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The kiddie tax is a tax first instituted in 1986.  The purpose of the kiddie tax was to prevent wealthy taxpayers, who were in high tax brackets from shifting investment earnings to their children who were typically in lower income tax brackets.

The original law applied only to children under age 14.  Over the years the IRS has continued to expand the age limit and it now applies to children that are dependents of their parents.  To clarify, this means any child under age 18 is subject to the kiddie tax. Children who are 18 are subject to the kiddie tax only if their own earned income is less than 50% of their support.  Children ages 19 – 23 that are full time students and also provide less than 50% of their own support are also subject to the kiddie tax.  The good news, if you can call it that, is that once a child reaches age 24, the kiddie tax no longer applies.

What are the consequences of being subject to the kiddie tax?

The law currently states that the first $1,000 of a child’s investment income can be reduced by a standard deduction, the next $1,000 is taxed at the child’s income tax rate and anything after that is taxed at the parents’ income tax rate.

What qualifies as investment income?

Investment income for kiddie tax purposes is defined as any income that is not earned income (compensation for services) and includes interest income, dividend income, capital gains, royalties, rents and retirement income.  Although it seems a little strange to discuss retirement income and the kiddie tax in the same sentence, this situation can occur when the child has inherited an IRA from a deceased relative and is required to take annual distributions.

How do I report the kiddie tax to the IRS?

There are two methods of reporting the kiddie tax to the IRS. The first involves the child filing his/her own income tax return.  The child files Form 8615 with their income taxes. This form will include the parents’ information so that the correct income tax rate can be applied.

The second method is that the parents report the child’s income on their income tax return.  In order to be able to do this the child’s income must be in the form of interest income, dividend income or capital gain distributions.  If the child has any other investment income then he/she must file their own tax return.

Conclusion

This article attempts to explain very quickly the kiddie tax, as always, I advise you to meet with a tax professional to help with these rules if you have any questions.

There is very often confusion among taxpayers as to the difference between the child and dependent care credit and the child tax credit.  This article is intended to shed some light on the differences between the two.

What is the Child Tax Credit?

The child tax credit is a credit worth up to $1,000 per child under age 17 at December 31^st.  The credit is a nonrefundable credit which is generally limited to the tax liability.

In order to be eligible for the child tax credit the following conditions must be met:

• Eligible children must be under age 17 at yearend
• The child must be your son, daughter, stepchild, foster child, brother, sister, stepsister or a descendant of any of these individuals (for example a grandchild, niece or nephew)
• The taxpayer(s) claiming the credit must have provided more than half of the child’s support
• The child must be claimed as a dependent on the taxpayer’s tax return
• The child must be a US citizen, US national or US resident alien
• The child must have lived with the taxpayer(s) for more than half the year

There are also income limitations which phase this credit out.  The income limitations begin at $110,000 for taxpayers filing jointly ($55,000 for married taxpayers filing separately) and $75,000 for single filers as well as those filing as head of household or qualifying widow(er).

What is the Child and Dependent Care Credit?

The child and dependent care credit is a credit to give some money back to families that incur expenses that enable them to work.

The eligibility requirements are as follows:

• The relationship test is the same as above for the child tax credit
• The expenses must have been incurred before the child reached age 13.  The child does not have to be under 13 at December 31^st but must have been under 13 when the expenses were incurred
• The support test is the same as shown above for the child tax credit
• The taxpayer (and spouse if filing a joint return) must have earned income

Eligible qualifying expenses are as follows:

Dependent care center, such as a day care center

Household services. These may be performed by a maid, housekeeper or babysitter

Household employee. An example of this would be a nanny

There are also overall limits on qualifying expenses ($3,000 for 1 child and $6,000 for 2 or more children).

Lastly there is a sliding scale for how much of the qualifying expenses may be taken as a credit ranging from 35% for taxpayers earning under $15,000 per year to 20% for taxpayers earning $43,000 or more.  The credit is calculated by taking the qualifying costs (let’s use $6,000 in our example) by the appropriate percentage (let’s use 20%) which yields a credit of $1,200.

Conclusion

This article attempts to explain very quickly the child tax and child and dependent care credits, as always, I advise you to meet with a tax professional to help with these credits if you have any questions.

