Category Archives: Tax Tips

Tax Tips for Divorced Parents

Share

Questions frequently arise in the case of divorced parents regarding who can claim certain tax benefits related to their children.  Generally, only one person may claim all the child-related tax benefits for a child, including the dependency exemption, the child tax credit, the dependent care credit, the exclusion for dependent care benefits and head of household filing status.

The exception is the special rule for divorced or separated parents or parents who live apart for the last 6 months of the calendar year. Under this special rule, the noncustodial parent may claim the dependency exemption for a child if the custodial parent releases the exemption. Also, the noncustodial parent may claim the child tax credit if the other requirements for the child tax credit are met.

Conversely, only the custodial parent may claim the dependent care credit.  Usually, only the custodial parent may claim the Earned Income Tax Credit (EITC), because the child must meet the residency test for qualifying child, that is, the child must live with the parent for more than six months of the year except for temporary absences.

Generally, custody is determined by the number of nights the child slept in the home of the parent or the parent had responsibility for the child for the night. Consult Publication 501, Exemptions, Standard Deduction, and Filing Information for more details and exceptions such as temporary absences.

Here are the rules for divorced parents as stated in Publication 596:

A child will be treated as the qualifying child of his or her noncustodial parent (for purposes of claiming an exemption and the child tax credit, but not for the EITC) if all of the following apply:

The parents:

  • Are divorced or legally separated under a decree of divorce or separate maintenance,
  • Are separated under a written separation agreement, or
  • Lived apart at all times during the last 6 months of the year, whether or not they are or were married.
  • The child received over half of his or her support for the year from the parents.
  • The child is in the custody of one or both parents for more than half of the year.
  • Either of the following statements is true.

For all divorces final after December 31, 2008, the IRS is no longer accepting a copy of a divorce decree to show who has the right to claim the dependency exemption. You must file Form 8332 or a substantially similar statement with the return or, if you file electronically, with Form 8453.  The custodial parent signs Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches the form or statement to his or her return.

If the divorce decree was dated before January 1, 2009,  the IRS may accept certain pages of the divorce decree as a substitute for a Form 8332, if  the decree unconditionally provides that the noncustodial parent may take the exemption for a child, the custodial parent signs the decree, and  the decree otherwise conforms to the substance of Form 8332.

A married taxpayer can be considered unmarried and file as Head of Household if all the following tests are met:

  • Must file a separate return.
  • Must have provided more than fifty percent of the cost of maintaining a home.
  • Must not live in the same home as the spouse at any time during the last six months of the year.
  • The home was the main home of a qualifying child for more than half the year.
  • Must be able to claim an exemption for the child.  However, the taxpayer may meet this test if they are not claiming the exemption for the child because they released the exemption to the other parent under the special rule for divorced or separated parents discussed above.

If you have any questions regarding the correct tax treatment of child related tax benefits, contact Steve Siesser at  ssiesser@verizon.net for immediate assistance.

Share

Congress Authorizes Tax Refunds For Combat-Injured Veterans

Share

The Combat-Injured Veterans Tax Fairness Act of 2016 was signed into law on December 16, 2016. The law directs the Department of Defense to refund money that was improperly withheld for tax purposes from severance payments for veterans separated from the Armed Forces because of combat-related injuries. Under IRC section 112, gross income does not include compensation received for active service in a combat zone.

According to the bill’s sponsor, veterans who suffered combat-related injuries and who separated from the military were not supposed to be taxed on the one-time lump sum disability severance payments they received. Unfortunately, since 1991 taxes were nonetheless withheld from qualifying veterans due to the limitations of the Department of Defense’s automated payment system. Some veterans were unaware that their benefits were improperly reduced as a result of tax withholding and the statute of limitations has long since expired for those years.

The new law corrects this problem by directing the Department of Defense to identify veterans who have been separated from service for combat-related injuries and received a severance payment. The law instructs the Department of Defense to determine how much the combat-wounded veterans are owed and to provide the veteran instructions for filing amended tax returns to recover the amounts improperly withheld for tax purposes.

The law extends the limitation on time for filing a claim for a credit or refund under IRC section 6511(a) to enable veterans to be restored of funds previously withheld from their severances. The statute of limitations is extended one year after the Department of Defense provides the affected service members notice of the amount improperly withheld from their severance payments.

Share

Protect Yourself From Identity Theft

Share

The Internal Revenue Service, the states and the tax industry recently urged taxpayers to take steps to protect themselves online to help in the fight against identity theft.

Scammers, hackers and identity thieves are looking to steal taxpayers’ personal information and ultimately their money. But, there are simple steps taxpayers can take to help protect themselves, like keeping computer software up-to-date and being cautious about giving out their personal information.

This is the first reminder to taxpayers during “National Tax Security Awareness Week,” which runs through Friday. This week, the IRS, the states and the tax community are joining together to send out a series of reminders to taxpayers and tax professionals as a part of the ongoing Security Summit effort.

