by JC Leahy, MA Accounting
CAN I ESTABLISH A TRADITIONAL IRA?
If you have taxable earned income and you are less than 70.5 years old, you can establish a traditional IRA. Earned income includes salary, wages, commissions, self-employment income, alimony, and combat pay. It does not include any pensions (including Social Security), interest, dividends, or annuities. In the year you reach the age of 70.5, you can no longer establish or contribute to a traditional IRA.
HOW MUCH CAN I CONTRIBUTE?
For 2010 and/or 2011, you can contribute $5,000 per year or the amount of your taxable earned income, whichever is less, to a traditional IRA. This is true whether you are covered by a retirement plan or not. If you have reached the age of 50 during the year, you may contribute an additional $1,000 catch-up contribution. This makes a total limit of $6,000.
Here's the exception. It's a good one: If one spouse doesn't work or earns less than $5,000, he/she may establish and contribute to an IRA based on the earnings of the other spouse. Between them, there is a limit of $10,000, which can be allocated in any way they wish between their two IRA accounts -- provided that neither one's account receives more than $5,000. For example, if the husband makes $100,000 and the wife makes zero of earned income, the wife may contribute up to $5,000 into her traditional IRA and the husband, likewise, may put up to $5,000 into his IRA. This also applies to the $1,000 catch up contribution.
One other fine point: If you have a Traditional IRAand also a Roth IRA, the $5,000/$6,000 limit includes both. In other words, you can only contribute $5,000/$6,000 TOTAL between the two.
DO I HAVE TO MAKE THE CONTRIBUTION BY DECEMBER 31??
The really great news is that you have until the April, 2011 tax filing deadline to open your Traditional IRA account and make your 2010 contribution.
HOW MUCH OF MY TRADITIONAL IRA CONTRIBUTION CAN I ACTUALLY DEDUCT?
If you are not covered by a retirement plan at work at any time during the year, you can deduct every penny of your traditional IRA contribution. That's simple.
It's slightly more complicated if you were covered by a retirement plan at work. In that case, if your "Modified Adjusted Gross Income" (MAGI) is less than certain thresholds, you still get to deduct your entire Traditional IRA contribution. For 2010, this threshold is $56,000 for Single or Head of Household filers, and $89,000 for Married Filing Jointly or Qualifying Widower filers. Above those thresholds, the deductible portion phases out between $56,000 and $66,000 for Singles and Head of Household, and $89,000 and $109,000 for Married-Joint and Qualifying Widower filers. If MAGI is greater than $66,000 ($109,000 for Married-Joint) then NONE of your Traditional IRA contribution can be deducted. But you can still make your $5,000/$6,000 contribution to the IRA account -- you just won't be able to deduct it.
In situations when you can't deduct your Traditional IRA contribution, why would you want to make the contribution at all? There are two reasons. First, earnings accumulate and compound every year without being diminished by annual income taxes. You only pay the tax on earnings when you withdraw them in your old age -- and you will probably be in a lower tax bracket then. Second, if you have a nondeductible Traditional IRA contribution, you get what is called a "basis" in your IRA account. This just means that when you eventually withdraw from your IRA, the "basis" portion will not be taxable.
If you need assistance with your income tax filing this Tax Season, you might want to contact:
JC Leahy, MA Accounting
Maximum Legal Refund (TM)
Tax Help When You Need It!!! (TM)
Silver Spring, Maryland
E-mail: jcleahy@jaitoday.com
Tel. (301)537-5365
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MESSAGE FOR THE NEW REPUBLICAN HOUSE OF REPRESENTATIVES: LADIES AND GENTLEMEN, LOSERS COMPROMISE!!! DEMOCRATS MUST COMPROMISE NOW, AND THAT COMPROMISE MUST BEGIN WITH COMPLETE REPEAL OF THEIR HEALTH CARE LAW. I REPEAT: COMPLETE REPEAL!! THIS WRITER ADVOCATES THAT IT BE REPLACED WITH THE SILVER PENNANT HEALTH CARE PLAN. LOSERS COMPROMISE!!! DON'T BE LOSERS THIS TIME, REPUBLICANS!!! FOLKS, PAY ATTENTION TO THIS!!! LET'S MOVE ON TO 2012 !!!!!!!!! -- JC Leahy, RN, BSN, MA -- Sigma Theta Tau's "100 Most Extraordinary Nurses" Award
Showing posts with label income tax planning. Show all posts
Showing posts with label income tax planning. Show all posts
Tuesday, December 28, 2010
Sunday, December 26, 2010
CHILD AND DEPENDENT CARE EXPENSE CREDIT
By JC Leahy
MA, Accounting
Maximum Legal Refund (TM)
Income Taxes Minimized to Your Best Advantage (TM)
Silver Spring, Maryland
If you would like help preparing your income tax returns, email jcleahy@jaitoday.com or phone (301)537-5365
Congress can make the simplest thing complicated, and the Child and Dependent Care Expense Tax Credit is no exception. The simple concept is for the Tax Code to help both spouses to be employed outside the home by lightening the burden of child care expenses. This is one of the few personal tax credits that do not phase out because of high income levels. In fact, a couple could have an adjusted gross income of a billion dollars and still claim the Child and Dependent Care Expense Credit.
