Claiming a dependent on your tax return can help save a lot of money each year. Some taxpayers may be unsure about who qualifies as a dependent. This is especially true if a living situation can change year to year. Here’s all you need to know about dependents and your taxes, including how to claim the Child and Dependent Care Credit and others to reduce your tax liability.
What is a dependent?
A dependent is someone you can claim on your tax return because they rely on your financial support. While you cannot claim yourself or your spouse as a dependent, you can claim your children, relatives, or domestic partners as dependents. This is as long as they meet the requirements for a qualifying child test and qualifying relative test. All dependents must be a U.S. citizen or resident. They also cannot be claimed on another return or file a joint return.
What is the qualifying child test?
A qualifying child must one of the following relationships to you:
Son, daughter, or stepchild
Eligible foster child or adopted child
Brother, sister, half-brother, or half-sister
Stepbrother or stepsister
An offspring of any of the above
They must be under age 19, or age 24 if they attend school full time. Permanently and totally disabled children can be claimed at any age. The child must live with you for most of the year. You must also provide more than half of their financial support.
What is the qualifying relative test?
You might also be able to claim qualifying relatives in your life if they lived with you all year long. You can claim someone who has not lived with you all year if they are:
Your child, stepchild, adopted child, foster child, or descendant of any of these
Your brother, sister, half-brother, half-sister, stepbrother, or stepsister
Your parent, stepparent, or grandparent
Your niece or nephew of your sibling or half-sibling
Your aunt or uncle
Your immediate in-laws, including son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
They cannot have made more than $4,700 in 2023. In addition, you must have provided more than half of their total support.
What is the Child and Dependent Care Credit?
The Child and Dependent Care Credit is a tax credit provided by the federal government to help working individuals and families offset some of the costs associated with childcare or the care of qualifying dependents. This credit is designed to make it more affordable for parents or caregivers to work or look for work while ensuring that their children or dependents are well taken care of.
To qualify for the credit, you must meet certain criteria, including having dependent children under the age of 13, or dependent adults who are physically or mentally incapable of caring for themselves. The credit is calculated as a percentage of your qualifying expenses, and this percentage can vary based on your earned income. Generally, the credit covers 20% to 35% of eligible expenses, up to $3,000 for single individuals and $6,000 for two or more individuals.
Qualified expenses include costs associated with daycare centers, babysitters, nannies, after-school programs, and certain summer camps. Expenses related to overnight camps typically do not qualify. One important thing to note is that if you are married, you must file a joint income tax return to claim this credit. There are several special rules that apply to dependents who will turn 13 during the tax year, newborn dependents, and children of divorced or separated parents. Taxpayers should reference IRS Publication 503, Child and Dependent Care Expenses, for more information.
What other deductions and credits are available for dependents?
Child Tax Credit: The CTC is $2,000 per qualifying child under age 17 in 2023
Earned Income Tax Credit: While you don’t need children to claim the EITC, the credit does increase if you have children. For tax year 2023, you can claim a max credit of $3,995 for one child, $6,604 for two children, and $7,430 for three or more children.
Adoption Credit: In 2023, you may claim a nonrefundable credit up to $15,950 of expenses that pay for the adoption of a child who is not your stepchild.
Higher Education Credits: The American Opportunity Tax Credit and Lifetime Learning Credit can be claimed for yourself, your spouse, or dependents who are enrolled in college, vocational school, or job training. You can get a maximum annual credit of $2,500 per eligible student with the American Opportunity Tax Credit in 2023. The Lifetime Learning Credit allows a credit of 20% of the first $10,000 in qualified education expenses, and a maximum of $2,000 per tax return.
Credit for Other Dependents: This nonrefundable credit allows a maximum credit of $500 for each dependent.
Tax Relief for Those with Dependents
Knowing the rules surrounding dependents and taxes is very important. Claiming someone on your tax return when they are not eligible can result in the IRS rejecting your return or an IRS audit. On the other hand, knowing these rules can help save money if you suddenly become financially responsible for another person, like a sick parent or a foster child. Optima Tax Relief can help with your tax debt situation.
Today, Phil discusses the Financial Crimes Enforcement Network, also known as FinCEN.
If you’ve never heard of the Financial Crimes Enforcement Network, you aren’t alone. FinCEN is a bureau of the United States Department of the Treasury. The Financial Crimes Enforcement Network’s primary mission is to combat and prevent financial crimes, including money laundering, terrorist financing, and other illicit activities that involve the financial system.
FinCEN is important to know about because they may have filing requirements that apply to small businesses. You can check if you have a filing requirement for your small business on their website, fincen.gov. If your business was founded and registered before 2024, you have until January 1, 2025, to report all beneficial ownership interest.
Filing taxes is one of life’s responsibilities that we simply cannot avoid. At some point, we all file taxes on our own. Filing a tax return for the first time can be intimidating. Here is a guide for first-time taxpayers with filing tips and common mistakes to avoid.
Determine if You Need to File
It may have been your first year being employed, but you might not be required to file a tax return. Calculate all gross income you earned this past year, even if the job was nontraditional like gig work or freelancing. Remember gross income is the amount you earned before taxes or deductions were taken out. There are a lot of rules surrounding filing requirements, but in 2024, you must file if you meet one of the following scenarios:
Filing Status
Age at the end of 2023
Must file if gross income is at least:
Single
Under 65
$13,850
Single
65 or Older
$15,700
Head of Household
Under 65
$20,800
Head of Household
65 or Older
$22,650
Married Filing Jointly
Under 65 (Both Spouses)
$27,700
Married Filing Jointly
65 or Older (One Spouse)
$29,200
Married Filing Jointly
65 or Older (Both Spouses)
$30,700
Married Filing Separate
Any Age
$5
Qualified Widow(er)
Under 65
$27,700
Qualified Widow(er)
65 or Older
$29,200
The rules are different if your parents provide financial assistance, either through living expenses, education, or a monthly allowance. If this is the case, your parents might be able to claim you as a dependent. If you can be claimed on someone else’s tax return as a dependent, you still might have to file a tax return of your own. Single dependents must do so if any of the following applied to them in 2023:
Unearned income was more than $1,250
Earned income was more than $13,850
Gross income was more than the larger of:
$1,250, or
Earned income (up to $13,450) plus $400
These same criteria apply to married dependents as well. Furthermore, they have an additional criterion that applies:
Gross income was at least $5, and spouse filed separately and itemized their deductions
Remember, unearned income includes any money earned by doing nothing. Examples include investment income or rental property income. Earned income is the money you earn from work like salaries, tips, and self-employment income.
Decide How to File
The easiest and fastest way to file a tax return is electronically. You can use a tax software to prepare and file a return for you if your tax situation is simple. The IRS offers free tax preparation through IRS Free File, a program ideal for young and first-time filers. There is also online tax preparation software that is free for simple federal tax filings.
Collect All Your Tax Documents
If you’re a first-time filer you might need the following items to file:
Education expense forms, including Form 1098-T, receipts, scholarship records
Social security number
Routing and account numbers for direct deposit
Dependent information (if applicable), including names, date of birth, SSNs, etc.
Find Credits and Deductions
Even first-time filers are eligible for credits and deductions. A tax credit is a dollar-for-dollar reduction of your income. Some credits you may be eligible for are:
American Opportunity Tax Credit
Worth up to $2,500 per student, the AOTC allows you to claim a credit for tuition, fees and course materials. You can use Form 1098-T to determine your credit amount. Your school will either mail this form or make it available to you by January 31 each year. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits. Just be sure you are eligible for this credit before claiming it. If you wrongly claim it, the IRS can make you pay back the amount you received, plus interest.
Lifetime Learning Credit
This credit is worth up to $2,000 per tax return and is for qualified tuition and related expenses paid for education, excluding course materials. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits.
Tax Deductions
A tax deduction is a reduction of taxable income to lower your tax bill. You can claim the standard deduction of $13,850 for single filers in tax year 2023, as it will likely result in a lower tax bill than if you were to itemize deductions. Additionally, you can deduct student loan interest payments you make even if you do not itemize deductions. If you use your car for business purposes, you can deduct your mileage. The 2023 standard mileage rate is 65.5 cents per mile.
File By the Deadline
Now that you’re ready to file, you should be sure to submit your return by the tax deadline. In 2024, the deadline is April 15th. If you are getting a refund, you can have it sent by paper check or direct deposit. Direct deposit is the fastest way to receive your federal refund and you can track its status on the IRS website. You can also track your state refund online.