As most people know the filing deadline for income tax returns is April 15^th however not everyone always files by the deadline.  This article will focus on what happens when a taxpayer does not file on time or if the taxpayer filed but did not pay their liability in full. I will focus on federal returns in the article.

Tax return was not filed on time, what’s next?

There are some returns that are not filed on time but have a valid extension. These taxpayers have no problem at all. The IRS recognizes that it is not always possible to gather all of your information and file by April 15^th.  Typically taxpayers that are involved in partnerships, LLCs, S corporations, Estates or Trusts may need additional time to obtain information pertinent to file their income tax returns.  Filing an extension, however, does not extend your time to pay therefore if you are unable to file by April 15^th you are still required to estimate the amount of tax you owe and pay it by April 15^th.  The main reasoning behind making people estimate their balance due is that if this was not done then any taxpayer with a balance due would automatically go on extension and wait until October 15^th (the due date of extended returns) to pay their balance due.

Some taxpayers that did not file on time also did not file an extension form.  This is a little more complicated.  There are late filing penalties of 5% of the amount due each month or part of a month that your return is late. The maximum penalty is 25%.

Individuals without a valid extension should file as soon as possible to at least stop the late filing penalties and pay as much as possible to reduce or eliminate the late payment penalties (which are explained below).

What happens if I did not pay may tax in full by April 15^th?

The IRS imposes a late payment penalty of ½ of 1% of any tax not paid by April 15^th. It is charged monthly and the maximum penalty is 25%.

What if I can’t pay my entire balance due?

For those taxpayers that cannot afford to pay their balance in full I would advise paying in as much as possible.  The penalties and interest are charged on outstanding balances and therefore the more that you can reduce the outstanding balance, the more you can reduce your penalties and interest.

The IRS also has an option available to most taxpayers to pay their balance due through an installment agreement.  Most taxpayers can sign up for the installment agreement online at www.irs.gov.

Conclusion

This article focuses on taxpayers that either file or pay their taxes late.  Although the article explains the general rules you would be well advised to speak to a tax professional as there are sometimes circumstances which may make a taxpayer’s situation unique.

In today’s environment there are many businesses that are owned as sole proprietorships, partnerships and LLCs.  If you are an owner of any of these types of entities, then you may benefit from employing your minor child.

How does employing my child benefit my business?

There is a provision in the tax code which exempts wages paid to a minor child from being taxed for social security or federal unemployment purposes.  New Jersey has a similar rule that exempts the wages of minor children from state unemployment taxes.

In order to be eligible for the exemption the employer must be either a sole proprietorship, single member LLC, partnership or LLC with the only partners/members being the child’s parents.  C corporations, S corporations and partnerships and LLCs with partners and/or members other than the child’s parent are ineligible for the exemption.

The exemption applies to parents and spouses of the employer for only federal and state unemployment tax purposes.  There is no exemption from social security and Medicare taxes for any relatives other than minor children.  Based on these facts the remainder of this article will focus on hiring children only.

Are there any other advantages besides saving payroll taxes?

Yes, a child has a standard deduction that is the greater of $950 or his/her earned income plus $350 (but not greater than $6,200 in 2014). This means you can pay your child as much as $6,200 as an example which would lower your taxable income and at the same time is exempt from tax on the child’s return.

How much benefit would I actually see?

If you are a qualifying entity (as listed above) and you’re in the 25% tax bracket and you pay your minor child $5,000 you would save $1,250 ($5,000 x 25%) plus self-employment tax of $765 ($5,000 x 15.3%).  That is a total tax savings of $2,015.  This figure of over $2,000 does not include any state benefits which may be another few hundred dollars.

Is there a catch?

The only catch is that the services performed by your child must be necessary and reasonable.  Reasonable services a minor child may perform could include filing, photocopying, emptying the trash, cleaning and some computer work.

If you try to pay your child $25 an hour to photocopy and empty the trash, then that would not be considered reasonable. If, however, your child worked 10 hours a week and was paid $10 an hour that may be considered reasonable.

Conclusion

This article explains some basic concepts regarding employing your child.  You would be well advised to speak to a professional before implementing any strategies or you may find unintended consequences such as student eligibility for financial aid being reduced down the road.

