Every year, our clients come to us with some common tax questions. Some of these tax questions have very complicated answers, but we’ve boiled the essentials down for you. Here are the top ten tax questions we get every year.
- Who can I claim as a dependent?
IRS rules around who can be claimed as a dependent on your taxes reflects the abundance of family situations in the U.S. It can get complicated, but these are the most basic categories:
- A legal or foster child (or child of your child) who is under age 19 for the entire tax year and lives with you at least six months of the year qualifies as a dependent. (Exceptions to the residency requirement are made for divorced parents with shared custody or kids that temporarily leave home for school, military service, juvenile detention, or illness.)
- If a child older than age 19 meets all the other criteria in scenario A and attends some kind of college, university, K-12 school, or vocational program full-time for at least five months of the year, they are considered dependents until age 24.
- A person of any age with a permanent disability who lives with you for at least six months of the year and does not make more than $4,200 a year is considered a dependent. (Income earned at special vocational programs for people with disabilities is generally not considered part of the individual’s gross income.)
- If you provide more than half of a person’s financial support for the year, they can be considered a dependent. This often applies to individuals caring for elderly relatives. The relative may receive social security benefits, but if those benefits do not cover half the relative’s expenses and you provide the rest, you can likely claim your relative as a dependent.
- Am I missing any important tax deductions?
- Don’t forget to deduct state sales taxes if you live in a state that does not collect income tax. This can really add up if you made a large purchase (i.e., car, boat, home, major renovation).
- Deduct medical and dental expenses. A couple hundred dollars might not be worth it, but if you spend more than 7.5% of your income on medical visits, procedures, and supplies, you should be able to deduct some of them.
- Many people had to work from home in 2020. Remember to deduct costs related to setting up a home office.
- Make sure you deduct property taxes and mortgage insurance if you pay a mortgage. Many people also overlook the home mortgage points they have earned from prepaying their home mortgage interest.
- I am self-employed. What can I do to make sure I complete my taxes correctly?
See our Top Tax Tips for the Self-Employed.
- I was misclassified by my employer as an independent contractor. What do I do?
Independent contractors have to pay social security and Medicare taxes themselves, which can be quite costly. Employers can save costs by hiring individuals as independent contractors, but sometimes, independent contractors are treated more like employees than contractors. In those cases, you do have some recourse.
- Talk to your employer to see if they can reclassify you. If your company hires both employees and independent contracts, your misclassification could be a mistake.
- If your employer will not budge, you can file IRS form SS-8. The IRS will review your claim and contact your employer to determine your status. Your identity may be revealed to your employer, so keep that in mind.
- If the IRS determines you are an employee or you are awaiting a decision, you can file IRS form 8919, which will calculate the amount of social security and Medicare taxes you are and are not responsible for.
- How can I adjust my benefits at work to make the most of potential tax benefits?
- Contribute as much as you can to your retirement account (up to the IRS limits). This reduces your taxable income for the year while making more money available to you in a future year when you would not be taxed on your retirement payout.
- Start a health savings account (HSA), available as part of most high-deductible health plans. Money allocated to an HSA is not taxable.
- I’m retired. Do I have to pay taxes on my social security benefits?
- Whether your social security benefits are taxed depends on your total income. If social security is your only source of income, it probably won’t be taxed.
- If you are married, and your spouse is still earning a significant paycheck that brings your total income above $32,000 a year, you may have to pay taxes on 50% or even 85% of your social security benefits.
- The same tax limits apply if you are making money at another job. For a single person, if your income is over $25,000, social security benefits may be taxed.
- This is why it is important to consider putting off filing for social security benefits until you really need them. If you have an IRA, another job, or other sources of income, consider delaying social security for a few years.
- Do I qualify for the Earned Income Tax Credit?
- The Earned Income Tax Credit is for individuals and families who earned money during the tax year, but not very much. You do not have to have children to qualify, but the amount you can earn and still receive the credit depends on how many children you have.
- You must have earned at least $1 in a year to qualify.
- You cannot be married filing separately. Only those filing as single, head of household, or married filing jointly qualify.
- For tax year 2020, people with zero children filing as single or head of household have to make less than $15,820 to qualify. If filing jointly, they have to make less than $21,710.
- For tax year 2020, people with two children filing as single or head of household have to make less than $47,440 to qualify. If filing jointly, they have to make less than $53,330.
- To read the specific requirements and see more income requirements, visit the IRS website.
We know tax questions can be complicated, and we are here to help. It is always worthwhile to talk with a financial advisor or tax expert. At Crunch Consulting, we can answer tax questions about your specific situation and assist with your tax preparation. Tax preparation services are deductible, and the advice you receive from your preparer can change the way you treat your finances for life. We want to help you succeed and make tax filing as easy as possible. Contact us today.