It seems that it’s always the little things that create uncertainty in the tax world. Here are some of the questions that commonly plague taxpayers, and the answers they seek.
1. Can I claim my child as a dependent?
When your child is a baby, there’s usually no doubt about your ability to claim him or her as your dependent. However, as your child matures, things can become less clear, especially when he or she is working. Keep these rules in mind:
- Your child up to age 24 can be your dependent if he or she is a full-time student, lives with you over half the year, and does not provide more than half of his/her support.
- Your child of any age can be your dependent if you provide more than half of his/her support and the child does not have gross income in excess of the exemption amount ($3,700 in 2011 and $3,800 in 2012).
If you are divorced from your child’s other parent, special rules apply. Typically the custodial parent is the one entitled to an exemption for the child.
2. What’s the best filing status for me?
This question can be problematic for some taxpayers. If married, should you file jointly or separately? If you are single but have a dependent, are you eligible for more favorable head of household status? The only way to know whether you’re eligible to make a choice of filing status is to run through the tax rules. Your tax advisor or software, as well as tax books, can help you make this decision.
If you’re married, joint or separate filing status can best be decided by completing a return both ways and choosing the status that produces the lower tax bill for you and your spouse together. But even if the tax is higher, you may still want to file separately to avoid the responsibility for the tax on a joint return, especially if you suspect your spouse is doing something not quite right.
3. Can I take a loss on the sale of my home?
In this tough housing market, many homeowners have lost their homes to foreclosure or been forced to sell at a loss. Unfortunately, while they’ve suffered an economic loss, they can’t take a tax loss. The home is a personal asset, not investment property, so the loss is not deductible.
4. What should I do if I can’t file on time?
If, for any reason, you won’t make the April 17th filing deadline, you can ask for an automatic 6-month filing extension. You don’t have to give the IRS a reason why you want more time. Use Form 4868 for this purpose. If you self-prepare your return, your software has it option for you.
Getting a filing extension avoids late filing penalties, but be sure to pay as much as you can of what you expect to owe; this will avoid or minimize late payment penalties and interest.
5. What should I do if I can’t pay my taxes?
Don’t let your inability to pay your taxes keep you from filing; this only compounds a difficult situation. There are a number of strategies that you can use to pay your tax bill:
- Charge your taxes to a major credit card. The IRS doesn’t impose any fee for doing this, but you’ll have to pay a convenience fee (up to 2.35% of the taxes charged) to the IRS-approved credit card processor.
- Use an installment agreement to spread payments over several years. You can request this using an online payment agreement at www.irs.gov.
- Request an offer in compromise to settle your bill for less than the full amount owed if you experience a severe financial hardship. Again, find details at the IRS website.
When in doubt, consult with a tax expert. You can also submit your tax questions to Ask JK at www.jklasser.com.
This article comes to us from Barbara Weltman and our friends at The J.K. Lasser Institute, leading tax resource and publisher of a wide range of tax, financial, and business books and newsletters. www.jklasser.com