Eight Tax Benefits for Parents

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act. 

Tax help: Can I claim a home office tax deduction?

Elizabeth Rosen for AJC writes: If you use part of your home for business, you may be able to benefit from the home office tax deduction. This tax help can be used by individuals who are employees or who are self-employed. Claiming the home office tax deduction is a good tax strategy to employ if you are eligible because it allows you to deduct certain expenses that the average homeowner cannot. Deducting the costs associated with your home office helps lower your taxable income, and thus your overall tax bill. The home office tax deduction is an itemized deduction.

NOTE: Tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250). There are two main types of tax deductions: the standard deduction and itemized deductions. A taxpayer must use one or the other, but not both. It is generally recommended that you itemize deductions if their total is greater than the standard deduction.

According to the IRS, you must meet three main requirements in order to be eligible for the home office tax deduction. You must use a portion of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with clients/customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home

Exclusive & Regular Use

In order to qualify for the home office tax deduction, the IRS requires that you regularly use a portion of your home exclusively for conducting business. In other words, you cannot put a computer in the guest room and call it a home office. You also cannot allow your children or spouse to use your office for their own projects. To be eligible, your home office must be a separate room or identifiable area from which personal activities are excluded. The IRS is very adamant about the exclusive-use requirement, although there is less clarity when it comes to the definition of “regular use.” Conducting business from your home office at least a couple hours every day is likely enough to satisfy the regular-use requirement.

Principal Place of Business and/or a Place to Meet with Clients

To be eligible for the home office tax deduction, you must demonstrate that you use your home office as your principal place of business. This means that the office portion of your home must be used significantly and consistently for business activities, or as a place where you meet with your clients/customers in the normal course of your business. Keep in mind, even if you also conduct business at another location, you can still deduct the expenses associated with the portion of your home that’s used exclusively and regularly for business.

In other words, your home office must be your principal place of business, but not necessarily your principal office. A separate or detached structure (such as a garage or barn) may qualify as a home office if it is used exclusively and regularly for business.

Expenses that Can Be Deducted

The home office tax deduction is a great tax strategy if you know how to use it. The IRS only approves of certain qualified expenses for this tax break.  To determine whether an expense can be deducted, there are 3 general rules:

1. Only to Home Office — If an expense is related only to your home office, the entire cost is deductible as a “direct” home office expense.
2. Entire House — If an expense pertains to the entire house, a portion of it will be deductible as an “indirect” home office expense.
3. Non-Business Portion — If an expense is associated only with the non-business part of your home, it is not deductible as a home office expense.

Direct Expenses

Direct expenses are fully deductible under the home office tax deduction. These may include the cost to repair, upgrade, or maintain your home office space.

Indirect Expenses

These types of expenses may help you save the most money because they are associated with your whole house. Indirect expenses can include a portion of your heating, air conditioning, electricity, security system,homeowners insurance, property taxes, and even your monthly mortgage payments. For example, if your home office makes up 20% of your house, you can deduct 20% of your utilities bills under the home office tax deduction.

If you also work at another location, be cautious when claiming certain expenses under the home office tax deduction. Administrative duties (such as bookkeeping, recordkeeping, billing operations, making appointments, and ordering supplies) may qualify as deductible expenses, but your home office must be the only place where you can accomplish these tasks.

Limits on the Home Office Tax Deduction

As with every tax break, there are limits to how much you can deduct for your home office. Note that the amount of your home office tax deduction cannot be more than your home-based business income. In general though, the more substantial your home business activities are, the greater your chances are for qualifying for the home office tax deduction.

For More Information

For more information regarding the home office tax deduction and business use of your home, please refer to the following documents:

• IRS Publication 587 (Business Use of Your Home)
• IRS Tax Form 8829 (Expenses for Business Use of Your Home)
• IRS Tax Form 8829 Instructions
• IRS Tax Form 1040, Schedule C (Profit or Loss from Business)
• IRS Tax Form 1040, Schedule A (Itemized Deductions)

Don't Let Tax Cheaters Target You

Jennifer Waters for the Wall St.Journal writes: In March of 2011, David Parker filed his 2010 income-tax return with a check for what he owed the Internal Revenue Service.

Three months later, weeks after the check was cashed, the Seattle resident discovered during a mortgage refinancing that someone else had collected more than $3,600 through a fraudulent return that carried his name, Social Security number and an address in Irving, Texas, with his same street name.

"It's a shock when this happens to you," says Mr. Parker.

It took dozens of hours on numerous calls to multiple IRS caseworkers over 20 months and help from the Office of the Taxpayer Advocate, the IRS watchdog, before his case was settled. The IRS flagged his account to prevent further abuse.

But when he filed his 2011 tax return last Feb. 17, it was rejected because one had already been filed with his Social Security number.

The IRS has long been the bane of American taxpayers, but the misery index has shot up since the advent of electronic filing and a congressional mandate to get refunds out within 21 days of receipt.

That puts speed ahead of detail and accuracy at the IRS, spiking tax-related identity thefts from 48,000 in 2008 to 650,000 in 2012, according to the Taxpayer Advocate.

Why the hike? E-filing is effortless. It only requires a legitimate name, a Social Security number and information from the W-2, not the actual form.

"It's so easy to type up a phony one," says Jay Starkman, a certified public accountant in Atlanta. "There are no fingerprints, no software ID, no tax forms to sign, no trail."

The IRS doesn't require refunds to be deposited to accounts in the names of filers, so criminals have them sent to their own accounts and, increasingly, to prepaid debit cards that have nothing tied to them.

