Quite frequently readers will ask how they can resolve disagreements among family members over who get's to claim a dependent. It's helpful to start with some ground rules, and my number one rule here is to prevent (if at all possible) the IRS from getting involved in family disputes. Now the IRS will get involved only if two or more people attempt to claim the same person as a dependent. So if at all possible, it's best to resolve your differences before anyone has filed their tax return.

In some situations, it's not easy or practical or even desirable to resolve a dispute. And here's where the tax rules can come to your aide. ...

Tips for Resolving Disputes over Dependents originally appeared on About.com Tax Planning: U.S. on Tuesday, January 24th, 2012 at 07:53:00.

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People often ask me about whether they can claim dependents, whether they qualify for the head of household filing status, and whether they qualify for the earned income credit. These three tax benefits are very closely related, as are designed to help minimized the tax burden for working families. The rules in this area often cause confusion, because each tax benefit has its own, separate requirements.

The first thing to start with is dependents, for that is a common element is all three tax incentives. Both head of household and the earned income credit require that a taxpayer claim (or be eligible to claim) dependents. Dependents are, roughly speaking, persons who depend on another for their financial support, and the usual example here are children. But sons and daughters aren't the only types of relationships that can exist between a taxpayer and a dependent. Parents, grandparents, nieces and nephews, and other family relations can also qualify. The important thing to remember about dependents is there are two ways to qualify as a dependent: either under the qualifying child criteria or under the qualifying relative criteria.  Claiming a dependent opens several tax saving benefits to a taxpayer: the taxpayer gets to claim one personal exemption for each dependent, and may also be eligible for the earned income credit, child tax credit, child care tax credit, education tax credits or deductions for that dependent, and medical expenses for that dependent. (By eligible to claim a dependent, I am referring to the situation where a custodial parent may waive the dependent's personal exemption in favor of the other parent, but retain eligibility for head of household and the earned income credit, a situation I call sharing the dependent-related tax breaks.)

Head of household is a separate tax benefit, one that functions by widening the income brackets to which each tax rate applies. For example, compare the income brackets for single and head of household filers found in the 2011 tax rates. To be eligible for head of household status, a taxpayer must have at least one dependent and be unmarried. So, this tax benefit is particularly well-suited for single parents. Now dependents can be of any number of family relations, but for Head of Household, the dependent must be closely related to the taxpayer by birth or marriage, such as children, parents, grandparents, nieces and nephews. There's a further restriction for Head of Household in that the dependent person must actually reside with the taxpayer, and the taxpayer must actually provide more than half of the total financial support of the dependent person. These two requirements are not always the case for dependents. For example, parents can be claimed as dependents under the qualifying relative criteria, and the parents don't necessarily need to reside with the taxpayer. But for head of household purposes, parents would need to reside with the taxpayer if the taxpayer wants to use them as their qualifying person.

The earned income credit is a refundable tax credit for lower-income families that in many cases results in the taxpayer having a negative effective tax rate, in other words that the taxpayer receives more back from the IRS than they paid in through income tax withholding. For the purpose of the earned income credit, only closely-related dependents will qualify. Specifically, children, grandchildren, brothers and sisters, nieces and nephews can qualify a taxpayer for the earned income credit. But parents, grandparents and other types of relationships won't qualify due to the age test, in which the dependent person must be under 19 or under 24 and a full-time student.

What often causes frustration are situations in which a taxpayer is caring for a younger person, but there's no relation by blood or marriage. In such cases,  taxpayers might find they are eligible only for the single filing status and the dependent's personal exemption, but not head of household or the earned income credit.

Tax preparation software often includes questionnaires to help taxpayers determine whether they are eligible to claim a dependent, eligible for head of household, and eligible for the earned income credit. Many of these interview questions may seem repetitive, but that's because in each case the criteria are slightly different. The IRS has a Web tool for helping taxpayers figure out if they qualify for the earned income credit, called the EITC Assistant. But the IRS does not have (as far as I'm aware) similar Web tools for evaluating dependents and head of household situations.