This is a nonrefundable credit. "Nonrefundable" means that the credit is limited to your income tax liability. Therefore, if you're low-income and your tax liability is consequently zero, then -- sorry -- your Child and Dependent Care Expense Credit is zero, too. Also, if you improved the energy efficiency of your home, for example, with energy efficient windows, and you therefore claimed the Nonbusiness Energy Property Credit (up to $1,500), you will probably be surprised to learn that the Child and Dependent Care Expense Credit will be subtracted from your Nonbusiness Energy Property Credit -- resulting, effectively, in a reduced or eliminated Child and Dependent Care Expense Credit. This is an odd case of qualifying for a tax credit but not actually receiving any money for it. (You have to plan your taxes carefully because the rules are often a bit of a shell game.)
There are some other limits. If you are married filing separate returns, your Child and Dependent Care Credit is limited to zero -- unless the married spouses lived apart for the last 6 months of the year, in which case, one or both may qualify for the full credit as heads-of-household. As heads of households, if they have 4 children (or other qualified dependents) there is the potential to more than double the Child and Dependent Care Credit by simply not living together. Also, expenses associated with the credit are limited to the earned income of the spouse who had the least earned income. The idea is, after all, to encourage the second spouse to put the kids into child care and go out to work, so if there is no second income there is no tax credit. One intersting exception occurs in the case of the couple with children living together without the benefit of marriage. In this case, the fact that one partner does not have any earned income will NOT limit the Child and Dependent Care Credit - because the partner who does have earned income will file as head of household and claim the children (and possibly the partner) as dependents -- thereby being eligible for the full credit. Another exception occurs when one spouse is disabled. The disabled spouse is deemed to have gone out to work even though he or she did not. The disabled spouse is deemed to have had earned income of $250 per month if there is one qualifying child or $500 per month if there were 2 children. Another exception occurs when one spouse is a full-time student for at least 5 months of the year. That student spouse is treated like a disabled spouse. Still another exception may occur when a couple is unmarried, has children, and both are employed. In this case, for all practical purposes, the 2 parents in aggregate may qualify for MORE THAN double the Child and Dependent Credit that they would get if they were married. Why would it be more than double? Because in computing the credit, they would count a maximum 4 children instead of 2, and by separating their incomes into 2 separate tax returns, they probably each qualify for a higher credit percentage.
The credit percentage is a multiplier used to compute the Child and Dependent Care Credit. Up to $3,000 of expenses per child for up to 2 qualifying children are allowed -- at total of $6,000. This total is multiplied by the credit percentage to compute the tax credit. The credit percentage ranges from 35% to 20% depending on Adjusted Gross Income (AGI). The same percentage table is used for married couples and others. Therefore, by being married and combining their incomes, married couples have a lower credit percentage than if they were not married. And if they have 4 children, for purposes of this credit, married couples can only claim half of the children (2) that they could if they were unmarried (2 each = 4).
Children qualify if they are under the age of 13. Once they are over 13, you cannot claim the Child and Dependent Care Credit for their care. Here is an important point, however: In they year that the child turns 13, you can still claim the Child and Dependent Care Expense Credit for the period before his birthday.
Besides dependent children under the age of 13, you can also claim this credit for expenses related to a physically or mentally incapacitated dependent OR SPOUSE who lives with you for at least half of the year. This could include, for example, an elderly parent.
Another wrinkle: Some expenses that qualify for this credit may also qualify as medical expenses on your Schedule A. In this case, you may list some expenses as an itemized (Schedule A) deduction and others as Child and Dependent Care expenses -- but the same expense may not be listed in both places.
If you have questions, you may contact the author directly at: jcleahy@jaitoday.com
If you would like help preparing your income tax return, e-mail maxlegalrefund@yahoo.com -- or phone (301)537-5365.
