I graduated from Wharton in 1987. For those of you keeping score at home, that means I’ve been working at my practice for a score and a quarter plus one.? Now that I’ve been practicing for twenty-six years, many of the clients I picked up earlier in my career have children in high school or college who have part-time jobs.
One thing I continually notice is that most of these kids who work are incorrectly having federal and state income taxes withheld from their wages.? Please note that a working child will generally owe no income taxes unless wages earned exceed $5,950 (in 2012) and/or investment income exceeds $300.? Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.
The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won’t earn enough to be taxed.? All you need to do is have your child write the word “Exempt” in Box 7 of the Form W-4 that is generally completed the first day of employment.? If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.
Here is what the IRS says in their instructions to the Form W-4:
Exemption from withholding: If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2013 expires February 17, 2014. See Pub. 505, Tax Withholding and Estimated Tax.
And here are the instructions on the W-4 for line 7:
I claim exemption from withholding for 2013, and I certify that I meet both of the following conditions for exemption.
? Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
? This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write ?Exempt? here .
Do yourself and your kids a favor by having him or her write the word “Exempt” on Line 7 of the W-4 form. Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages.? And you won’t get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund.
In today’s consumer driven world we live in, almost everyone builds up clutter that never sees the light of day. Why not take this opportunity to clean out your closets, garages, and attics and generate a tax deduction while you’re at it?
Donating these goods can also save you taxes, as long as you itemize your deductions instead of claiming the standard deduction. Just make sure to make a list of what you donated, and somehow come up with the fair value of each donated item.
According to the instructions to the Form 8283 – Non-cash Charitable Contributions:
The FMV of used household items and clothing is usually much lower than when new. A good measure of value might be the price that buyers of these used items actually pay in consignment or thrift shops. You can also review classified ads in the newspaper or on the Internet to see what similar products sell for.
You cannot claim a deduction for clothing or household items you donate after August 17, 2006, unless the clothing or household items are in good used condition or better. However, you can claim a deduction for a contribution of an item of clothing or household item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal of it with your return.
Publication 526 – Charitable Contributions sheds more light onto this issue:
The fair market value of used household items, such as furniture, appliances, and linens, is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.
You should support your valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. Do not include any of this evidence with your tax return.
Properly valuing your donated clothing and household rules has become more important in the post August 17, 2006 “Good or Better” world. If you ever get audited, there is a good chance that the IRS will use these new rules as a way to greatly reduce the deduction they will allow you to claim unless you can:
? Substantiate that the donated goods were in good condition or better, and
? Demonstrate how you came up with the Fair Market Value you claimed
To help you put a value on the donated goods, we have created a few different tools based on the published values of used merchandise sold at the thrift shops of the Salvation Army and Goodwill Industries. For starter, check out UDoGood, an iPhone App. Or, download our Non-cash Charitable Donation worksheet in either pdf format or as an Interactive Microsoft Excel Spreadsheet. (To download the Excel Spreadsheet, right click your mouse and hit “Save Target As”, and then choose the directory on your computer where you want this file to sit.)
Simply complete either version of this worksheet, take a few photos of what you are donating, and file along with your tax records, and use this information when completing your Form 8283 next year to attach to your federal income tax return.? Hopefully this information will do the trick if you ever get audited.? While we don’t recommend that you exaggerate the value you claim for the items you’re donating, we do believe you should take the full deduction based on the fair market value of the stuff you gave away.
With the April 15th deadline still a recent memory, most of us probably still have our tax records piled up somewhere in our homes. Why not take this opportunity to shred all the documents that you no longer need to keep? According to the IRS:
Well organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.
- What to Keep – Individuals. In most cases, keep records that support items on ???? your tax return for at least three years after that tax return has been? filed. Returns filed before the due date are treated as filed on the due date. Examples include bills, credit card and other receipts, invoices,??mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed.??You should typically keep records relating to property at least three? years after you’ve sold or otherwise disposed of the property. Examples include a home purchase or improvement, stocks and other investments,? Individual Retirement Account transactions and rental property records.
- What to Keep – Small Business Owners. Typically, keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is ???? later. Also, keep records documenting gross receipts, proof of purchases, expenses, and assets. Examples include cash register tapes, bank deposit?slips, receipt books, purchase and sales invoices, credit card charges and sales slips. Forms 1099-Misc, canceled checks, accounts statements, petty cash slips and real estate closing statements. Electronic records can?included databases, saved files, e-mails, instant messages, faxes and?voice messages.
There is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For filing a claim for a loss from worthless securities the time to make the claim is 7 years from when the return was due.
For more information from the IRS, check out:
- Publication 552, Recordkeeping for Individuals, provides more information on recordkeeping requirements for individuals.
- Publication 583, Starting a Business and Keeping Records
- Publication 463, Travel, Entertainment, Gift,?and Car Expenses, provide additional information on required documentation for taxpayers with business expenses
For a more complete listing, please check out this Record Retention Guide Compiled by the Massachusetts Society of CPAs available on my firm’s website.
From the IRS Tax Tips News:
If you have a child under age 17, the Child Tax Credit may save you money at tax-time. Here are some facts the IRS wants you to know about the credit.
- Amount.? The non-refundable Child Tax Credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return.
- Qualifications.? For this credit, a qualifying child must pass seven tests:
1.?Age test.? The child must have been under age 17 at the end of 2012.
2.?Relationship test.? The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child may also be a descendant of any of these individuals, including your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
3.?Support test.? The child must not have provided more than half of their own support for the year.
4.?Dependent test.? You must claim the child as a dependent on your federal tax return.
5.?Joint return test.? The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
6.?Citizenship test.? The child must be a U.S. citizen, U.S. national or U.S. resident alien.
7.?Residence test.? In most cases, the child must have lived with you for more than half of 2012.
- Limitations.? The Child Tax Credit is?subject to income limitations, and may be reduced or eliminated depending on your filing status and income.
- Additional Child Tax Credit.? If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the refundable Additional?Child Tax Credit.
- Schedule 8812.? If you qualify to claim the Child Tax Credit make sure to check whether you must complete and attach the new Schedule 8812, Child Tax Credit, with your return. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812.
IRS Publication 972, Child Tax Credit, can provide you with more details. View it online at IRS.gov or request it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant tool on the IRS website to check if you can claim the credit. The ITA is a resource that can help answer tax law questions.
Additional IRS Resources:
From the IRS Tax Tips News:
If you were married or divorced and changed your name last year, be sure to notify the Social Security Administration before you file your taxes with the IRS. If the name on your tax return doesn?t match SSA records, the IRS will flag it as an error and that may delay your refund.
Here are five tips for a person whose name has changed. They also apply if your dependent?s name has changed.
1.?If you have married and you?re using your new spouse?s last name or you?ve hyphenated your last name, notify the SSA. That way, the IRS computers can match your new name with your Social Security number.
2.?If you were divorced and are now using your former last name, notify the SSA of your name change.
3.?Letting the SSA know about a name change is easy. File Form SS-5, Application for a Social Security Card, at your local SSA office or by mail with proof of your legal name change.
4.?You can get Form SS-5 on the SSA?s website at www.ssa.gov, by calling 800-772-1213 or at local SSA offices. Your new card will have the same number as your former card but will show your new name.
5.?If you adopted your new spouse?s children and their names changed, you’ll need to update their names with SSA too. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:
IRS YouTube Videos: