it (presumably for a profit) in a short period of time. The key is to find a suitable fixer-upper that is priced under market for its location, fix it up and resell it for more than it cost to buy, hold, fix up and resell.

Are you contemplating trying your hand at flipping? If so, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely, Sam’s cousin in your state capitol will expect a share, too.) Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner. The following is the current tax treatment for each.

  • Dealer in Real Estate – Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (10% to 39.6%), and in addition, individual sole proprietors are subject to the self-employment tax of 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Higher-income sole proprietors are also subject to an additional 0.9% Medicare surtax on their earnings. Thus, a dealer will generally pay significantly more tax on the profit than an investor. On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his or her tax at the same rates.
  • Investor – Gains as an investor are subject to capital gains rates (maximum of 20%) if the property is held for more than a year (long term). If held short term (less than a year, as will likely be the case for most flippers), ordinary income rates (10% to 39.6%) will apply. An investor is not subject to the self-employment tax, but could be subject to the 3.8% surtax on net investment income for higher-income taxpayers. A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his or her deductible loss is limited to $3,000, with any excess capital loss being carried over to the next year. The rules get a bit more complicated if the investor rents out the property while trying to sell it, but such rules are beyond the scope of this article.
  • Homeowner – If the individual occupies the property as the primary residence while it is being fixed up, he or she would be treated as an investor, with three major differences: (1) if the individual has owned and occupied the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he or she can exclude gain of up to $250,000 ($500,000 for a married couple); (2) if the transaction results in a loss, the homeowner will not be able to deduct the loss or even use it to offset gains from other sales; and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one’s primary residence are neither deductible nor includible as part of the cost basis of the home.

Being a homeowner is easily identifiable, but the distinction between a dealer and an investor is not clearly defined in the tax code. A real estate dealer is a person who buys and sells real estate property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, generally does not deal in real estate on a regular basis.

This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration:

  • whether the individual is already a dealer in real estate, such as a real estate sales person or broker;
  • the number and frequency of sales (flips);
  • whether the individual is more committed to another profession as opposed to fixing up and selling real estate; and
  • how much personal time is spent making improvements to the “flips” as opposed to another profession or employment.

The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer. But one who flips five or more houses and/or properties and has substantial profits would probably be considered a dealer. Everything in between becomes various shades of grey, and the facts and circumstances of each case must be considered.

If you have additional questions about flipping real estate or need assistance with your specific situation, please give this office a call.

Congress Gives Small Employer HRAs the Green Light

Congress has approved the 21st Century Cures Act, which includes a provision allowing small employers to reimburse their employees for medical expenses under a health reimbursement arrangement without being liable for the draconian, $100 per day penalty for violating the Affordable Care Act’s rules. President Obama has indicated his approval of the bill.

Background: Stand-alone HRAs do not meet two key requirements of the ACA, as they:

  • Limit the dollar amount of the insured person’s annual benefits and
  • Fail to provide certain preventive-care services without requiring cost-sharing.

As a result, under the IRS’ interpretation of the ACA, employers are subject to a $100 per day (maximum $36,500 per year) excise tax penalty per employee.

New Law: Effective January 1, 2017, under the 21st Century Cures Act, qualified small employers that have an average of fewer than 50 full-time employees (including full-time-equivalent employees) and that maintain a qualified small-employer HRA will be exempt from the penalty. Under this act, a qualified small employer is one that:

  1. Employs an average of fewer than 50 full-time employees (including full-time-equivalent employees) and does not offer a group health plan to its employees. The number of full-time-equivalent employees is determined by adding up all the hours that part-time employees worked in a given month and dividing by 120.
  2. Provides the HRA on the same terms to all eligible employees. Eligible employees all those except:
    a. Those who have not completed 90 days of service,
    b. Those who have not attained the age of 25,
    c. Part-time workers (generally those working an average of less than 30 hours per week),
    d. Seasonal workers (generally those employed for 6 months or fewer during the year),
    e. Those covered by a collective bargaining unit, and
    f. Certain nonresident aliens.
  3. Entirely funds the HRA (i.e., no salary-reduction contribution is made to the HRA).
  4. Only reimburses the employees after being provided with proof of their medical expenses.
  5. Limits reimbursements to $4,950 ($10,000 where the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016.

Although this law is effective January 1, 2017, transitional relief is generally provided for any HRA plan beginning on or before December 31, 2016.

Any medical-expense reimbursements that an employee receives from a qualifying HRA are excluded from that employee’s income.

If you have questions, please give the office a call.

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 consult with this office 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.