MA, Accounting
Maximum Legal Refund (TM)
Income Taxes Minimized to Your Best Advantage (TM)
Silver Spring, Maryland
If you would like help preparing your income tax returns, email jcleahy@jaitoday.com or phone (301)537-5365
Congress can make the simplest thing complicated, and the Child and Dependent Care Expense Tax Credit is no exception. The simple concept is for the Tax Code to help both spouses to be employed outside the home by lightening the burden of child care expenses. This is one of the few personal tax credits that do not phase out because of high income levels. In fact, a couple could have an adjusted gross income of a billion dollars and still claim the Child and Dependent Care Expense Credit.
This is a nonrefundable credit. "Nonrefundable" means that the credit is limited to your income tax liability. Therefore, if you're low-income and your tax liability is consequently zero, then -- sorry -- your Child and Dependent Care Expense Credit is zero, too. Also, if you improved the energy efficiency of your home, for example, with energy efficient windows, and you therefore claimed the Nonbusiness Energy Property Credit (up to $1,500), you will probably be surprised to learn that the Child and Dependent Care Expense Credit will be subtracted from your Nonbusiness Energy Property Credit -- resulting, effectively, in a reduced or eliminated Child and Dependent Care Expense Credit. This is an odd case of qualifying for a tax credit but not actually receiving any money for it. (You have to plan your taxes carefully because the rules are often a bit of a shell game.)
There are some other limits. If you are married filing separate returns, your Child and Dependent Care Credit is limited to zero -- unless the married spouses lived apart for the last 6 months of the year, in which case, one or both may qualify for the full credit as heads-of-household. As heads of households, if they have 4 children (or other qualified dependents) there is the potential to more than double the Child and Dependent Care Credit by simply not living together. Also, expenses associated with the credit are limited to the earned income of the spouse who had the least earned income. The idea is, after all, to encourage the second spouse to put the kids into child care and go out to work, so if there is no second income there is no tax credit. One intersting exception occurs in the case of the couple with children living together without the benefit of marriage. In this case, the fact that one partner does not have any earned income will NOT limit the Child and Dependent Care Credit - because the partner who does have earned income will file as head of household and claim the children (and possibly the partner) as dependents -- thereby being eligible for the full credit. Another exception occurs when one spouse is disabled. The disabled spouse is deemed to have gone out to work even though he or she did not. The disabled spouse is deemed to have had earned income of $250 per month if there is one qualifying child or $500 per month if there were 2 children. Another exception occurs when one spouse is a full-time student for at least 5 months of the year. That student spouse is treated like a disabled spouse. Still another exception may occur when a couple is unmarried, has children, and both are employed. In this case, for all practical purposes, the 2 parents in aggregate may qualify for MORE THAN double the Child and Dependent Credit that they would get if they were married. Why would it be more than double? Because in computing the credit, they would count a maximum 4 children instead of 2, and by separating their incomes into 2 separate tax returns, they probably each qualify for a higher credit percentage.
The credit percentage is a multiplier used to compute the Child and Dependent Care Credit. Up to $3,000 of expenses per child for up to 2 qualifying children are allowed -- at total of $6,000. This total is multiplied by the credit percentage to compute the tax credit. The credit percentage ranges from 35% to 20% depending on Adjusted Gross Income (AGI). The same percentage table is used for married couples and others. Therefore, by being married and combining their incomes, married couples have a lower credit percentage than if they were not married. And if they have 4 children, for purposes of this credit, married couples can only claim half of the children (2) that they could if they were unmarried (2 each = 4).
Children qualify if they are under the age of 13. Once they are over 13, you cannot claim the Child and Dependent Care Credit for their care. Here is an important point, however: In they year that the child turns 13, you can still claim the Child and Dependent Care Expense Credit for the period before his birthday.
Besides dependent children under the age of 13, you can also claim this credit for expenses related to a physically or mentally incapacitated dependent OR SPOUSE who lives with you for at least half of the year. This could include, for example, an elderly parent.
Another wrinkle: Some expenses that qualify for this credit may also qualify as medical expenses on your Schedule A. In this case, you may list some expenses as an itemized (Schedule A) deduction and others as Child and Dependent Care expenses -- but the same expense may not be listed in both places.
If you have questions, you may contact the author directly at: jcleahy@jaitoday.com
If you would like help preparing your income tax return, e-mail maxlegalrefund@yahoo.com -- or phone (301)537-5365.
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