Some 80% of the more than 130 million individual tax forms filed annually are e-filed, which has popped out refunds in as little as seven days. Computers armed with sophisticated algorithms and filters are doing most of the work, but they do still pass human eyes.

That's troubling to Mr. Parker. The two-page fake return stated that Mr. Parker, chief executive of the Washington Institute of Sports Medicine, which he owns as well as two other businesses and investment properties, made only $32,000 in 2009, a level that qualifies for an additional refund of $400 from the Earned Income Tax Credit. His real filings over two decades have reported incomes far higher and were at least an inch thick and very complicated.

"I asked them if the rejected one looks like the ones I've sent for the last 25 years," says Mr. Parker, who noted that he has been married for 45 years and the fraudulent return said he was single.

"The IRS would only say that people get divorced, they move, we don't know that wasn't you and that your circumstances didn't change," Mr. Parker says. "That's a valid point, but shouldn't they have checked it out more?"

The IRS, burned by rampant criticism, calls identity and refund theft a "top priority." It has instituted stronger screening filters and doubled caseworkers to 3,000 to work on identity-theft-related issues. Another 35,000 employees are trained to identify theft indicators and help victims.

Still, accountants and ID-fraud experts warn that tax-fraud theft will get a lot worse before the IRS gets control of it.

"The only way to stop it is to slow down the refund process," Mr. Starkman says.

Here are tips on how to avoid tax fraud:

Stalk your mail carrier. If you haven't received your W-2 or other tax documents, find out why. This is prime time for mail theft.

Don't fall for phishing emails. The IRS will never contact you through email or ask you online for your Social Security number to verify your identity.

Don't carry your Social Security card around and never give the number out to any business that asks for it.

File early. "It's not going to stop any breaches, but it reduces your risk," says Raul Vargas, fraud operations manager for Identity 911, an identity-management solutions firm.

If you have a "reasonable" expectation of victimization because your information was breached or you already have been victimized, ask the IRS for an identity protection personal identification number, or IP PIN. That's attached to your Social Security number, blocking your return until someone has manually looked at it for three years.

If you haven't done it already, when you e-file this year, get a PIN for filings or use your adjusted gross income from 2011 as a PIN. If you forget or lose it, the IRS will give it to you over the phone, but plan on it taking as much as an hour of waiting.

Financial Planning Strategies for 2013 and Beyond

Christopher Colyer, CPA, M.S.T., M.B.A., is a tax director with Wiss & Company, LLP. and  for NJ1015.com writes: After several years of long-term tax rate uncertainty, we now have tax rate certainty. The portion of the fiscal cliff that loomed over taxpayers as the sun set on the Bush-era tax rates was solved in a last-minute political compromise. We’ve partnered with the New Jersey Society of  CPA’s to explain how this will effect you as a resident of New Jersey in the fiscal year 2013.

The new law passed January 1 has a clear dividing line: Income tax rates will increase at incomes above $400,000 for individuals and $450,000 for married couples filing jointly. Income tax rates will remain the same for anyone below those levels. Everyone, however, will see some sort of tax increase due to new Medicare taxes which come into play in 2013:

• The temporary FICA tax holiday lapsed in 2012. The Social Security tax was temporarily lowered to 4.2 percent in 2011 and 2013. In 2013 and forward, the rate reverts to 6.2 percent.
• Individual wage earners with salaries of more than $200,000 will be subject to an additional 0.9-percent Medicare tax (on top of the 2.9 percent that existed before).
• Investment income (interest, dividends, capital gains) is now subject to the 3.8-percent Medicare tax once the taxpayer’s adjusted gross income exceeds $250,000 for couples or $200,000 for single filers.

If there’s one great take away from the fiscal cliff, it is that special consideration needs to be given to long-term financial planning in light of economic instability. By planning ahead, there are steps taxpayers can take to lessen the impact of any potential damage and keep control of their financial futures:

• Retirement plans contributions become more valuable. The higher the current income tax rate, the more valuable tax deferral becomes. Further, investment income earned within a retirement plan is not subject to the new Medicare tax on investment income. Try to contribute more to your 401(k) or IRA. The last day to make a 2012 IRA contribution is April 15, 2013.
• Retirement account, tax diversification: Investors are familiar with the concept of portfolio diversification. The same concept applies to the tax status of retirement accounts. Most employers offer a Roth option on 401(k) accounts, where an employee pays tax on the contributions. However, the contributions grow tax-free and are tax-free upon distribution.  Combining a Roth with a traditional 401(k) or IRA provides tax diversification that can give some protection against future tax rate uncertainty.
• As income tax rate rise, municipal bonds become a more attractive investment compared to the taxable bonds. Along with income tax savings, the municipal interest may also avoid the new Medicare tax on investment income.
• Evaluate your stock portfolio and consider a shift away from dividend-paying stocks into growth stocks. The new law increases federal tax rates on dividends from 15 percent in 2012 to 23.8 percent in 2013 and forward when you include the Medicare tax.

IRS Will Begin Accepting Tax Returns with Education Credits on February 14

The IRS has announced that taxpayers will be able to start filing two major tax forms during the week of February 10, 2013, covering education credits and depreciation. The processing of tax returns that include Form 4562, Depreciation and Amortization, will start on Sunday, February 10. On Thursday, February 14, the IRS plans to begin processing Form 8863, Education Credits. These forms are filed by the largest group of taxpayers who were unable to file following the opening of the 2013 tax season. The IRS also announced that it will start accepting the remaining forms affected by the new tax legislation during the first week of March.