Tax Help for First-Time Taxpayers
First-time filers should note that filling your tax return by the tax deadline is critical. If you prepare your return and find that you owe taxes, don’t panic. You will need to pay your tax bill by the April deadline or request an extension to file. If approved, you have until October 16, 2024. Do not ignore your tax bill as this can lead to greater financial stress later. You should also figure out why you owe so you can avoid this problem again next tax season. Common reasons for owing are not withholding enough taxes during the year or not making quarterly estimated payments if you do not withhold any taxes from your income. When in doubt, ask for help. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The IRS is responsible for collecting taxes owed to the United States government. When taxpayers fail to pay their taxes on time, the IRS initiates a collections process to recover the outstanding debt. This process can be complex and intimidating for those unfamiliar with it. Understanding how the IRS collections process works can help taxpayers navigate their obligations and avoid potential consequences.
Assessment of Taxes
The IRS begins by assessing the amount of tax you owe. This assessment can occur through various means. For example, if you file a tax return reporting income and deductions, or if the IRS conducts an audit to determine the correct amount owed. Once the tax liability is determined, the IRS will send you a notice detailing the amount owed, including any penalties and interest that may have accrued. At this point, the collections process has begun, and it will only end when one of two things happens. The tax bill needs to be paid or settled, or the statute of limitations needs to run out.
IRS Notice and Demand for Payment
After assessing the tax liability, the IRS sends a Notice and Demand for Payment. This notice outlines the amount owed and provides instructions on how to pay. It is important for you to respond promptly to this IRS notice to avoid further collection action by the IRS. Keep in mind that interest will accrue until the tax balance is paid in full. The current rate is 8% per year, compounded daily. Unfortunately, those who do not pay their tax bills will also need to deal with the failure to pay penalty. This is 0.5% for each month, or partial month, that the tax goes unpaid. The penalty can cost up to 25% of the total amount owed.
Payment Options
The IRS also accepts various forms of payment, including electronic funds transfer, credit card, check, or money order. You can pay the full amount owed in a lump sum. If paying in full is not possible, there are options for tax relief.
Installment Agreements
An IRS installment agreement is a formal arrangement between a taxpayer and the IRS to pay off a tax liability over time. With a short-term installment agreement, you will need to pay your full tax bill within 180 days. This option is available to those who owe less than $100,000 in combined tax, penalties and interest. With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to those who owe less than $50,000 in combined tax, penalties and interest.
Offer in Compromise
An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. It’s a viable option for individuals or businesses who are unable to pay their tax liability in full or would suffer undue financial hardship if forced to do so. It’s important to understand that the chances of the IRS accepting an OIC is not high. This form of tax relief is reserved for taxpayers who have suffered severe, long-term financial troubles, making it impossible for you to pay your tax bill.
Currently Not Collectible Status
Currently Not Collectible (CNC) status, also known as hardship status, is a designation used by the IRS for taxpayers who are experiencing significant financial hardship and are unable to pay their tax debt. When a taxpayer is granted CNC status, the IRS temporarily suspends collection activities, such as liens, levies, and garnishments, until the taxpayer’s financial situation improves.
IRS Notice of Federal Tax Lien
Once the tax debt remains unpaid, the IRS files a Notice of Federal Tax Lien. Filing the NFTL makes your unpaid tax debt public and establishes the IRS’s legal claim to your property. The IRS will also send you a copy of the notice. A federal tax lien will make it very difficult for you to sell or transfer property without satisfying the IRS’s claim. Furthermore, the lien may affect your credit score and ability to obtain loans or credit.
To release the Notice of Federal Tax Lien, you must satisfy the tax debt in full, either by paying the amount owed, entering into an installment agreement with the IRS, or settling the debt through an Offer in Compromise. Once the tax debt is paid or otherwise resolved, the IRS will issue a Certificate of Release of Federal Tax Lien within 30 days. This removes the lien from your property and releases the IRS’s claim.
IRS Final Notice of Intent to Levy
If you still make no effort to pay your taxes, the IRS will issue a Final Notice of Intent to Levy. This notice typically comes 30 days before the levy is initiated. When the IRS levies, it means they seize your property to satisfy a tax debt. Levies can take various forms, including seizing wages, bank accounts, vehicles, real estate, retirement accounts, or other assets.