This article discusses both taxpayer identity theft and the health insurance premium tax credit.

IRS tips on identity theft

The IRS does not initiate contact with taxpayers by email for personal or financial information.   They also do not email taxpayers stating they are being audited or getting a refund.

If a taxpayer receives any email claiming to be from the IRS it should be forwarded to phishing@irs.gov.

If you receive a letter from the IRS stating that more than one return has been filed under your social security number or that you have wages from an employer that you do not know, then you may be a victim of identity theft.

The IRS also warns against telephone scammers that call with fake names and badge numbers.  Keep in mind the IRS never calls and requests credit card numbers or debit card numbers to pay a debt over the telephone.

If you receive a telephone call from the IRS concerning a tax deficiency that you are unaware of (it is very rare to receive a telephone call before you have received a letter concerning a tax deficiency) then you should call 1.800.829.1040 and discuss your situation with an IRS representative who can verify or discredit the existence of your issue.

If you believe that you are not currently affected by identity theft but may be at risk due to certain circumstances, then you should contact the IRS and also follow the Federal Trade Commission’s (FTC) guidance on identity theft which can be found at www.ftc.gov/idtheft.

Premium Tax Credit

You may be eligible for the premium tax credit if you meet all of the following:

• buy health insurance through the Marketplace;
• are ineligible for coverage through an employer or government plan;
• are within certain income limits;
• file a joint return, if married; and
• cannot be claimed as a dependent by another person.

There are two ways of receiving the credit.  You can either receive the credit now by having your estimated credit paid directly to your insurance company to lower your monthly premiums or you can wait and get the credit when you file your 2014 income tax return in 2015.

The important aspect to keep in mind about the tax credit is that it is similar to income taxes paid in the sense that it is not until you complete your income tax return that you know the actual amount of your credit.  If you have received less than you are entitled to, then your federal refund would be increased or your payment due would be decreased.  If you have received more than you are entitled to then your federal refund would be decreased or your payment due would be increased.  Because the credit is calculated based on income and other factors such as family size, it is important to report any change in your circumstances during the year to minimize the risk of any under or over payment.

Various tax provisions – 2013 vs. 2014

• The maximum IRA deduction allowed for 2013 is $5,500 and will remain $5,500 in 2014 ($1,000 higher in for individuals age 50 and older).

• The maximum section 401(k), 403 (b) & 457 deferral amount is $17,500 in 2013 and 2014.  An additional $5,500 is allowed for individuals age 50 and older in both years.

• The standard mileage rate for 2014 is 56.0 cents per mile (the rate is 0.5 cent lower than the 56.5 cents per mile allowed in 2013).    In addition the standard mileage rate used for medical or moving expenses is 23.5 cents per mile in 2014 down from 24 cents allowed in 2013.  The standard mileage rate for charitable miles remains at 14 cents per mile.

• The section 179 limit (which allows taxpayers to write-off fixed assets all in the first year of operation) allowed in 2013 is $500,000. The 2014 limit is currently $25,000.  There is a possibility that the 2014 amount will be increased retroactively to January 1, 2014, however, it is $25,000 right now.

• The social security maximum taxable wage base has increased from $113,700 in 2013 to $117,000 in 2014.

• The 2014 NJ Unemployment wage base is $31,500 (up from $30,900 in 2013).

• The NJ hourly minimum wage is $8.25 in 2014, up from $7.25 in 2013.

• The NY hourly minimum wage is $8.00 in 2014, up from $7.25 in 2013.

• The amount of earnings allowed by a social security recipient that has not yet reached full retirement age before there is a reduction in social security benefits is $15,480 in 2014 ($15,120 in 2013). The amount allowed in the year full retirement age is reached is $41,400 in 2014 ($40,080 in 2013).  The amount allowed in the year full retirement age is reached is only for the portion of the year before the recipient reaches full retirement age.  Once full retirement age is reached there is no limit to the income that can be earned by a recipient.

• The individual gift tax exclusion of $14,000 in 2013 remains the same in 2014.  This is the amount of money a taxpayer is allowed to give any other individual without having any gift tax consequences.

• The federal estate tax unified credit equivalent which is the amount of assets a decedent can pass away with and have no federal estate tax due is $5,340,000 in 2014 which is up from $5,250,000 in 2013.  The New Jersey amount remains at $675,000.

Conclusion

This article explains some of the 2014 tax changes.  You would be well advised to speak to a professional as there are many other tax provisions that have changed and each taxpayer’s situation is unique.

The IRS announced in October of this year that it will not start accepting and processing 2013 income tax returns until somewhere between January 28^th and February 4^th of 2014.  Originally the 2014 filing season was to begin on January 21^st.  The IRS extended the deadline based on the 16-day government shutdown in October.  The additional time is needed to program and test tax processing systems.  Final announcement of the actual date is expected to occur in December.

2013 AND 2014 Retirement Plan Limitations

This is just a reminder of the annual limits of retirement funds.

The annual limitation on IRA contributions in 2013 and 2014 is $5,500 ($6,500 for those age 50 and older).

The elective deferral limit for employees who participate in 401(k), 403(b) and 457 plans is $17,500 in 2013 and 2014 ($22,000 for those age 50 and older).

There are various income phase out limitations for all IRA accounts. Please make sure to check with a tax professional in order to determine your eligibility.

2013 Mileage Rates

The business mileage rate for 2013 is 56.5 cents per mile, 14 cents per mile for charitable purposes and 24 cents per mile for medical expenses and moving purposes. The 2014 rates have not yet  been announced.

Section 179 Expensing and Bonus Depreciation

As I’ve reported a number of times this year, the section 179 limit (which allows businesses to deduct certain equipment in the year of purchase rather than depreciating it over a number of years) is $500,000 in 2013 and is scheduled to be reduced to $25,000 in 2014.  While the IRS has raised this limit last minute each of the last few years, there is no guarantee that this will happen again in 2014.

Bonus depreciation on new equipment is limited to 50% of the cost in the year of purchase. Bonus depreciation is currently scheduled to sunset on December 31, 2013.

Conclusion

The above provisions are just a few of many that affect taxpayers.  It is important to keep these in mind as we come to the end of the year.  There are many other provisions that may apply and some have been covered in previous articles.  In order to truly understand how all of the tax provision changes affect your return it is always advisable to consult with a tax professional.

In late 2012 New Jersey enacted the Revised Uniform Limited Liability Company Act which replaced the old laws governing Limited Liability Companies (“LLCs”).  The law applied to all LLCs formed on or after March 18, 2013 and as of March 1, 2014 will apply to all LLCs regardless of their formation date.

Why am I covering this topic at all?

Many of my clients form LLCs.  Most taxpayers that form these entities may not realize that some of the new provisions could adversely affect them or at a minimum not reflect the intentions of the members.

Which new provisions are issues?

The biggest pitfalls occur in the areas of profit and loss allocations and management. Under the prior law members of an LLC shared profits and losses in the ratios of their capital contributions (unless otherwise stated in an operating agreement). For example member A contributes $80 and member B contributes $20 to the LLC.  Under the old law profits and losses would be allocated 80/20 between the two members.  Under the new law profits and losses would now be allocated 50/50.

Management provisions under the old law were very similar to the profit and loss allocations.  Again using our example above, the old law would provide member A an 80% vote and B a 20% vote.  The new law allocates the votes 50/50 between the two members.

There are a number of new provisions that were also added regarding resignation of a member, fiduciary duty and remedies for deadlock and oppression of a member.

Is there anything you can do about these new provisions?

Fortunately the provisions regarding profit and loss allocations, management, resignation of a member and fiduciary duties are default statutory provisions that apply only if the LLC does not have an operating agreement.  While I realize that many individuals open LLCs without the services of an attorney, it is more important than ever to seek the aide of an attorney to draft an operating agreement that structures the LLC in a way that reflects the members’ intentions.

The new law does allow for operating agreements that are oral as well as those that are written.  I would strongly urge members have their operating agreement reduced to writing.

Conclusion

If you find that you are going to be opening an LLC with more than one member I believe that is important to seek the professional advice of an attorney.  In addition to the topics discussed above, operating agreements may cover many other areas of concern such as what happens if capital is needed and one member does not have it, interest rates that can be charged on loans from a member or specific provisions on possible buyouts of members.  The added expense on the business will be inconsequential in comparison to the legal costs that could arise if you intended your LLC to have any provisions that differ from the New Jersey default provisions.

