Are you scrambling to finish filing in time for the tax deadline? Did you remember to file taxes for your kids?

Since we opened multiple accounts at ING to get $25 Sign Up Bonuses for our kids, they’re earning interest on their accounts, which reminded me to check into the kids tax filing rules. (Signing up for College Advantage $25 Sign Up Bonuses do not count as income for your child.)

If your kids earn interest and dividends, or have a job, check out the requirements for filing taxes.

2011 Kids Tax Filing Requirements

If you claim your child as a dependent on your return, the kids need to file taxes if ANY of the following are true:

• Earned income, from a job for example, is more than $5,800.
• Unearned income, including dividends or interest, is more than $950.
• Self employment net earnings are more than $400.
• Earned and unearned total income is more than the larger of $950 or earned income plus $300.

Also, if interest, dividends and other investment income are more than $1,900, you’re going to get hit with the kiddie tax (which means you’ll pay your tax rate on part of your child’s income).

Filing a Child’s Tax Return

You can file your child’s taxes for free at TurboTax.

If you want, you can also attach it to your return if the income is less than $9,500 and only from interest or dividends. This option is available to children under age 19 (or a full time student under 24) using Form 8814.

A word of caution though, qualified dividends or capital gains may be taxed at a higher rate if you attach it to your return instead of filing the child’s return separately.

More Filing Requirements

There are other circumstances when children must file a tax return. For more information see When Do Kids Need to File Taxes? or Publication 929, Tax Rules for Children and Dependents.

For more information when others must file, see minimum income to file taxes.

 Print   |   Email   |  6 Comments

Suffice it to say, over the past two years the IRS has made it more of a priority to recoup the money it is owed by individuals and businesses who are not truthfully reporting their earnings. And who can blame them? With the United States debt growing to over $12.5 trillion dollars, it seems only rational for them to continue this trend of coming after money that is owed.

So how is the IRS going about its debt collections?

Overseas Accounts

Based on US pop culture it is easy to think that every rich, James-Bond like American has an account in the Cayman Islands worth millions of dollars. Apparently the IRS has been watching these movies as well, as they are going after these accounts, which number in the tens of thousands. After some strong-arming from the U.S. government in 2009, several traditional countries where secret, tax-evading bank accounts are known to be kept (Switzerland, Liechtenstein and Luxembourg for example) are now going to cooperate more with the United States on identifying the accounts and making sure that the taxes owed on these accounts have been paid. Over 14,700 individuals voluntarily came forward with their overseas account information, and the IRS is currently investigating over 7,000 overseas accounts.  Also, in a settlement with the giant UBS Swiss bank, the US will be given 4,450 bank account names.

On top of that, the IRS is now expecting more information from individuals with overseas accounts. Individuals are now required to file a revised and stricter Foreign Bank Account Report by June 30 each year if the combined value of all foreign accounts in the previous calendar year exceeded $10,000. If you disclose that you have an overseas account, instead of reporting a vague range of money that is in that account, you now must include an exact dollar amount. Another new rule is that the full address of the bank where the account is held now must be disclosed. For more information on changes to this form, see the Anti-Deferral and Anti-Tax Avoidance information.

Hiring More Employees

The IRS is increasing their manpower in order to catch tax cheaters. In December of 2009, 100 new employees were hired in order to get a new “high wealth unit” within the IRS up and running. The high wealth unit will be focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals in the hopes that by looking holistically at a wealthy individual’s entire asset portfolio, they will find taxes that have not been paid.

Incentives to Snitch on Your Tax-Evading Friends, Family, and Bosses

The IRS paying people who tattle on tax cheaters with evidence is not a new concept, we discussed it previously when readers answered whether or not they report all their income; according to a Forbes article dated December 14^th, 2009, from 2004-2005, 428 informants received a total of $12 million for their information that recouped the IRS $168 million. But in the new passing of the Tax Relief and Health Care Act in 2006 (effective 2008), the IRS upped the ante by paying between 15%-30% to people who tip-off tax cheaters for cases of $2 million plus. While no funds have yet been paid, many cases are in the works.

 Print   |   Email   |  3 Comments

We all know that we must pay both income and social security taxes on employment income as well as any contract labor. But the IRS levies income taxes on some other sources of income too – some more surprising than others. If you received a windfall or other unexpected funds in 2010, chances are the IRS will view it as income. Read below for some of the most overlooked items.

Taxable Items

Generally speaking, the IRS taxes anything that leaves you in a better economic position than you were before you received it. Sometimes, like when you sell a house, the IRS has credits or deductions to eliminate all or part of the tax. Other times, you simply have to pay up. Prepare to open your wallet for:

• Scholarships/financial aid: Scholarships and financial aid used for tuition or other required fees, books, or supplies are not taxable (and they must be subtracted from any tuition tax deductions). However any funds that are used for living expenses, travel, or expenses that are not required are considered income by the IRS and fully taxable. Students not enrolled in a degree program may have to pay taxes on all financial aid, even when spent on otherwise qualified expenses.
• Debt settlement: If you find yourself unable to pay credit card or other debts, the lender may negotiate with you to pay a reduced amount. Any forgiven debt is subject to taxation and will be reported to the IRS if it is more than $600. If you have a negative net worth at the time of the settlement, the IRS may waive the tax liability. Until 2012, this does not apply to debt cancellation involving a principal residence mortgage. Taxpayers also do not owe taxes on any debts discharged through bankruptcy.
• Gambling Winnings: If you hit the jackpot in Vegas or win the lottery, you will owe the IRS a nice chunk of change. This is one of the main reasons people might choose to take annual payments, when they’re an option, rather than a lump-sum payout.
• Prizes: Along with lottery and other gambling winnings, you will have to pay taxes on any prizes you received, regardless of whether they were given in the form of cash. If your church or child’s school sold raffle tickets, and you win a car, you’ll have to pay taxes on the cash value of that car. Ditto for any game show or contest winnings.

Exceptions to the Rule

• Gifts: If you received a gift from a friend, relative or perfect stranger, you do not have to pay taxes on it – but they might. However, be aware that any money exchanged between an employer and employee is considered compensation and therefore taxable income.
• Fringe Benefits: To encourage employers to provide more benefits across the board, the IRS allows them to take a tax deduction for the value of many of those benefits, and also allows you to receive the benefits tax free. Tax-free benefits include things like your health insurance, childcare assistance, and access to gym facilities on the employers’ premises. But other benefits may be taxable, especially if they’re only offered to certain employees – your employer should notify you if you are affected.

In addition, Credit Card Rewards are generally not taxable.

If you’re looking for something specific that you don’t see on the list, feel free to ask about it in the comments. But as a general rule of thumb, the answer to your question is simple: if you had measurable economic gain, it’s probably taxable. Exceptions do exist, so check with your accountant or tax preparer if you’re really not sure!

 Print   |   Email   |  7 Comments

Are you in line to receive a tax refund? Were you hoping to have received more of your hard earned money back into your bank account? As of 2010, there is an automatic way to invest your tax refund into government U.S. Series I Savings Bonds. This is a great way to increase your refund by earning interest, as well as a convenient way to ensure your money ends up working for you instead of being spent.

Bond Purchasing Limits

For all bond purchases automatically made with your tax refund, you must purchase US Savings bonds in multiples of $50, and the most you can request is $5,000 worth. The bonds will be issued in your name, unless you file a joint return, in which case the bonds will be issued in both you and your partners’ name. Please note that you cannot designate a beneficiary under this option.

Split Your Refund Deposits: Form 8888

As in previous tax years, you can choose to split your refund up into several accounts, including the following: savings account, checking account, a retirement fund, a health savings account, and/or a Coverdell education savings account by using Form 8888: Direct Deposit of Refund to More Than One Account. This year you can also choose to split your refund between these accounts and U.S. Series I Savings Bonds, or put your entire refund into purchasing these treasury bonds. Most likely you will need this form to do so (see below).