You have the right to appeal a levy action by requesting a Collection Due Process (CDP) hearing with the IRS Office of Appeals. During the CDP hearing, you can dispute the validity of the tax debt, propose alternative collection options, or present evidence of financial hardship or other extenuating circumstances. The IRS may release a levy if you apply for a payment arrangement, demonstrate financial hardship, or present an Offer in Compromise. Once the IRS releases the levy, you regain control of your assets, and the IRS stops collection actions related to those assets.
Legal Action
In extreme cases, the IRS may take legal action against delinquent taxpayers to enforce collection of unpaid taxes. This can involve filing a lawsuit in federal court to obtain a judgment against the taxpayer or pursuing criminal charges for tax evasion or fraud. Legal action should be avoided whenever possible, as it can result in significant financial penalties and even imprisonment.
Tax Help for Those in IRS Collections
The IRS collections process is a complex and multifaceted system designed to ensure compliance with the tax laws. While dealing with tax debt can be stressful and intimidating, understanding how the process works can help you navigate their obligations and avoid serious consequences. By responding promptly to notices from the IRS and exploring payment options, taxpayers can resolve their tax issues and move forward with peace of mind. When in doubt, seeking the help of a credible tax professional is a good option. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Sometimes after a loved one dies, we must deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work.
What Are Estate Taxes?
Estate taxes are federal taxes levied on the entire taxable estate of a deceased individual. The IRS taxes based on the asset’s current market value. The IRS exempts estates worth less than $12.92 million in 2023 and $13.61 million in 2024. The amounts are per person. If the estate is worth more, it’s taxed according to the following rates:
Tax Rate
Taxable Amount
Tax Owed
18%
$0-$10,000
18% of taxable income
20%
$10,001-$20,000
$1,800 plus 20% of amount over $10,000
22%
$20,001-$40,000
$3,800 plus 22% of amount over $20,000
24%
$40,001-$60,000
$8,200 plus 24% of amount over $40,000
26%
$60,001-$80,000
$13,000 plus 26% of amount over $60,000
28%
$80,001-$100,000
$18,200 plus 28% of amount over $80,000
30%
$100,001-$150,000
$23,800 plus 30% of amount over $100,000
32%
$150,001-$250,000
$38,800 plus 32% of amount over $150,000
34%
$250,001-$500,000
$70,800 plus 34% of amount over $250,000
37%
$500,001-$750,000
$155,800 plus 37% of amount over $500,000
39%
$750,001-$1,000,000
$248,300 plus 39% of amount over $750,000
40%
$1,000,001 and up
$345,800 plus 40% of amount over $1,000,000
State Estate Tax Exemptions
Some states impose their own estate taxes. In general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. There are a handful of states that impose an estate tax. These are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Here are their individual exemption amounts.
State
2023 Exemption
2024 Exemption
Connecticut
$12.92 million
$13.61 million
District of Columbia
$4.52 million
$4.71 million
Hawaii
$5.49 million
$5.49 million
Illinois
$4 million
$4 million
Maine
$6.41 million
$6.8 million
Maryland
$5 million
$5 million
Massachusetts
$1 million
$2 million
Minnesota
$3 million
$3 million
New York
$6.58 million
$6.94 million
Oregon
$1 million
$1 million
Rhode Island
$1.73 million
$1.77 million
Vermont
$5 million
$5 million
Washington
$2.19 million
$2.19 million
Your estate assets pay any federal and state taxes before they are distributed to beneficiaries. Typically, the executor of the estate is responsible for making tax payments. They also confirm there are no other liabilities due, and then distribute the remaining assets.
What Are Inheritance Taxes?
Inheritance taxes are state taxes levied on a deceased individual’s assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is based on the total value of the estate. The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:
State
Tax Rates
Iowa
0%-6%
Kentucky
0%-16%
Maryland
0%-10%
Nebraska
0%-15%
New Jersey
0%-16%
Pennsylvania
0%-15%
Iowa is preparing to eliminate its inheritance tax for deaths on or after January 1, 2025. Your tax rate is typically based on your relationship to the decedent. Surviving spouses are almost always exempt from this tax. In some states, so are sons, daughters, and parents of the deceased. Usually, you would pay a higher rate if you had no familial relationship with the decedent.
Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules. In other words, the assets are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million.
How Can I Reduce Estate and Inheritance Taxes?
We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes. For example, you can pay for educational or medical expenses from your estate. These payments will be exempt from taxes if the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