I realize that we have not yet hit Halloween so how can I possibly be writing about year-end tax planning?  While it may only be October, in the blink of an eye it will soon be January.  In order to properly plan for year-end 2013, it is time to consider some tax planning strategies.

Look at your investment portfolio

It is time to determine if you have any capital gains that you will have to report in 2013.  Keep in mind that you are allowed to offset capital gains with capital losses.  You have until December 31^st to sell any securities that will generate a capital loss.  You are entitled to offset all capital gains and are allowed $3,000 of loss against ordinary income.  If your capital losses exceed your capital gains by more than $3,000, the excess is carried over to future years.  I strongly recommend that you proceed with caution.  While you do want to sell securities that will generate a loss, you would not want to sell securities that you feel are good securities that are just temporarily down in value.

Look at your business

If you are either a shareholder of an “S” corporation, partner of a partnership, member of an “LLC” or a sole proprietor, then you must look at your profit or loss to date and try to project results through December 31^st.  There are many avenues open to possibly lower your income taxes when there is a business involved.  As discussed in previous articles, there are large incentives to purchasing equipment before year-end. These incentives include first year expensing under code section 179 of $500,000 and 50% bonus depreciation on eligible property purchased before December 31, 2013.

There may be additional planning for your business such as setting up a pension or profit sharing plan or ways of deferring income until 2014.

Look at you itemized deductions and the AMT

Certain deductions such as medical expenses are subject to a limitation based on your Adjusted Gross Income (AGI).  It is therefore sometimes advantageous to try to bunch your expenses.  In other words instead of winding up just below the 10% threshold in 2013, you may be able to have certain discretionary medical procedures that you’ve been putting off.    There may also be reason to prepay state income taxes for deductibility purposes or postpone those payments until 2014 if you would receive greater benefit in 2014.  You may wind up with a greater benefit by deferring state income tax payments, if for example you were subject to the Alternative Minimum Tax (AMT) in 2013, but not in 2014.

Conclusion

This article gives only basic strategies and unless you plan for your particular situation, you may find some unexpected consequences in April such as being subject to the AMT.   It is definitely that time of year that you should be contacting your tax professional in order to keep as many options as possible open to you.

We are now through the first 8 months of the year and, in my opinion, this is a good time for everyone to examine their personal tax situation.  There have been a number of changes in the tax law and not all of them pertain exclusively to the wealthy. The rest of this article will outline some areas that I believe individuals should take a look at in order to avoid surprises in April.

Self-Employment Tax

If you are an individual that is self-employed (sole proprietor or single member LLC) and you are subject to self-employment tax it is important to realize that the rate for 2013 is 15.3% which is 2% higher than the rate was in either 2011 or 2012.  If an individual is making $100,000 the extra $2,000 can be painful in April.  In addition individuals that own interests in partnerships or LLCs may also be subject to self-employment tax.

Changes in your personal situation

There may be changes in your personal situation that can affect your tax liability.  An example of this might be the child tax credit. There is currently a $1,000 tax credit for children under the age of 17.  If you had a child that reaches the age of 17 in 2013 the credit that you had in 2012 will not be available in 2013.  Additionally there are income limitations on this credit and if your income has gone up in 2013 you may have either a reduced credit or no credit.

Medical expenses which were previously deductible if they exceeded 7.5% of your income are not deductible unless they exceed 10% of your income in 2013 (unless you are a senior citizen in which case the 7.5% limit still applies in 2013).

In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit.  Both of these credits, however, have income limitations and therefore a credit you are counting on now may not be available to you.  In some instances it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit.  While this may raise the tax liability on the parents, the overall taxes on the family may be lower.

Taxpayers should of course be reviewing their investment activity as well.  If a taxpayer has any capital gains they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains.

Conclusion

If you find that you are going to be underpaid at yearend you still have almost 4 months to remedy the situation which is much better than finding out a few weeks before your return is due.  Once again if you’re not sure, then check with a tax professional to help determine your tax position.