At Sandollar Accounting, we’re often asked questions – especially about taxes. Here are some of our most commonly asked tax, bookkeeping and accounting questions we get in the Daytona Beach area.
Question: My babysitter refused to provide me with her Social Security number. Can I still claim the amount I paid her for childcare while I worked? If so, how do I claim these childcare expenses on my tax return?
Answer: Yes, if you meet the other requirements to claim the child and dependent care credit but are missing the Social Security number or other taxpayer identifying number of your provider, you can still claim the credit by demonstrating due diligence in attempting to secure this information.
• Provide whatever information you have available for your provider (such as name and address) on Form 2441 (.pdf), Child and Dependent Care Expenses.
• Write “See Attached Statement” in the columns requesting the missing information. Explain on the attached statement that you requested the provider’s identifying number, but the provider did not give it to you. This statement supports a claim of the use of due diligence in trying to secure the identifying information.
Question: I heard there is a credit for hiring certain groups of workers, such as veterans or ex-felons. Is that the same thing as the work opportunity tax credit?
Answer: The work opportunity tax credit (WOTC) provides an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs.
The Tax Increase Prevention Act of 2014 extended the WOTC for members of targeted groups hired after December 31, 2013, and before January 1, 2015. The benefit is a 40 percent credit generally on the first 6,000 of wages paid to new hires in the first year of employment.
You must obtain certification from your state employment security agency that an individual is a targeted group member before you claim the credit. Generally, you obtain certification by submitting Form 8850 (.pdf), Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the state employment security agency. You must submit the form not later than the 28th day after the individual begins work for you.
Newly hired individuals from the following targeted groups might qualify you for this tax credit:
• a qualified Title IV-A recipient,
• a qualified veteran,
• a qualified ex-felon,
• a designated community resident,
• a vocational rehabilitation referral,
• a qualified summer youth employee,
• a qualified supplemental nutrition assistance program benefits recipient,
• a qualified SSI recipient, or
• a long-term family assistance recipient.
You can calculate the credit by completing Form 5884 (.pdf), Work Opportunity Credit, with the business’ tax return. Taxpayers claim the credit on Form 3800 (.pdf), as part of the General Business Credit.
Question: Are child support payments deductible by the payer or can the payer claim a dependency exemption for the child?
Answer: No, child support payments are neither deductible by the payer nor taxable income to the payee.
The payer of child support may be able to claim the child as a dependent:
• Generally, the child is the qualifying child of the custodial parent, and the custodial parent is allowed to claim a dependency exemption for the child if that parent meets the other dependency tests. The parent with whom the child lived for the greater part of the year is the custodial parent for income tax purposes.
• The noncustodial parent may claim an exemption for the child if the custodial parent signs a Form 8332 (.pdf), Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a substantially similar statement and the noncustodial parent attaches it to his or her return.
Question: I am divorced with one child. This year my ex-spouse, who is the noncustodial parent, will claim the exemption for our child. Can I qualify as head of household?
You may qualify to file as head of household even though you do not claim an exemption for your child if you meet all of the following requirements:
1. You are unmarried or considered unmarried on the last day of the year.
2. You paid more than half of the cost of maintaining a household that is your home and the main home of your child for more than one-half of the year.
3. Your child is your qualifying child for purposes other than the dependency exemption and the child tax credit.
Question: If the noncustodial parent receives permission from the custodial parent to claim a child on his or her tax return, is the noncustodial parent eligible for the earned income credit?
Answer: No. The noncustodial parent cannot claim the earned income credit based on that child because the child did not live with that parent for the greater part of the year and therefore does not meet the residency test.
The custodial parent may be able to claim the earned income credit if all the other requirements are met.
Note: For income tax purposes, the custodial parent is the person with whom the qualifying child in question lives with the greater number of nights during the year.
Question: If both parents who were never married want to claim the earned income credit, which parent is entitled to claim the credit?
Answer: If they otherwise meet all of the requirements to claim the earned income tax credit (EITC), unmarried parents with a qualifying child may choose which parent will claim the credit.
• If there are two qualifying children, each parent may claim the credit based on one of the children.
• One parent may claim the credit based on both children.
• If both parents claim the child as a qualifying child for the EITC, the IRS will apply rules and treat the child as the qualifying child of the parent with whom the child lives for the longer amount of time in the tax year. If the child lives with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who has the higher adjusted gross income (AGI) for the tax year.
• If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who has the highest AGI for the tax year.
• If a parent can claim the child as a qualifying child but neither parent claims the child, the child is treated as the qualifying child of the person who has the highest AGI, but only if that person’s AGI is higher than the AGI of any of the child’s parents.
Question: Can a state court determine who may claim a dependency exemption for a child?
Answer: Federal tax law determines who may claim a dependency exemption for a child. Even if a state court order allocates a dependency exemption for a child to a noncustodial parent, the noncustodial parent must comply with the Federal tax law to claim an exemption for the child. To claim an exemption for a child, the noncustodial parent must attach to the noncustodial parent’s return a copy of a release of claim to exemption by the custodial parent. The release may be on a Form 8332 (.pdf), Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a document that conforms to the substance of that form.
Question: I received Social Security benefits this year that were back benefits for prior years. Do I amend my returns for prior years? Are the back benefits paid in this year for past years taxable for this year?
Answer: You cannot amend returns for prior years to reflect Social Security benefits received in a single lump-sum in the current year. You must include the taxable part of a lump-sum payment of benefits received in the current year (reported to you on Form SSA-1099, Social Security Benefit Statement) in your current year’s income, even if the payment includes benefits for an earlier year.
However, there are two ways to determine the amount of income to include:
• You can use your current year’s income to figure the taxable part of the total benefits received in the current year; or
• You may make an election to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year.
You can select the lump-sum election method if it lowers the taxable portion of your benefits:
• Under this method, you refigure the taxable part of all your benefits (including the lump-sum payment) for the earlier year using that year’s income.
• Then you subtract any taxable benefits for that year that you previously reported.
• The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for the current year (figured without the lump-sum payment for the earlier year).
Question: I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?
A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.
You own shares in the fund but the fund owns capital assets, such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.
If the mutual fund held the capital asset for more than one year, the nature of the income is capital gain, and the mutual fund passes it on to you as a capital gain distribution. Consider capital gain distributions as long-term capital gains no matter how long you have owned shares in the mutual fund.
Question: Do I need to pay taxes on the additional stock that I received as the result of a stock split?
No. In a stock split, the corporation issues additional shares to current shareholders, but your total basis does not change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.
• Stock splits do not create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You do not report income until you sell the stock.
• Your overall basis does not change as a result of a stock split, but your per share basis changes. You will need to adjust your basis per share of the stock.
For example, you own 100 shares of a corporation with a $15 per share basis for a total basis of $1,500. In a 2-for-1 stock split, the corporation issues an additional share of stock to the shareholder for each share the shareholder owns. You now own 200 shares, but your total basis is still $1,500. Following the stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split. Your basis per share is now $7.50 ($1,500 divided by 200) for each of the 200 shares.
Question: Can I receive a tax refund if I am currently making payments under an installment agreement or payment plan for a prior year’s federal taxes?
Answer: No. A condition of your installment agreement is that the IRS will automatically apply any refund due to you against taxes you owe.
• Because your refund is not applied toward your regular monthly payment, you must continue making your installment agreement payments as scheduled and in full.
• Regardless whether you are participating in an installment agreement or other payment arrangement with the IRS, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support.
Question: What can I do if I think someone has filed a tax return using my Social Security number?
Answer: The IRS has security measures in place to verify the accuracy of tax returns and the validity of Social Security numbers submitted.
• If you receive a notice from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please notify the IRS immediately by responding to the name and number printed on the notice or letter.
• If you are an actual or potential victim of identity theft and would like the IRS to mark your account to identify any questionable activity, please complete Form 14039 (.pdf), Identify Theft Affidavit. Mail or fax the form to the address or fax number listed on the notice with your tax return if your electronic filing was rejected or to the address/fax located in the instructions.
• You may also contact the IRS’s Identity Protection Specialized Unit (IPSU) at 800-908-4490. IPSU employees are available to answer questions about identity theft and resolve any tax account issues that resulted from identity theft.
• Review Publication 4535 (.pdf), Identity Theft Prevention and Victim Assistance, for more information. It is available in both English and Spanish.
• If you suspect someone else is using your Social Security number, or to secure information on how to prevent identity theft, you can contact the Federal Trade Commission (FTC) Identity Theft Hotline toll-free at 877-438-4338.
I received my refund, and because I made a mistake on my return, it is more than I should have received. I have not yet cashed this check. What should I do now?
Since the mistake was not caught and corrected during processing and you did not receive a letter of explanation showing a change, you need to:
• File an amended or corrected return using Form 1040X (.pdf), Amended U.S. Individual Income Tax Return, as soon as possible.
• Include copies of any schedules that are changing and/or any Form(s) W-2 (.pdf) you did not include on the original return.
• You should return the refund check with a letter of explanation submitted with your amended return; when the IRS finishes processing the amended return, the IRS will issue a new refund check.
• Write “Void” in the endorsement section of the check when you return the check with your amended return.
• Allow the IRS up to 16 weeks to process the amended return.
Question: I care for my parents in my home. My parents occasionally give me money to pay for their share of household expenses. Is this money taxable to me?
An amount of money that your parents give you to offset their expenses is not taxable to you. This amount is treated as support provided by your parents in determining whether your parents are your dependents.
Question: I pay for some of my parent’s medical expenses. May I deduct these expenses on my return?
Answer: If you can claim your parent as a dependent, you also may be able to claim a deduction for the portion of your parent’s medical or dental expenses that you paid. For tax years beginning after December 31, 2012, your total deduction for medical and dental expenses must be reduced by 10 percent of your adjusted gross income. There is a temporary exemption from January 1, 2013, to December 31, 2016, for individuals age 65 and older and their spouses who can reduce their medical and dental expenses by 7.5 percent.
Question: I received a death benefit from my parent’s life insurance policy. Are these insurance proceeds taxable to me?
Answer: Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.