How to Purchase

If you are using your entire tax refund to purchase bonds, and it meets the criteria (at least $50, in multiples of $50, and no more than $5,000), then you do not need to fill out Form 8888. Instead, you would enter the information below on the appropriate lines on your tax return.

If, however, your tax refund needs to be split up, then you need to use Form 8888 to do so. For example, if your refund is $1,680, you could purchase $1,650 in bonds, but then would need to deposit the $30 into another financial institution, thus requiring the use of Form 8888.

You can use TurboTax to help you fill out the form. On Form 8888, fill in a dollar amount in line 1a, 2a, or 3a (depending on how many ways you are splitting your return deposit), the routing number(s) on line 1b, 2b, or 3b, and the account number(s) on line 1d, 2d, or 3d. Check whether or not each account is ‘checking’ or ‘savings’. For the line where you want to purchase the bonds, enter the dollar amount in line 1a, 2a, or 3a (remember the bond purchasing limits above when figuring out how much to put on these lines). For the routing number, enter the following: 043736881. Enter the word BONDS on line 1d, 2d, or 3d, and check the box ‘savings’.

You will receive the bonds in the mail. However, if you make a mistake, you will receive your refund as a check from the IRS instead.

Update: After the end of paper savings bonds, using your tax refund is currently the only way to purchase paper savings bonds.

 Print   |   Email   |  Comments?

Most taxpayers are well aware of the deduction that comes from claiming dependent children on their taxes. But what are the rules on claiming dependents on taxes? And what about other relatives? And, when can those formerly claimed as dependents on someone else’s return begin to claim themselves?

If someone else can claim you as a dependent, you cannot receive a personal exemption for yourself, and your standard deduction is limited. If you are filing using TurboTax, the program will help you determine the limitations.

You can claim someone as a dependent if they are a United States citizen, do not file a joint return, and meet either the qualifying child test or qualifying relative test, both discussed in IRS Publication 501 and explained below.

Qualifying Child

The most common reason to claim someone as a dependent on your taxes is because they are a qualifying child. To be a qualifying child, the dependent must meet all six of the following tests:

• Relationship: the dependent must be your child (including foster, step, or adopted child), your sibling (including half or step), or any of their descendants (e.g., your grandchild, niece, or nephew)
• Age: the dependent must be under 19 and younger than you (younger than either you OR your spouse if filing jointly), under 24 and a full-time student for at least part of 5 months of the calendar year, or permanently and totally disabled regardless of age.
• Residency: the dependent must live with you for at least half the calendar year.
• Support: the child cannot have provided more than half of his or her own support (i.e., necessary living expenses) for the year
• Joint Return: the child cannot have filed a joint return with a spouse, except if the return was only filed to claim a refund
• Special Test: if the parents are divorced, only one can claim the child as a qualifying child. If both would be otherwise eligible, this is usually the parent with the highest gross income, unless the parents have agreed otherwise.

Qualifying Relative

If your potential dependent does not qualify as a qualifying child, he may instead be classified as a qualifying relative, and still be claimed as a dependent. To be a qualifying relative, the dependent must meet all of the following tests. Note that there is no age test for a qualifying relative.

• Not a qualifying child: A dependent cannot be deemed your qualifying relative if he is a qualifying child for you or any other taxpayer.
• Relationship: the dependent must live with your OR, if he does not live with you, be your child (including foster, adopted, step, or in-law), your sibling (including half, step, or in-law), your parent or grandparent (including step or in-law but NOT including foster), or a direct descendant of any of the preceding relatives.
• Gross income: the relative’s gross income must be less than $3,700
• Support: you must provide more than half of the support for this person during the year. If multiple parties combine to provide more than 50% (e.g., two adult children each provide 30% of a parent’s support), any one taxpayer who provides more than 10% can claim the relative with the written permission of the others.

With the tax deadline just over a week away, it’s important to understand the rules on claiming dependents on taxes and when claiming dependents is appropriate.

 Print   |   Email   |  16 Comments