Related: Can two people at the same address both be head of household?

Differences between Dependents, Head of Household, and Earned Income Credit originally appeared on About.com Tax Planning: U.S. on Tuesday, January 24th, 2012 at 06:56:55.

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The Internal Revenue Service issues federal tax refunds on a schedule, which they call the "refund cycle." For tax returns accepted by the IRS by 11 am on Wednesday, the IRS issue refunds the following week, with direct deposits issued on Wednesdays and checks mailed out on Fridays. By accepted, we mean that the IRS's computers have acknowledged the receipt of an electronically filed return.

The IRS publishes their refund schedule, also called the refund cycle chart, in Publication 2043, which is partially reprinted below: ...

When to Expect Your Federal Tax Refund originally appeared on About.com Tax Planning: U.S. on Tuesday, January 24th, 2012 at 04:08:46.

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Consumers have a wide range of choice when it comes to preparing their tax return. You can prepare a tax return using forms downloaded directly from the IRS, use tax preparation software from independent software publishers, or hire a professional tax preparer. You can even combine these choices, for example you could draft out your tax return on paper forms or using software before seeking out professional help.

When shopping for professional help, there's some simple things to bear in mind. First, starting this year tax preparers must be registered with the Internal Revenue Service if they are going to be preparing tax returns for a fee. All tax preparers must have an IRS-issued preparer identification number (called a PTIN). Eventually (but not yet), all professional tax preparers will need to have one of four credentials:

• Registered tax return preparer (this credential will be issued by the IRS after the tax preparer has passed a competency test and a background check, but the IRS has yet to issue any of these credentials)
• Enrolled agent (this credential is issued by the IRS to persons who have passed a rigorous competency test in taxation and passed a background check)
• Certified public accountant (persons holding the CPA credential have passed a rigorous test in accounting and are licensed to practice by state boards of accountancy)
• Tax attorneys rarely prepare tax returns, although some might. Tax attorneys hold a law degree (Juris Doctor) and may have a graduate degree in tax law (LL.M.).

Besides checking for credentials, you should also ask some basic questions, such if they have the skills and expertise needed to prepare your tax return, how they set their tax preparation fees (and what's included in their fee), what sort of privacy protections they adopt, and what what they think about your overall level of taxation.

Elsewhere on the Web:

• Robert Flach has posted a nice collection of 8 Questions to Ask Your Tax Preparer.
• Kerry Kerstetter has an excellent article on how to evaluate potential tax advisors.

Directories of Tax Preparers:

• The National Association of Enrolled Agents publishes a directory of enrolled agents who are a member of that association. Not all enrolled agents belong to the association, however, so this is not a comprehensive resources.
• The American Institute of Certified Public Accountants publishes a directory of certified public accountants. Be aware that not all CPAs prepare tax returns.
• The National Association of Tax Professionals publishes a directory of tax professionals who are members of that organization.

Tips for Finding the Right Tax Professional For You originally appeared on About.com Tax Planning: U.S. on Tuesday, January 17th, 2012 at 06:50:09.

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Self-employed persons and businesses of any size are required to report payments for services rendered by independent vendors by using Form 1099-MISC. For the year 2011, Form 1099-MISC reporting has become more complex, so I'll attempt to clarify the situation. ...

Tips for Preparing Form 1099-MISC originally appeared on About.com Tax Planning: U.S. on Tuesday, January 17th, 2012 at 05:17:33.

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The fourth and final estimated tax payment for the year 2011 is due on Tuesday, January 17th. (See: Publication 505.) For independent contractors, this is a perfect opportunity for you to draft out your 2011 tax return to get an idea of how much federal and state tax is due to be paid (your total tax liability), review how much as been paid in so far through previous estimated tax payments, and determine how much extra is due for 2011.

For many independent contractors, including myself, we've been paying estimates based on our 2010 tax liability, divided into four equal installments. That payment schedule works good as an estimating tool, but our actual tax liability for 2011 might be higher or lower than those estimates. The important thing is to pay attention to how much is required to be paid, when those payments are due, and developing a "tax budget" or a schedule of tax payments throughout the year 2012.