Here are some best practices taxpayers can follow to protect their tax and financial information:

  • Understand and Use Security Software. Security software helps protect computers against the digital threats that are prevalent online. Generally, the operating system will include security software or you can access free security software from well-known companies or Internet providers. Essential tools include a firewall, virus/malware protection and file encryption if you keep sensitive financial/tax documents on your computer. Do not buy security software offered as an unexpected pop-up ad on your computer or email. It’s likely from a scammer.
  • Allow Security Software to Update Automatically. Set security software to update automatically. Malware — malicious software — evolves constantly, and your security software suite updated routinely to keep pace.
  • Look for the “S.” When shopping or banking online, always look to see that the site uses encryption to protect your information. Look for “https” at the beginning of the web address. The “s” is for secure. Unencrypted sites begin with an http address. Additionally, make sure the https carries through on all pages, not just the sign-on page.
  • Use Strong Passwords. Use passwords of eight or more characters, mixing letters, numbers and special characters. Don’t use your name, birth date or common words. Don’t use the same password for several accounts. Keep your password list in a secure place or use a password manager. Don’t share passwords with anyone. Calls, texts or emails pretending to be from legitimate companies or the IRS asking to update accounts or seeking personal financial information are almost always scams.
  • Secure Wireless Networks. A wireless network sends a signal through the air that allows it to connect to the Internet. If your home or business Wi-Fi is unsecured, it also allows any computer within range to access your wireless and potentially steal information from your computer. Criminals also can use your wireless to send spam or commit crimes that would be traced back to your account. Always encrypt your wireless. Generally, you must turn on this feature and create a password.
  • Be Cautious When Using Public Wireless Networks. Public Wi-Fi hotspots are convenient but often not secure. Tax or financial Information you send though websites or mobile apps may be accessed by someone else. If a public Wi-Fi hotspot does not require a password, it probably is not secure. Remember, if you are transmitting sensitive information, look for the “s” in https in the website address to ensure that the information will be secure.
  • Avoid E-mail Phishing Attempts. Never reply to emails, texts or pop-up messages asking for your personal, tax or financial information. One common trick by criminals is to impersonate a business such as your financial institution, tax software provider or the IRS, asking you to update your account and providing a link. Never click on links even if they seem to be from organizations you trust. Go directly to the organization’s website. Legitimate businesses don’t ask you to send sensitive information through unsecured channels.

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. Also, read Publication 4524, Security Awareness for Taxpayers.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

If you need additional assistance, please contact Steve Siesser at steve@taxlawmd.com

Share

There Are Penalties For Excess Contributions To An IRA

Share
An excess contribution results when a taxpayer has contributed more than the annual limit to a traditional IRA or a Roth IRA. If any part of the excess contribution is allowed to remain in the IRA past the due date for correcting the excess, it is subject to a 6% excise

tax (6% penalty tax). The 6% penalty tax applies each year the excess is allowed to remain in the IRA.
To correct an excess contribution, the excess contribution must be withdrawn by the due date for filing the return, including extensions. The withdrawal of the excess contribution is considered tax-free if:
• The taxpayer does not take a deduction for the contribution, and
• The taxpayer withdraws any interest or other income earned on the contribution while it was part of the IRA.  For this purpose, any loss on the contribution is also taken into consideration when calculating the amount to withdraw.
If more than one contribution is made during the year, the last contribution is considered to be the one that is withdrawn first for purposes of calculating net income on earnings.
If the excess contribution is withdrawn after the due date (or extended due date), the withdrawal is generally taxable. However, the withdrawal is not taxable if both of the following conditions are met:
• Total contributions (other than rollover contributions) for the tax year were not more than the contribution limit that is not based on the taxpayer’s compensation ($5,500/$6,500 limits that apply for 2016), and
• The taxpayer did not take a deduction for the excess contribution being withdrawn.
Another way to handle an excess contribution is to pay the 6% penalty on the excess and leave it in the IRA. In the following
year, under contribute to the IRA for that year and apply the prior year excess contribution to the current year contribution. If the excess contribution carryover is still in excess of the contribution allowed for the carryover year, pay the 6% penalty on the difference
and carry the remainder over to the next year. Keep doing this until the excess is used up.
If you need assistance dealing with an excess contribution, contact Steve Siesser at steve@taxlawmd.com/div>

Share

I Just Got a Notice From IRS. What Should I Do?

Share

The IRS mails millions of notices and letters to taxpayers every year.   This can be extremely upsetting when receiving this form of communication, whether it is from the IRS or any other taxing authority.  Here are some suggestions to help formulate specific action plan for any correspondence received from the IRS (or from your state or local taxing authority).

Don’t Panic: You can usually deal with a notice simply by responding to it. You should immediately contact your tax adviser to discuss this matter in more detail.  Waiting or ignoring the notice can only compound and complicate your tax problems.  Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do.  Follow the instructions very carefully and give a specific and detailed response to the tax issue in question.

Your notice will likely be about changes to your account, taxes you owe or a payment request.  However, your notice may ask you for more information about a specific issue.  Only respond to the particular issue and do not provide or discuss issues that are not being raised by the IRS.  Do not assume that the taxes owed are correct.  In many cases, the IRS calculates taxes without all the relevant facts.

If your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return.  Just because the IRS says you owe taxes does not mean that they are correct.

If you don’t agree with the notice, you must respond within the time limit set out in the notice.  Write a letter that explains why you disagree, and include information and documents you want the IRS to consider.  Mail your response with the contact stub at the bottom of the notice to the address on the contact stub.  Always include a copy of the notice they sent you.  If a fax number is provided, use it. Allow at least 30 days for a response from the IRS.  The safest route is to have your tax adviser craft a well-conceived response that is supported with references to the relevant facts of your situation and the tax law in question.

If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment. If you choose not to respond to the IRS be sure you understand the IRS letter and its implications, because the next step from them is usually an assessment of additional taxes.

For most notices, you won’t need to call or visit a walk-in center. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call.  Waiting time could easily exceed an hour.  Be careful when talking with the IRS; they are not your friend.  Only speak to the specific issues in question.

Warning:  Be alert for tax scams:  The IRS sends letters and notices by mail. They don’t contact people by email or social media to ask for personal or financial information.

If you need my assistance, I can be reached at ssiesser@verizon.net

Share