Filing Status – Head of Household
By: Richard Schneider, Emeritus Professor of Accounting
We remember from last time that the Head of Household (HH) filing status for income taxes, is an elective status for those that qualify. It is better than filing Single, or Married Filing Separate. Let's start with the qualifications for a married person and than move on to the qualifications for a single person. First for both you must not be a dependent of any other taxpayer.
Married:
The only way for a married person can claim head of household status, is if they qualify as an Abandoned Spouse. An Abandoned Spouse, occurs where your spouse has moved out of the home before July 1st of the tax year, and has not come back to stay over night during the last six months of the year, and there is a dependent child living with you for over ½ of the year.
Single: (including those divorced or legally separated prior to January 1, 2009)
Taxpayer has their child or dependent close relative living in their home for over ½ of the tax year. If the dependent is a parent of the taxpayer, they need not live with the taxpayer.
And for both Married and Single:
Taxpayer pays over ½ of the cost of maintaining the home.
Costs of maintaining a home include:
1. Rent or mortgage payments
2. Utilities, such as heat, electric, trash, water, etc
3. Property tax and insurance
4. Repair and maintenance
5. Furnishings
Some notes:
1. The noncustodial parent may claim the dependency exemption on their tax return and the custodial parent will still qualify for the HH filing status.
2. If one of your parents is your dependent and you provide over ½ of the cost of maintaining the home for that parent, they do not have to live with you, in order for you to qualify for the HH filing status. So you could provide a condo home for Mom and Dad in Florida, make the mortgage payments, some of the utilities, you get an upgrade in filing status to HH.
3. What is a close relative, well the list includes:
a. Your children and their descendants
b. Your siblings (whole, half, or step), and their children,
c. Your parents, (natural, legal, and step, but not foster)
d. Your parents, parents, or grandparents, etc.
e. Your parents’ siblings
f. The in-laws: son, daughter, bother, mother or father – in – law (once the relationship is established by marriage, it is not dissolved by divorce, legal separation, or death of the spouse – you could have several sets of in-laws depending on how many times you were married.)
Friday, January 16, 2009
Tuesday, January 13, 2009
What’s My Filing Status for Taxes:
There are 2 basic ones and 3 more elective if you qualify. The two basic statuses are single and married. Your filing status is normally determined at the end of the year. If you get married on December 31, you are considered married for the full year. If you are divorced on December 31, you’re considered single for the full year.
The five filing statuses are:
Basic:
1. Single (S)
2. Married Filing Jointly (MFJ)
Optional or Elective:
3. Head of Household (HH)
4. Married Filing Separate (MFS)
5. Qualified Widow(er) (QW)
The married status offers the most options or exceptions. Lets look at some cases were married filing jointly may not be available to you.
1. You are not living with your spouse, for what ever reason:
A. You can always file Married filing Separate (MFS).
B. If your spouse left prior to July 1st, and hasn’t lived with since and you have a dependent child who lives with you, you may well qualify for Head of Household (HH) filing status (much better than MFS).
2. Your spouse dies:
A. Year of death – you are considered married for the full year and may file either MFJ or MFS.
B. For the two years after year of death, you may qualify for Qualified Widow(er), if there is a dependent child in the household, if not you are single.
C. For the third year and on –
i. If there is a dependent child, possibly HH
ii. Otherwise most likely S, if you do not qualify for the elective status of HH.
3. You and your spouse do not share financial information.
You may file Married Filing Separate.
This can be the case in second marriages where one or both are retirement age.
Now if you are single at December 31st, you will most likely file as single. You may qualify as Head of Household (HH).
MFJ or HH or QW are normally better than MFS.
The MFS status disqualifies the taxpayer for a number of credits and some deductions. The amount of tax will be higher where there is a disparity in income between the spouses.
HH is superior to S filing status.
The standard deduction is higher, tax rates are generally lower for the same amount of taxable income, and the taxpayer may qualify for more credits.
The next article will cover how a taxpayer qualifies to elect the Head of Household filing status.
There are 2 basic ones and 3 more elective if you qualify. The two basic statuses are single and married. Your filing status is normally determined at the end of the year. If you get married on December 31, you are considered married for the full year. If you are divorced on December 31, you’re considered single for the full year.
The five filing statuses are:
Basic:
1. Single (S)
2. Married Filing Jointly (MFJ)
Optional or Elective:
3. Head of Household (HH)
4. Married Filing Separate (MFS)
5. Qualified Widow(er) (QW)
The married status offers the most options or exceptions. Lets look at some cases were married filing jointly may not be available to you.
1. You are not living with your spouse, for what ever reason:
A. You can always file Married filing Separate (MFS).
B. If your spouse left prior to July 1st, and hasn’t lived with since and you have a dependent child who lives with you, you may well qualify for Head of Household (HH) filing status (much better than MFS).
2. Your spouse dies:
A. Year of death – you are considered married for the full year and may file either MFJ or MFS.
B. For the two years after year of death, you may qualify for Qualified Widow(er), if there is a dependent child in the household, if not you are single.
C. For the third year and on –
i. If there is a dependent child, possibly HH
ii. Otherwise most likely S, if you do not qualify for the elective status of HH.
3. You and your spouse do not share financial information.
You may file Married Filing Separate.
This can be the case in second marriages where one or both are retirement age.
Now if you are single at December 31st, you will most likely file as single. You may qualify as Head of Household (HH).
MFJ or HH or QW are normally better than MFS.
The MFS status disqualifies the taxpayer for a number of credits and some deductions. The amount of tax will be higher where there is a disparity in income between the spouses.
HH is superior to S filing status.
The standard deduction is higher, tax rates are generally lower for the same amount of taxable income, and the taxpayer may qualify for more credits.
The next article will cover how a taxpayer qualifies to elect the Head of Household filing status.
Monday, January 12, 2009
Some new changes for 2009 post Jan. 12th, 2009 - source RIA tax service
Changes Affecting Retirement and Estate Planning
New law waives required minimum distributions (RMDs) for calendar year 2009. A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. (Code Sec. 401(a)(9)(H)) Thus, taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed.
Increase in estate tax exemption. The applicable exclusion amount (the amount excluded from estate tax by the unified credit) increased from $2 million to $3.5 million for estates of decedents dying in 2009. (Code Sec. 2010(c)) The top rate remains at 45%. Barring further Congressional action, the estate tax is repealed for 2010 deaths, only to be reinstated for deaths occurring in 2011 and later with a $1 million exemption and a top rate of 55%.
RIA observation: Congress presumably will not let the estate tax return to a $1 million exemption and a top rate of 55% in 2011. On the other hand, it is doubtful that Congress will permanently repeal the estate tax. The most likely scenario would be a permanent increase in the exemption to somewhere between $3.5 and $5 million, perhaps with inflation adjustments.
Credit for plug-in electric drive vehicle. For tax years beginning after Dec. 31, 2008, a tax credit is allowed for new qualified plug-in electric drive motor vehicles (NQPEDMVs). (Code Sec. 30D) Subject to a limit based on weight, the credit amount is the sum of: (1) $2,500; plus (2) $417 for each kilowatt hour of traction battery capacity in excess of 6 kilowatt hours. (Code Sec. 30D(a)(2))
Qualified bicycle commuting reimbursement. For tax years beginning after Dec. 31, 2008, qualified bicycle commuting reimbursements are qualified transportation fringe benefits. (Code Sec. 132(f)(1)(D)) Qualified bicycle commuting reimbursements are, for any calendar year, any employer reimbursement during the 15-month period beginning with the first day of that calendar year for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage. The benefit is limited to $20 (not adjusted for inflation) multiplied by the number of months during the year that an employee regularly uses a bicycle for a substantial portion of the travel between his residence and his place of employment.
Changes Affecting Retirement and Estate Planning
New law waives required minimum distributions (RMDs) for calendar year 2009. A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. (Code Sec. 401(a)(9)(H)) Thus, taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed.
Increase in estate tax exemption. The applicable exclusion amount (the amount excluded from estate tax by the unified credit) increased from $2 million to $3.5 million for estates of decedents dying in 2009. (Code Sec. 2010(c)) The top rate remains at 45%. Barring further Congressional action, the estate tax is repealed for 2010 deaths, only to be reinstated for deaths occurring in 2011 and later with a $1 million exemption and a top rate of 55%.
RIA observation: Congress presumably will not let the estate tax return to a $1 million exemption and a top rate of 55% in 2011. On the other hand, it is doubtful that Congress will permanently repeal the estate tax. The most likely scenario would be a permanent increase in the exemption to somewhere between $3.5 and $5 million, perhaps with inflation adjustments.
Credit for plug-in electric drive vehicle. For tax years beginning after Dec. 31, 2008, a tax credit is allowed for new qualified plug-in electric drive motor vehicles (NQPEDMVs). (Code Sec. 30D) Subject to a limit based on weight, the credit amount is the sum of: (1) $2,500; plus (2) $417 for each kilowatt hour of traction battery capacity in excess of 6 kilowatt hours. (Code Sec. 30D(a)(2))
Qualified bicycle commuting reimbursement. For tax years beginning after Dec. 31, 2008, qualified bicycle commuting reimbursements are qualified transportation fringe benefits. (Code Sec. 132(f)(1)(D)) Qualified bicycle commuting reimbursements are, for any calendar year, any employer reimbursement during the 15-month period beginning with the first day of that calendar year for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage. The benefit is limited to $20 (not adjusted for inflation) multiplied by the number of months during the year that an employee regularly uses a bicycle for a substantial portion of the travel between his residence and his place of employment.
Tax Changes for 2009
By: Richard Schneider
Retired professor of accounting
First I need to correct an item from my last article. Taxpayers 70 ½ and older may transfer up to $100,000 from their IRA to a qualified charitable organization, not just $10,000.
What’s in store for 2009 when it comes to tax changes under the Obama administration? My tax services Kiplinger and RIA Check Point are weekly and daily tax news services and are the source for the following information.
When Barack Obama was elected there was and is an air of high expectation of a better future. He had promised tax relief for low and middle incomers, and an increase in tax for the wealthy, well lets see what the crystal ball says will happen.
1. Expanding the Earned Income Tax credit, increasing the income cap to qualify for the credit.
2. The Child Credit will be fully refundable. Currently the credit offsets tax and in certain cases where the tax is less than the credit, may be partly refundable depending on amount of tax and earned income.
3. No income tax for seniors with income less than $50,000. It is unclear what age qualifies for senior status, 50, 55, 60, 62, or 65. Will the $50,000 limit include the full amount of social security benefits?
4. A stimulus rebate, in the form of reduced tax withholding for workers, in stead of mailing out checks. This could happen as soon as February.
5. Prevention of the tax rate reduction on estates over $3.5 million, keeping it at 45%. This will help pay for some of the cuts.
6. Temporary fix for the Alternative Minimum Tax.
7. The maximum tax rate for long term capital gains and qualified dividends will increase to 20% from 15%, on a prospective basis. That is the change will affect gains realized from the date of enactment on, and not gains realized before that date.
8. In 2010 or 2011 there will be a restoration of the 36% and 39.6% tax rates for taxable incomes of over $250,000.
9. Pulling the plug on tax breaks for oil companies, related to oil drilling and production activities.
Remember these are guesses by the above tax services, and the actual future tax laws may differ considerably.
By: Richard Schneider
Retired professor of accounting
First I need to correct an item from my last article. Taxpayers 70 ½ and older may transfer up to $100,000 from their IRA to a qualified charitable organization, not just $10,000.
What’s in store for 2009 when it comes to tax changes under the Obama administration? My tax services Kiplinger and RIA Check Point are weekly and daily tax news services and are the source for the following information.
When Barack Obama was elected there was and is an air of high expectation of a better future. He had promised tax relief for low and middle incomers, and an increase in tax for the wealthy, well lets see what the crystal ball says will happen.
1. Expanding the Earned Income Tax credit, increasing the income cap to qualify for the credit.
2. The Child Credit will be fully refundable. Currently the credit offsets tax and in certain cases where the tax is less than the credit, may be partly refundable depending on amount of tax and earned income.
3. No income tax for seniors with income less than $50,000. It is unclear what age qualifies for senior status, 50, 55, 60, 62, or 65. Will the $50,000 limit include the full amount of social security benefits?
4. A stimulus rebate, in the form of reduced tax withholding for workers, in stead of mailing out checks. This could happen as soon as February.
5. Prevention of the tax rate reduction on estates over $3.5 million, keeping it at 45%. This will help pay for some of the cuts.
6. Temporary fix for the Alternative Minimum Tax.
7. The maximum tax rate for long term capital gains and qualified dividends will increase to 20% from 15%, on a prospective basis. That is the change will affect gains realized from the date of enactment on, and not gains realized before that date.
8. In 2010 or 2011 there will be a restoration of the 36% and 39.6% tax rates for taxable incomes of over $250,000.
9. Pulling the plug on tax breaks for oil companies, related to oil drilling and production activities.
Remember these are guesses by the above tax services, and the actual future tax laws may differ considerably.
Demand vs. Supply
Trickle Up vs. Trickle Down
Democrats vs. Republicans
What are the basic philosophies behind the tax plans of McCain and Obama or Democrats and Republicans in general? It really helps to understand the basic philosophy and economic approach of each candidate, which does reflect, for the most part the philosophy of their respective parties.
Republicans:
Republicans believe in supply side economics, trickle down. Companies and investors provide the jobs and drive the economy. The more money they are allowed to keep, or receive; the more that will trickle down to the working class in the form of jobs, a stronger economy, and security for workers. Thus the tax plan will generally lower taxes and increase tax credits and deductions for companies and investors.
Investment income should have a lower tax rate or no income tax at all. Investment income includes interest, dividends, capital gains, etc. The individuals that invest the most are in the upper income brackets, and the tax rate should be reduced for them, even if the income is from wages and salaries, so they have more capital to invest. The republican national committee has recommended there be no tax on investment (unearned) income.
Democrats:
Democrats believe in the Demand Side, Trickle Up approach. Consumers consuming and buying, drive the market and the economy, and creates jobs. Thus there should be lower tax rates for the working middle class, and even a rebate as part of a stimulus package. Corporations and investors will get their money as their products and services are sold and the companies’ profits are improved. To meet the demand companies will have to produce more, hire more workers, and invest in more capital goods to expand.
While these seem to be the basic economic philosophies of the two parties, there are other under lying attitudes and judgments they hold. These are voiced by people I know on the extreme right and left, along with very liberal and conservative talk shows.
WARNING: These comments may be offensive, embarrassing, and possibly not true, but are reflective of the mindset of some conservatives and liberals. They also are a backdrop for some tax policies.
From the conservative side:
Wealth is a measure of success. This is the American dream, which should be rewarded not punished.
Those who are the brightest, most productive and innovative will be discouraged from achieving if a graduated income tax system is in place.
Corporations do not pay tax, but just pass them along to the consumer, as part of the price of the product or service.
Every able bodied person should be working. Jobs allow individuals to be self sufficient. Many people on welfare and other entitlements are free loaders, and should be forced to work.
Providing assistance to companies and investors will benefit all, in the form of additional jobs, higher profits, security and enhanced value of retirement funds.
From the liberal side:
Too many companies receive corporate welfare from the government, such as the large oil companies.
Wealth corrupts. Many individuals are wealthy because they inherited the money. They are arrogant, self centered, and condescending.
Giving more money to the investor class and corporations will only tend to shift wealth from the poor and middle class to the upper class, causing a greater disparity between rich and poor, with fewer Americans in the middle class.
Large amounts of wealth should not be allowed to reside in a family generation after generation, but should be redistributed to the population, and only the government can do this effectively.
All individuals are created equal and deserve and are entitled to the basics of life, such as food, shelter, education, clothing, and medical care. While charitable organizations are good, the responsibility is that of the greater community, and only the government can fulfill this obligation.
Large corporations and investors are greedy, and only seek to increase their wealth at the expense of the poor and less wealthy. They are currently using the federal government to accomplish this transfer through tax breaks, grants, tax loopholes, subsidies, earmarks, lack of government regulation, large government contracts to provide services and products at bloated prices, etc.
In the next article I will compare the tax proposals of McCain and Obama. You will see the supply side and demand side at work.
Trickle Up vs. Trickle Down
Democrats vs. Republicans
What are the basic philosophies behind the tax plans of McCain and Obama or Democrats and Republicans in general? It really helps to understand the basic philosophy and economic approach of each candidate, which does reflect, for the most part the philosophy of their respective parties.
Republicans:
Republicans believe in supply side economics, trickle down. Companies and investors provide the jobs and drive the economy. The more money they are allowed to keep, or receive; the more that will trickle down to the working class in the form of jobs, a stronger economy, and security for workers. Thus the tax plan will generally lower taxes and increase tax credits and deductions for companies and investors.
Investment income should have a lower tax rate or no income tax at all. Investment income includes interest, dividends, capital gains, etc. The individuals that invest the most are in the upper income brackets, and the tax rate should be reduced for them, even if the income is from wages and salaries, so they have more capital to invest. The republican national committee has recommended there be no tax on investment (unearned) income.
Democrats:
Democrats believe in the Demand Side, Trickle Up approach. Consumers consuming and buying, drive the market and the economy, and creates jobs. Thus there should be lower tax rates for the working middle class, and even a rebate as part of a stimulus package. Corporations and investors will get their money as their products and services are sold and the companies’ profits are improved. To meet the demand companies will have to produce more, hire more workers, and invest in more capital goods to expand.
While these seem to be the basic economic philosophies of the two parties, there are other under lying attitudes and judgments they hold. These are voiced by people I know on the extreme right and left, along with very liberal and conservative talk shows.
WARNING: These comments may be offensive, embarrassing, and possibly not true, but are reflective of the mindset of some conservatives and liberals. They also are a backdrop for some tax policies.
From the conservative side:
Wealth is a measure of success. This is the American dream, which should be rewarded not punished.
Those who are the brightest, most productive and innovative will be discouraged from achieving if a graduated income tax system is in place.
Corporations do not pay tax, but just pass them along to the consumer, as part of the price of the product or service.
Every able bodied person should be working. Jobs allow individuals to be self sufficient. Many people on welfare and other entitlements are free loaders, and should be forced to work.
Providing assistance to companies and investors will benefit all, in the form of additional jobs, higher profits, security and enhanced value of retirement funds.
From the liberal side:
Too many companies receive corporate welfare from the government, such as the large oil companies.
Wealth corrupts. Many individuals are wealthy because they inherited the money. They are arrogant, self centered, and condescending.
Giving more money to the investor class and corporations will only tend to shift wealth from the poor and middle class to the upper class, causing a greater disparity between rich and poor, with fewer Americans in the middle class.
Large amounts of wealth should not be allowed to reside in a family generation after generation, but should be redistributed to the population, and only the government can do this effectively.
All individuals are created equal and deserve and are entitled to the basics of life, such as food, shelter, education, clothing, and medical care. While charitable organizations are good, the responsibility is that of the greater community, and only the government can fulfill this obligation.
Large corporations and investors are greedy, and only seek to increase their wealth at the expense of the poor and less wealthy. They are currently using the federal government to accomplish this transfer through tax breaks, grants, tax loopholes, subsidies, earmarks, lack of government regulation, large government contracts to provide services and products at bloated prices, etc.
In the next article I will compare the tax proposals of McCain and Obama. You will see the supply side and demand side at work.
0% tax on Long Term Capital Gains
For low and many middle income taxpayers
By: Richard Schneider
A major tax law passed in 2003, and extended in 2005, contained provisions that set 0% tax for most long term capital gains and qualified dividends, for taxpayers in the 15% bracket or below.
The 0% applies for 2008, 2009, and 2010. This is an opportunity that may never happen again. The problem for most taxpayers is their investments have diminished in value, and if sold now would generate a loss. There are at least three situations that come to mind where you may benefit. But first let’s see what the qualifying income levels are.
Your adjusted gross income must be below $83,000, for a married couple, and $41,500 for a single, including the capital gain. You may add $3,500 for each dependent child. Seniors receiving social security, include 85% of your SS benefits in computing your total income and increase the limit by about $1,000 if you are age 65 or over.
Now the three situations that do come to mind are 1. Stock purchased many years ago, such as Fastenal Stock that is still above its original cost, 2. Purchasing stock or mutual funds in this down turn, and holding on to it for over one year and it goes up, and 3. Dependent children may be holding investments.
Stock purchased many years ago, such as Fastenal Stock may have a basis of say $4 per share and is now selling at $36 per share. You could sell the stock, take the $32 per share gain, pay no tax if you are below the income limits, repurchase the stock the same day, and now be holding the stock with an increased basis of $36. Another case may be stock received as a gift, which had a low basis, because grandma or your parents purchased the stock say twenty years ago.
The second opportunity occurs because the 0% window runs for 3 years, and to qualify, you need to hold the investment only 12 months or more. You purchase now at a low price, in hopes that it will go up after 12 months but before the end of 2010, if so, you sell at a nice tax free gain.
Stock or other investments may have been given to dependent children, and if the stock or other investment’s market value is above the basis, this would be an opportunity to report a tax free gain, and increase the basis of the stock. The children may not be used as a dependent deduction in the year this is done. The assumption is the child’s tax bracket would be 15% or lower including the capital gain.
Each taxpayer’s situation is unique and you should consult a professional who is familiar with your tax situation. Also a word of caution, congress with the president could change the tax law in 2009 and/or 2010, eliminating this opportunity, so 2008 is the only sure year for this tax benefit.
For low and many middle income taxpayers
By: Richard Schneider
A major tax law passed in 2003, and extended in 2005, contained provisions that set 0% tax for most long term capital gains and qualified dividends, for taxpayers in the 15% bracket or below.
The 0% applies for 2008, 2009, and 2010. This is an opportunity that may never happen again. The problem for most taxpayers is their investments have diminished in value, and if sold now would generate a loss. There are at least three situations that come to mind where you may benefit. But first let’s see what the qualifying income levels are.
Your adjusted gross income must be below $83,000, for a married couple, and $41,500 for a single, including the capital gain. You may add $3,500 for each dependent child. Seniors receiving social security, include 85% of your SS benefits in computing your total income and increase the limit by about $1,000 if you are age 65 or over.
Now the three situations that do come to mind are 1. Stock purchased many years ago, such as Fastenal Stock that is still above its original cost, 2. Purchasing stock or mutual funds in this down turn, and holding on to it for over one year and it goes up, and 3. Dependent children may be holding investments.
Stock purchased many years ago, such as Fastenal Stock may have a basis of say $4 per share and is now selling at $36 per share. You could sell the stock, take the $32 per share gain, pay no tax if you are below the income limits, repurchase the stock the same day, and now be holding the stock with an increased basis of $36. Another case may be stock received as a gift, which had a low basis, because grandma or your parents purchased the stock say twenty years ago.
The second opportunity occurs because the 0% window runs for 3 years, and to qualify, you need to hold the investment only 12 months or more. You purchase now at a low price, in hopes that it will go up after 12 months but before the end of 2010, if so, you sell at a nice tax free gain.
Stock or other investments may have been given to dependent children, and if the stock or other investment’s market value is above the basis, this would be an opportunity to report a tax free gain, and increase the basis of the stock. The children may not be used as a dependent deduction in the year this is done. The assumption is the child’s tax bracket would be 15% or lower including the capital gain.
Each taxpayer’s situation is unique and you should consult a professional who is familiar with your tax situation. Also a word of caution, congress with the president could change the tax law in 2009 and/or 2010, eliminating this opportunity, so 2008 is the only sure year for this tax benefit.
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