Start by tallying up income and expenses related to your self-employed business.

Then, draft out your 2011 tax return. You can do this using online tax software. You don't need to go through every single interview screen on your software. But do go through the sections related to your business income and expenses, and your estimated tax payments.

Find your total tax liability for federal and state taxes, and write those down on a piece of paper. Also write down your gross business-related income, your net business income, estimated tax payments, and the amount of taxes still to be paid. Off to the side somewhere write down your total tax liability (federal and state) for 2011. From here we're going to do some analysis and budgeting. (Your total federal tax liability is found on Line 61 of Form 1040, if your software allows you to preview your 1040.)

Your piece of paper might look something like this:

• Gross business income (before expenses):
• Net business income (after expenses):
• Total federal tax liability:
• Estimates paid in so far:
  • 1st estimated payment:
  • 2nd estimated payment:
  • 3rd estimated payment:
  • 4th estimated payment:
    • Total estimated payments:
• Balance to be paid (total tax minus payments):

Repeat the tax liability and payment lines for your state taxes.

Now, you're ready to do some analysis and budgeting. We can slice and dice these numbers in several ways, but I'm going to first start with payment deadlines:

• The fourth estimated payment is due by January 17th, 2012. The minimum amount to be paid in is one-fourth of your 2010 tax liability.
• Any remaining tax for 2011 is due by April 17, 2012.
• Your first estimated payment for 2012 is also due on April 17, 2012.
• Your second estimated payment for 2012 is due on June 15, 2012.

From here we can add amounts for federal and state taxes to each of these deadlines.

Let's start by analyzing payments for the year 2011. You can split this up between your 4th estimated payment (due January 17th) and your extension payment (due April 17th). Consider having your 4th estimate be at least one-fourth of your 2010 tax liability, as this will help you avoid the "penalty" (really an interest charge) for underpaying your estimates. Right now, this underpayment penalty is 3% (which is stated as an annual rate). At the very least, your goal should be to have your 2011 taxes paid-in by April 17th so as to avoid the late payment penalty, which runs at half a percent per month.

Next, analyze payments for the year 2012. Your estimates for 2012 will be one-fourth of your 2011 total tax, spread over the four estimated payment due dates. The first payment is due April 17th (the same day your 2011 taxes are due), and the second payment is due just two months later on June 15th.

You can use a spreadsheet or a sheet of scratch paper to sketch out these payment amounts and deadlines. From there you can analyze how to go amount making these payments. Seeing the amounts and due dates organized like this will give you a good overview of your situation.

Now, let's do one more piece of analysis. Find your effective tax rates, which is the ratio of your total tax liability to your net business income. You can calculate separate ratios for your federal, state, and combined tax burdens. This ratio reveals, in a quick way, how much of your net business income goes to taxes.

You can also calculate a similar ratio based on your gross business income. I use this ratio (based on gross income) as a budgeting tool. What this ratio says to me, as a tax professional, is that if I set aside at least this percentage out of gross income, then that will likely be an amount sufficient to cover tax payments. While this ratio method of budgeting is not exact, it is a helpful place to start.

Some additional timing tips for the self-employed.

You don't need to file your return just now. You can wait and file in April, or request an extension and file in October. The more important task is figuring out how much to pay and when, and developing a payment schedule that's manageable.

You can use your tax summary as a benchmark for fine-tuning your tax return. Once you have your basic situation, you can compare what your taxes would look like if you funded an IRA or SEP-IRA, for example. You can also use your summary to compare a tax return prepared professionally versus one you prepared yourself.

4th Estimated Payment Due on January 17 originally appeared on About.com Tax Planning: U.S. on Tuesday, January 10th, 2012 at 11:31:36.

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Generally speaking, you can file a tax return for 2011 as soon as you have received all your relevant tax documents, such as Form W-2 reporting wage income, Forms 1099 reporting interest, dividends and other types of income, and so forth.

Do be aware that the Internal Revenue Service starts accepting electronically filed tax returns on January 17, 2012. You can mail in a hand-prepared tax return earlier, but the IRS generally starts processing hand-prepared returns around the same time (mid-January).

Also be aware, that you cannot file a tax return using only your last paystub. There's additional information found on the Form W-2 that is needed for your tax return.

How Soon Can You File Your 2011 Tax Return? originally appeared on About.com Tax Planning: U.S. on Tuesday, January 10th, 2012 at 10:30:04.

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January is a good time to review your finances for the previous year and start organizing the documents and information you'll need for preparing your tax return. One technique I've been using with some of my clients is to make a list of various types of income and tax-deductible expenses you had for 2011. When your tax documents arrive in the mail, you can check them off your list. In this way you'll know when all your documents have arrived, and then you'll be ready to file your tax return.

This technique is especially useful if you have lots of documents, as it can help both you and your tax preparer ensure that all items have been accounted for. If you're preparing your own tax return, the checklist can serve as cross-check when working with your tax software.

Now each person's checklist will look a little bit different, since we all have slightly different financial situations. Here's one sample checklist for married homeowners:

• W-2 for the husband
• W-2 for the wife
• 1099-INT for savings account
• 1098 for mortgage interest paid
• Property tax statements
• Receipts for any energy-efficient home improvements

Once you develop your checklist, you'll be able to tell when you have all your documents ready, and you'll be able to cross-check your progress in your tax software or be able to cross-check your tax preparer's work.

Your checklist can be as detailed or as simple as you need it to be.

Organizing Your Tax Documents originally appeared on About.com Tax Planning: U.S. on Tuesday, January 10th, 2012 at 10:03:29.

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The following is a brief overview of tax items that are new, different or substantially revised for 2011.

The deadline to file personal tax returns is April 17, 2012. The extended deadline is October 15, 2012. This year's primary tax deadline falls on a Tuesday due to the Emancipation Day holiday in the District of Columbia, which is a federal holiday celebrated this year on Monday, April 16th. The traditional tax deadline of April 15th falls on a Sunday, and so the deadline is pushed to the next non-holiday, which this year is Tuesday, April 17th.

Capital gains and losses are reported on new Form 8949, with totals from that form reported on the Schedule D. This new reporting format coordinates with the new cost basis reporting requirement by brokers.

Standard mileage rates for 2011 are split into two amounts, each covering half the year, as follows:

Standard deduction amounts have increased. The 2011 amounts are

• Single: $5,950
• Head of Household: $8,700
• Married Filing Joint: $11,900
• Married Filing Separately: $5,950
• Qualifying Widow/Widower: $11,900
• Dependent: $950-$5,950

Personal exemption amounts have also increased. It is $3,700 for 2011, up from $3,650 for 2010.

Individual Retirement Account funding limits for 2011 remain at $5,000 for people age 49 or younger and at $6,000 for people age 50 or older. The deadline to fund an IRA retroactively for 2011 is April 17, 2012.

The self-employed health insurance deduction no longer offsets the self-employment tax (which was the case for 2010). The deduction still offsets the regular income tax as an adjustment to income on Form 1040.

Alternative minimum tax (AMT) exemption amounts increased slightly from 2010, but they are scheduled to decrease for 2012 unless Congress legislates a "patch" to the exemption amounts. The 2011 AMT exemption amounts are:

• $48,450 for single and head of household filers,
• $74,450 for married people filing jointly and for qualifying widows or widowers, and
• $37,225 for married people filing separately.

Health savings accounts (HSAs) and Archer MSAs now have a higher 20% surtax for non-medical distributions (previously was 10% for HSAs and 15% for MSAs). The rules have changed regarding non-prescription medications and supplies. Starting with 2011, medications and supplies eligible for tax-free payment through an HSA or MSA are prescription drugs, over-the-counter treatments with a prescription, and insulin. (Publication 969 and Notice 2010-59.)

Remember to include half of your 2010 Roth conversion if you elected to spread the income from a 2010 conversion over two years. Any conversions occurring in 2011 are fully taxable in 2011.

The alternative motor vehicle credit has expired for most vehicles. However, newly purchased fuel cell vehicles can qualify for a tax credit in 2011.

First-time homebuyer credit for 2011 is available only to members of the uniformed services or the Foreign Service.

Repayment of first-time homebuyer credit. Some taxpayers can report their repayments of the homebuyer credit directly on their Form 1040 without using Form 5405 as an attachment. Refer to the revised instructions for Form 5405.

Nonbusiness energy property credit for 2011 has a $500 lifetime maximum credit, rather than the $1,500 previous lifetime max. Refer to Form 5695 (which has instructions included on the form).

Foreign financial assets are reported on Form 8938. Taxpayers with financial assets held outside the United States may have to file new Form 8938 (instructions). The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

Schedule L has been retired from use. This form was previously used to calculate the standard deduction plus any additions to the standard deduction. Additional standard deductions expired at the end of 2009.

Making work pay credit has expired, and Schedule M has been retired from use.

Be sure to use the right address for mailing tax returns to the IRS, since the IRS occaisionally changes which processing center handles tax returns. The IRS posts current mailing addresses on their Web site.

Source: adapted from the What's New section of Publication 17.

2011 Federal Income Tax at a Glance originally appeared on About.com Tax Planning: U.S. on Tuesday, January 3rd, 2012 at 07:14:59.

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The year 2012 is likely to be a contentious year when it comes to taxation. I've put together a short list of what I think will be the key tax issues that we'll be dealing with this year.

Expiration of the Bush-era tax incentives. 2012 is the last year for an astonishingly wide range of tax incentives. Collectively these are referred to as the "Bush tax cuts," since most of the tax provisions were enacted in 2001 when G.W. Bush was president. Some of the provisions that expire at the end of 2012 include:

• Our current six-tier tax rate structure (ranging from 10% to 35%) will be replaced in 2013 with a five-tiered tax rate structure (ranging from 15% to 39.6%)
• Dividends will lose their preferential 15% tax rate.
• Earned income credit, dependent care credit and child tax credit are reduced.
• Itemized deductions and personal exemptions will be reduced for higher-income persons.
• Employer-provided education assistance plans will be restricted to undergraduate studies only.

I expect this issue to dominate political news. As CNN smartly remarks, Congress likely will be "waiting to the very last minute" of 2012 before making any major tax changes. But taxpayers need not wait to the last minute to see what Congress decides. Kay Bell over at Bankrate.com has posted tax planning suggestions just in case the Bush tax cuts expire.

Expiration of the Payroll Tax Holiday. The temporary reduction in the Social Security tax rate expires at the end of February 2012. With such a short time-frame, I expect Congress to address this tax issue early in the year.

New Tax Form for Capital Gains Transactions. Taxpayers will be reporting their capital gains transactions on the new Form 8949. This new form is likely to cause confusion by taxpayers, their brokers, and tax professionals as we all get accustomed to this new reporting format. Claudia Hill says, "I'm giving this form the #1 trouble spot award for 2012" (Forbes).

New Tax Form for Reporting Foreign Assets. If you have assets invested outside the U.S., you have a new tax form to fill out, the Form 8938. Taxpayers will use this form to let the IRS know exactly what assets, and their approximate market value, are held outside the U.S. While this form is used merely to disclose the existence of those foreign assets, there's a hefty $10,000 fine for not filling out the form accurately. Robert Wood provides a good overview of Form 8938 (Forbes).

More scrutiny over the Earned Income Credit. The IRS is exerting greater pressure on tax professionals in an effort to reduce the amount of improper earned income tax credits. Namely, tax preparers can now be fined $500 for each return containing an improper EIC claim. Trish McIntire explains in her blog post If Your Preparer Won't Do EITC.

2012: A Preview of the New Tax Year originally appeared on About.com Tax Planning: U.S. on Tuesday, January 3rd, 2012 at 02:49:40.

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