Tax Benefits for Adopting

Tax-Benefits-for-Adopting

Are you aware of the tax benefits for adopting a child? There are two tax breaks available to offset expenses. In 2022, adoptive parents may be able to claim a credit against their federal tax for up to $14,890 of “qualified adoption expenses” for each child. This will increase to $15,950 in 2023. That’s a dollar-for-dollar reduction of tax.

Also, adoptive parents may be able to exclude from gross income up to $14,890 in 2022 ($15,950 in 2023) of qualified expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits.

Parents can claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expenses.

Qualified Expenses Defined

To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an “eligible child.”

Qualified expenses don’t include those connected with the adoption of a child of a spouse, a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a government program. Expenses reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.

Further, expenses related to an unsuccessful attempt to adopt a child may qualify. Expenses connected with a foreign adoption (the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs are deemed to have qualified adoption expenses in the tax year in which the adoption becomes final, in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,890 for 2022 ($15,950 for 2023). They can take the adoption credit or exclude employer adoption assistance up to that amount, whether or not they had those amounts of actual expenses.

What is an Eligible Child?

An eligible child is under age 18 at the time a qualified expense is paid. A child who turns 18 during the year is eligible for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him- or herself is eligible, regardless of age.

A special needs child refers to one who the state has determined can’t or shouldn’t be returned to his or her parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition. Only a child who is a citizen or resident of the U.S. is included in this category.

Phase-out Amounts

The credit allowed for 2022 is phased out for taxpayers with adjusted gross income (AGI) over $223,410 ($239,230 for 2023) and is eliminated when AGI reaches $263,410 ($279,230 for 2023).

Note: The adoption credit isn’t “refundable.” So, if the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount isn’t refunded to you. In other words, the credit can be claimed only up to your tax liability.

Get the Full Benefit for Adopting

The tax benefits for adopting a child can help offset adoption expenses. Be sure to get the full benefit of tax savings available to adoptive parents. If you need help understanding the rules, the tax professionals at Ramsay & Associates can help. Contact us with any questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Updating Income Tax Withholdings

Updating-Income-Tax-Withholdings

When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan. Here are some things to know about updating income tax withholdings.

Adjust if Necessary

Taxpayers should periodically review their tax situations and adjust withholding, if appropriate.

The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas, such as available itemized deductions, the child credit, the dependent credit, and the repeal of dependent exemptions.

Consider Life Changes

There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

  • Adjusted your withholding last year, especially in the middle or later part of the year,
  • Owed additional tax when you filed your 2021 return,
  • Received a refund that was smaller or larger than expected,
  • Got married or divorced,
  • Had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments for 2022 are due on January 16, 2023.)

Plan Ahead Now

Updating income tax withholdings can help remedy any shortfalls to minimize taxes due for 2022, as well as any penalties and interest. Contact us if you have any questions or need assistance. The personal tax professionals at Ramsay & Associates can help you determine if you need to adjust your withholding.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Transferring Assets Through the Kiddie Tax

Transferring-Assets-Through-the-Kiddie-Tax

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. When transferring assets through the kiddie tax, be sure you’re aware of the rules.

Kiddie Tax Rules and Rates

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

  1. The child hasn’t reached age 18 before the close of the tax year, or
  2. The child’s earned income doesn’t exceed half of their support and the child is age 18 or is a full-time student aged 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax,” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates instead of the parents’ tax rates.

Be aware that to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible Saving Vehicles

The portion of investment income that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

  • Securities and mutual funds oriented toward capital growth;
  • Vacant land expected to appreciate in value;
  • Stock in a closely held family business, expected to become more valuable as the business expands but pays little or no cash dividends;
  • Tax-exempt municipal bonds and bond funds;
  • U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in, or an election to recognize income annually is made.

Investments that produce no taxable income — and therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

We Can Help You with Reporting Options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child.

The tax professionals at Ramsay & Associates can help with transferring assets through the kiddie tax. If you have questions about the rules for income shifting, contact us. We can help.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Tax Matters to Consider After You File

Tax-Matters-to-Consider-After-You-File

The tax filing deadline for 2021 tax returns has come and gone. Now that your 2021 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are a few tax matters to consider after you file.

You Can Discard Some Tax Records Now

You should hang onto tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return. So, you can generally get rid of most records related to tax returns for 2018 and earlier years. (If you filed an extension for your 2018 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should keep certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or if you filed a fraudulent one.)

What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (Keep these records for six years if you want to be extra safe.)

Anticipating a Refund? Check on It

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status” to find out about yours. You’ll need your Social Security number, filing status, and the exact refund amount.

Forget to Report Something? You Can Still Make the Correction

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So, for a 2021 tax return that you file on April 15, 2022, you can generally file an amended return until April 15, 2025.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We’re Always Here to Help

If you have questions about tax record retention, your refund or filing an amended return, contact us. The tax professionals at Ramsay & Associates can help explain any tax matters to consider after you file. And we’re available more than just during tax filing time; we’re here all year round.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Know the Vacation Home Tax Rules Before Renting

Know-the-Vacation-Home-Tax-Rules-Before-Renting

Summer is just around the corner. If you’re fortunate enough to own a vacation property, you may wonder about the tax consequences of renting it out for part of the year. We’ll break down the specifics so that you know the vacation home tax rules before renting this summer.

Duration is a Factor

The tax treatment depends on how many days the home is rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged.

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to several rules.

First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible if the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house personally.

Put it to the Test

Here’s the test: if you use the property personally for more than the greater of 1) 14 days, or 2) 10% of the rental days, you’re using it “too much,” and you can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t go beyond that to create a loss. Any unused deductions are carried forward and may be usable in future years. If you’re limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: 1) interest and taxes, 2) operating costs, 3) depreciation.

If you “pass” the personal use test (i.e., you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)

Rely on the Experts

As you can see, the rules are complex. But knowing the vacation home tax rules before renting can help you plan ahead and maximize deductions. The professional team at Ramsay & Associates can help you better understand these regulations to benefit your specific situation. Contact us with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.