With the tax season on the way and Tax “D” day is fast approaching, I am sure many of you are heading over to get help from your favorite Tax preparer or CPA. Tax is always complicated with many codes, rules and limitation which often changes every year making it hard to follow. Even for CPA’s, it takes time to check the code and see whether particular rule applies for certain client unless it’s a common one.
In that case, as an individual it is normal to doubt our capability to see whether a certain situation or event triggers any taxing advantage or not. Here are some of the common doubts and dilemmas arises in the mind of common Tax filer,
1. Whether I must file or not?
The question should be actually whether you must file or should file. It all depends on one’s gross income, filing status and age of the person. If your filing status is joint and your joint gross income is above $18,700 and your age is under 65, then you must file. Similarly if you are single under age 65 with gross income is less than or equal to $9350 then you must file. If you did not live with your spouse at the end of 2010 (or on the date your spouse died) and your gross income was at least $3,650, you must file a return regardless of your age. So it is a combination these 3 important factors.
May be you are not required to file according to the conditions, but you should consider filing it anyway if you are eligible to receive a refund like income tax withheld from your pay, estimated tax payments or had a prior year overpayment applied to this year’s tax and more..
2. Whether to claim a person dependent or not?
Generally you can claim a person as dependent for dependency exemptions only when they are a qualifying child or qualifying relative. If you are the dependent of another taxpayer, you cannot claim any other person as a dependent.
Qualifying Child and Qualifying Relative can only qualified to be as dependent if they qualify their own dependent test. For a qualifying child, we have to test for Relationship, Age, Residency and Support provided. For a qualifying relative, you have to check first they are not qualified child, Relationship, Gross income and Support provided. If all these conditions satisfy, you can claim a person as a depending to use $3650 exemptions.
3. Can I file Married Jointly?
There are 5 filing status as per the tax norms in order to find the right standard deductions and also to find other tax deductions and limitations.
Single, Married filing joing, Married filing seperate, Head of Household and Qualifying widower.
The martial status is determined by whether you are married at the last day of the tax year. If you are divorced and/or seperated with divorce decree and not living together, you will not be considered married. You are considered married if you are married and living together as husband and wife, you are living together in a common-law marriage, where recognized in the state you live in or in the state where the common law marriage began, you are married and living apart but not legally separated by a divorce or separate maintenance decree and you are separated under a temporary decree of divorce.
4. Can I file seperately even though I am married?
It all depends on your personal situation. You can be married but still can file seperately but it will usually lead to higher taxes and lose out on certain advantageous AGI limitations. For example, your IRA contributions can be limited depending on your AGI and filing status. If you file jointly your AGI should be $89,000 but less than $109,000 to take the deduction. If you are filing married separate, then your deductible phase out starts at under $10,000. That’s big difference.
Similarly Education credits like lifetime learning credit, American Opporunity Credit depends on the AGI limits. So be wise while chosing to filing joint or seperately. If you and your spouse elect to file jointly, you both can be held responsible, separately or together, for the tax and any interest or penalty due on your return.
5. Can I claim my moving expenses?
Hope many of you know that you can claim your moving expenses related to your job change. There are couple tests like Distance and Time test needs to be satisfied in order to be eligible for claming this deduction. Things like the cost to transport goods, driving to the new location, storage and lodging expenses all deductible except the meals.
For 2010, the standard mileage rate for using your vehicle to move to a new home is 16½ cents a mile. If you are reimbursed certain amount, you can only claim unreimbursed part of the moving expense and not all of it.
There are limitations and exceptions for moving outside US, so check the IRS.gov website for more info.
6. Do I show Unemployment insurance payment as income?
Finally an important item as many people around nation are still under unemployment insurance payment because of tough economic conditions.
For 2010 taxes, all unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to pay estimated tax. See Estimated Tax for 2011 , later. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty