Seven Facts about Dependents and Exemptions

Posted by Sanket Shah | General | Friday 19 May 2017 2:46 pm

There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.

1. Exemptions cut income. There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your 2013 tax return.

2. Personal exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.

3. Exemptions for dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.

4. Some people don’t qualify. You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

5. Dependents may have to file. People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.

6. No exemption on dependent’s return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.

7. Exemption phase-­out. The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. See Publication 501 for details.

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You may face higher taxes this year

Posted by Sanket Shah | General | Friday 19 May 2017 2:41 pm

Some people filing their 2013 US tax returns are probably in for a nasty surprise. Here are some tax changes that could have a significant impact on what you will owe when you file your 2013 tax return:

Phase-­out of the personal and dependent exemptions:

Starting with 2013 tax returns, more folks will see a reduction in the personal and dependent exemptions they could claim in past years. Taxpayers with Adjusted Gross Income (AGI) levels of $250,000 for singles, $300,000 for married, $275,000 for head of household and married filing separately of $150,000, will see the loss of some or all of their previously allowed personal and dependent exemption deductions.

That means a couple with two dependent children with AGI over $500,000 could pay an additional tax of $6,200, or more.

Higher tax rates for long-­term capital gains and dividend income:

For people in the higher­-income groups below, the rate on capital gains and dividend income increases from 15 percent to 20.

A married taxpayer with a taxable income of $500,000, along with $30,000 in capital gains and $30,000 in dividend income, would pay an additional $3,000 of income tax.

Phase­-out of itemized deductions:

Taxpayers with higher incomes will also lose a portion of the deductions they claim for things like mortgage interest, real estate taxes and charitable gifts. Taxpayers with the same AGI levels as above — singles at $250,000, married jointly at $300,000, head of household at $275,000 and marries filing separately at $150,000 — will see their deductions reduced by an amount equal to 3 percent of their adjusted gross income that is above these thresholds. This can wipe out up to 80 percent of the deductions some taxpayers would have been allowed to claim in 2012.

A couple with about $40,000 in itemized deductions with AGI about $500,000 could pay an additional tax of $2,376.

Higher tax rates on ordinary taxable income:

For workers with higher incomes, the higher tax rate of 39.6 percent will replace the 35 percent rate. That new higher rate applies to single filers with taxable income above $400,000; married filers with income over $450,000; married filing separately over $225,000; and heads of household with taxable income over $425,000.

For instance, due to this tax hike a married couple with a taxable income of $500,000 will owe an additional $2,300.

Medicare surtax on self-­employment income:

Beginning in 2013, an additional 0.9 percent was levied on people whose combined salary and income from self-employment is above $200,000 for singles and $250,000 for married. This was another tax increase aimed at raising revenue to offset the cost of the new health care laws.

If you are married, and have net income from self-employment of $500,000 in 2013, this additional tax will cost you $2,250 this year.

Medicare surtax on investment income:

A part of Obamacare, this tax is designed to raise federal revenue to offset the cost of things like the government subsidies provided to lower income people who buy health insurance on the new health exchanges.

The Medicare surtax amounts to an additional 3.8 percent on net investment income (Like interest, dividends, tax exempt bond interest, royalties, rents, capital gains, etc.). This tax applies to taxpayers with modified adjusted gross income that exceeds $250,000 for married filers and $200,000 for singles. In total, high­income people must pay a tax rate of 23.8 percent on capital gains and dividends.

So for the married taxpayer mentioned above — with $20,000 in capital gains, $20,000 in dividend income and $10,000 in interest — would pay an additional $1,900 of income tax due to this change.

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IRS will soon examine U.S. taxpayers with undeclared Indian bank accounts.

Posted by Sanket Shah | General | Friday 19 May 2017 2:38 pm

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent with SEP.

Read the full Tax Notes here.

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New standard mileage rates beginning January 1, 2015

Posted by Sanket Shah | General | Friday 19 May 2017 2:36 pm

The Internal Revenue Service on December 10, 2014 issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

57.5 cents per mile for business miles driven, up from 56 cents in 2014

23 cents per mile driven for medical or moving purposes, down half a cent from 2014

14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously).

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Imputed interest rules on interest free loans in US

Posted by Sanket Shah | Newsletters | Thursday 9 May 2013 1:35 pm
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IRS Announces Simplified Option for Claiming Home Office Deduction

Posted by Sanket Shah | International Tax | Wednesday 16 January 2013 3:41 pm

On January 15, 2013, the Internal Revenue Service (“IRS”) announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet.

This will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions.  Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. 

The new simplified option is available starting with the 2013 return which most taxpayers will be filing early in 2014.

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