Filing Status of Living Together and Not Married

A few days ago I heard on the news that the number of unmarried couples living together in the US is increasing.  Around tax time, these couples might wonder how to report their filing status.

If you are not legally married, then your filing status is NOT married filing jointly or married filing separately.  If you live in a common law state and file your tax return as either, then the IRS is going to consider you married. This can create problems for you if being married is not your desire.

That leaves two filing status, Single and Head of Household (not discussing qualifying widow).  

Scenario 1: You and your girlfriend live together (no kids and relationship does not violate local law)

1)      You work & support both of you

2)      Girlfriend does not work and has no income

Head of Household is a more desirable filing status than Single, but you do not qualify for it. In order to file Head of Household, you MUST pass three tests.

1)      You are unmarried or “considered unmarried” on the last day of the year à PASS

2)      You paid more than half the cost of keeping up a home for the year à PASS

3)      A “qualifying person” lived with you in the home for more than half the year à FAIL

Here’s why you failed number 3.  A qualifying person for the Head of Household status is either a qualifying child or a qualifying relative*. In this example, there are no children.  What about qualifying relative? Well, your girlfriend would actually have to be related to you in a way listed by the IRS. By the way, cousins are not considered relatives, according to the IRS. So your filing status is Single.  But, you can claim your girlfriend as a dependent!

Scenario 2: Same as above, but your girlfriend’s child lives in the household too

You pass the first two tests, but fail the third test again. Here is why you fail. The child is your girlfriend’s qualifying child, not yours. What about qualifying relative?  Well to be a qualifying relative, a person cannot be a qualifying child of another person.  So, your filing status is Single, but you can claim both your girlfriend and her child as dependents.  You can only claim the child as a dependent because your girlfriend does not have to file a tax return and does not file or files only to get a refund from estimated tax paid.

*The definition for Qualifying Relative depends on the context that it is being used. In order to qualify a person for the Head of Household filing status, a Qualifying Relative must actually be related to the person in one of the ways listed by the IRS.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

How Long Do You Have to Claim a Refund from the IRS?

Unfortunately, you don't have an unlimited amount of time to claim a refund from prior year tax returns. For example, suppose you finally find a receipt for an expense that you could have claimed (but didn't) on your 2009 return. You review the tax return and decide that you can back $1000 if you amend it. Well, it's  probably too late to get that refund.  Generally,

1) You must file a claim for a credit or refund within 3 years from the date you filed your original return.

OR 

2) You must file a claim for a credit or refund 2 years from the date you paid the tax.

You pick the date that is the latest. If you timely filed your 2009 return on 4/01/2010 you would have until 4/15/2013 to amend it and claim a refund.

But suppose that you had amended your 2009 return on 5/15/2011 and paid some additional tax with that filing. Then you would have until 5/15/2013 (2 years) to amend it again to claim a refund (up to the amount you paid on 5/15/2011).

You can refer to IRS Pub 556 for more details.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

Self Employed Individuals May Need to Make Quarterly Tax Payments to the IRS

Estimated tax payments exist because our tax system is “pay as you go”. In other words, the government wants you to pay income tax as you earn money. If you work for someone and receive wages reported on Form W-2, you may not need to make estimated tax payments. Your employer probably withholds enough money from your paycheck to satisfy your annual tax obligation. However, if  you receive income in which taxes were not withheld, you may have to make estimated tax payments. A few examples are when your income is reported on Form 1099-Misc, you received rental income, or you sold stock or property at a gain.  If you are self-employed and are paid with cash, checks, credit cards, etc. throughout the year, you probably need to be making estimated tax payments too. 
 
You must pay estimated taxes if both (1) & (2) apply:

1. You expect to owe at least $1,000 in tax for 2013, after subtracting your withholding and refundable credits.

2. You expect your withholding and refundable credits to be less than the smaller of:

•  90% of the tax to be shown on your 2013 tax return   OR
• 100% of the tax shown on your 2012 tax return

If you have to pay estimated taxes, you can use the EFTPS system to expedite your payments. Or, you can mail in your check using IRS Form 1040-ES.

Brycast Financial Planning in Austin Texas --- We Can Help

Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/

Enrolled Agent; Investment Advisor Representative

Cancelled Debt on Your Primary Residence

If your home was foreclosed upon or you abandoned it, then there are some tax consequences that you should be aware of.  The Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion from income certain debt forgiven or canceled on your principal residence.  If the debt was canceled by your lender, you should have received IRS Form 1099-C. For this discussion, “principal residence” is generally the home where you live most of the time.

Usually, a canceled debt is considered income and subject to income tax. However, in the case of your principal residence the cancelled debt is excluded from income if it is qualified debt. In order to be qualified, the debt must have been incurred in acquiring, constructing, or substantially improving your principal residence. It also includes refinance debt if the debt was used to substantially improve your principal residence. Also, the debt must be secured by your principal residence.

The maximum amount of qualified debt that can be excluded is $2 million ($1 million if MFS). Applicable years are from 2007 through 2013. If it turns out the canceled debt is qualified, IRS Form 982 and Schedule D should be filled out.  If the cancelled debt is not qualified, then the amount is entered on line 21 of IRS Form 1040.

Brycast Financial Planning in Austin Texas --- We Can Help

Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/

Enrolled Agent; Investment Advisor Representative

Is Social Security Income Taxable?

Maybe. It depends on whether or not you have other income. If 100% of your income is from Social Security payments, there is no income tax due on your benefits. However, if you have other income in addition to your Social Security income, it may become taxable, up to 85% of it.

The IRS looks at what is called a modified adjusted gross income (MAGI). In creating the MAGI, tax-free income (e.g. muni bond income) is pulled into the equation. The MAGI equation is:
All Income + (1/2 Social Security Income)

There are two break points for each filing status. If your filing status is married filing jointly, then SS income starts becoming 50% taxable at MAGI = $32,000 and 85% taxable at $44,000.

For all other filing status, SS income becomes 50% taxable for MAGI = $25,000 and 85% taxable at $34,000.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Paying Your Taxes Electronically through EFTPS

EFTPS is the Electronic Federal Tax Payment System. It is a secure way to pay your taxes. It is particularly useful if you make estimated tax payments throughout the year and is way better than mailing in your voucher quarterly.  The service is free. If you want to enroll, visit the website https://www.eftps.gov/eftps/

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Education Tax Credits Can Help Pay for College

There are two great Education credits. The first is the American Opportunity Credit, the second is the Lifetime Learning Credit. If you or your dependent(s) qualify for the AOC, you can claim up to $4000 of qualified education expenses and get back up to $2500.

Although not as generous as the AOC, the LLC can be up to $2000. Additionally, eligibility for the credit is not as strict as the AOC.

Remember, even if you used borrowed funds to pay for your eligible expenses, you can still claim all of the expenses.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor