Important IRS Facts About Dependents and Exemptions

While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2012 tax return.

1. Exemptions reduce taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.
2. Personal exemptions.  You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.
3. Exemptions for dependents.  Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for information about dependents who do not have Social Security numbers.
4. Some people do not qualify as dependents.  While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.
5. Dependents may have to file.  If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.
6. Dependents can’t claim a personal exemption.  If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.

Remember that a person must meet several tests in order for you to claim them as your dependent. See Publication 501 for the tests you will use to determine if you can claim a person as your dependent.

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers and payers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to [email protected] Use the subject line, ‘Suspicious website’.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to [email protected]

The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing.”

EFTPS is a system offered by the U.S. Department of Treasury for paying federal taxes electronically via the internet, over the phone or through special channels designated for tax professionals, payroll services and financial institutions. You can use EFTPS to make all federal tax payments, including income, employment, estimated and excise taxes. Anyone can use it and it’s absolutely free.

You can make payments whenever it’s convenient for you, 24 hours a day, 7 days a week. Businesses can schedule payments up to 120 days in advance and individuals can set up payments up to 365 days in advance. Be aware that payments must be scheduled at least one calendar day prior to the date the taxes are due and the payment must be scheduled by 8:00pm ET.

You can schedule payments months in advance knowing that your instructions will be executed on the day you choose and your records will be updated with the IRS. As soon as the funds are transferred from your account to the Treasury’s account, you’ll immediately receive an acknowledgement that your payment has been made.

Before you can use the online system to make tax payments, you’ll need to enroll. To do so, you’ll need your tax identification number if you are making a business payment or your social security number if you are making a payment as an individual. You’ll also need a bank account number and the routing number. It takes about a week to receive your PIN in the mail.

Each online transaction requires authentication through both your PIN and password. Without both of these pieces of information, you will be unable to use most of the online EFTPS functions. As with all passwords, keep them in a safe place and don’t divulge this information to anyone.

Because the system retains sixteen months of your EFTPS online payment history, you can retrieve payments data with ease.

The bottom line is that the system is fast and you can make a payment in minutes. You can review all of the payment information for accuracy before sending the payment. It’s convenient because you can access the system from just about anywhere at any time. Lastly, provided you keep your login information private, the system is safe.

Like death, taxes are unavoidable. With proper planning you can make things easier on yourself and your family. Your annual tax liability can be very uncertain but there are several online calculators to help determine your estimated tax liability along with your average and marginal tax rates.

Money Chimp

This calculator from MoneyChimp is straightforward and easy to use. You don’t need to be a CPA to figure this out.

http://www.moneychimp.com/features/tax_brackets.htm

Calc XML

This one is more complicated because you need to know the amounts of your IRA contribution, itemized deductions and personal exemptions. However, because this calculator requires those additional pieces of information, the end result is likely to be more accurate.

http://www.calcxml.com/calculators/federal-income-tax-estimator

Complete Tax

This calculator hosted by CompleteTax has several steps and requires you to input quite a bit of information in order to calculate your estimated federal income tax. It’s part of a system for filing your taxes online but you can use the calculator without using their filing system.

http://www.completetax.com/income-tax/calculators/federal.asp

e-File

Efile is another website for filing income taxes online but you can use their calculator without buying any of their other services. Again, you need to have a lot of information at your fingertips or this calculator will be of no use.

http://www.efile.com/tax-service/tax-calculator/

Are you evaluating annuity options or trying to decipher annuity information? If so, chances are that you’ll come across information about the tax-sheltered annuity. What is a tax-sheltered annuity and how does it compare with all of the other annuity options out there?

One of the reasons that tax-sheltered annuities are so attractive is that they allow you to defer your taxes. By contributing an established percentage of your income into an account designed for long-term savings, you are not required to pay taxes on those funds when you earn them. Instead, you are taxed when you withdraw the funds at a later date. The obvious benefit is that you can reduce your current tax liability by reducing your taxable income.

Unfortunately, not everyone can take advantage of this type of annuity. IRS code 403(b) specifies the types of employees that qualify for a tax-sheltered annuity. If you happen to work for a tax-exempt charitable organization, a public school, a self-employed minister or the government of an Indian tribe then you most likely qualify. Be aware that other types of annuities and investments may refer to themselves as tax-sheltered but unless you quality under 403(b), then you are not contributing to a genuine tax-sheltered annuity.

As with other annuities, tax-sheltered ones come with limits and there is a maximum annual contribution. Contributions in excess of that amount will be taxed based on your tax bracket but there are ways to soften the blow. Take advantage of catch-up clauses if they are available and look for employer-matched annuities.

Tax-sheltered annuities are excellent options when planning for retirement. Realize that your income during retirement will most likely be somewhat to significantly less than your income at the time of contribution. Therefore your annuity withdrawal will be taxed at a much lower rate than it would have been if you had claimed it during the year in which it was actually earned. The end result is savings both when you contribute the funds and when it’s time to withdraw them. Be aware that you may face penalties or fees if you chose to withdraw your funds prior to retiring.

If you’re examining annuity options, a tax-sheltered one is a solid choice for a portion of your retirement portfolio. However, it should not be the only part of your plan. Like other annuity options, a tax-sheltered annuity is only as good as its guarantor. You should consider contributing up to the annual amount only and then distributing your retirement funds across other types of investments.

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