TAX+BUSINESS ALERT
News for your business and your life. | Hawkins Ash CPAs
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In this Edition
March 16, 2021
Why You Might Want to Not Claim Your Child as a Dependent
PODCAST: When Can I Claim a Dependent on My Return
Have a Foreign Account? File an FBAR
Reconsidering Your Personal Emergency Fund
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Why You Might Want to Not Claim Your Child as a Dependent
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Understandably, many parents get in the habit of claiming their children as dependents on their federal tax returns. You generally may do so as long as your child is either under age 19 (nonstudents) or under age 24 (students). But there is a reason to not claim your child as a dependent – and it has everything to do with higher education.
Credits and Phase-out's
The two primary college-funding tax credits available are the American Opportunity Tax Credit and the Lifetime Learning credit. The American Opportunity Tax Credit now permanently allows eligible taxpayers to take an annual credit of up to $2,500 for the first four years of postsecondary education. Meanwhile, the Lifetime Learning credit provides up to $2,000 in relief to those eligible. (You can’t claim both credits in the same year for the same student.)
But these credits are subject to “phase-outs” that limit eligibility for higher-income taxpayers. For example, for 2020, eligibility for the American Opportunity credit begins to phase out for taxpayers with modified adjusted gross incomes (MAGIs) beyond $80,000 (single filers) or $160,000 (married couples filing jointly). Similarly, eligibility for the Lifetime Learning Credit begins to phase out for taxpayers with MAGIs beyond $59,000 (single) or $118,000 (joint filers).
Good Reasons
If your income disqualifies you from claiming these credits, your child’s income probably doesn’t disqualify him or her. Therefore, your child may be able to report payment of education expenses for tax purposes and then claim one of the credits – but only if you don’t claim him or her as a dependent. This credit can then be used to offset some of the tax that the child may have on their return, but is not refundable.
Under this scenario, the child’s tax benefit typically outweighs the value of the child tax credit for the parents. Why? Because an income-based phase-out may reduce or eliminate the benefit of the child tax credit even if you did claim your child as a dependent. For 2020, the phase-out starting points for the child tax credit are adjusted gross incomes of $200,000 (singles) and $400,000 (joint filers).
The Right Call
If your dependency exemption is phased out, it will probably make sense not to claim your child as a dependent so he or she can grab a tax credit. But if your child tax credit isn’t phased out or is only partially phased out, the decision becomes trickier. We can help you make the right call.
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Author: Steve Albers, CPA
Direct: 920.337.4520
Email: salbers@hawkinsashcpas.com
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PODCAST
When Can I Claim a Dependent on My Return
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Can I claim my child or grandchild as a dependent? Can I claim someone who is not related to me? These are some of the questions we get asked a lot during this time of the year. This episode breaks down what you need to know about claiming a dependent on your return.
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Have a Foreign Account? File an FBAR
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Any U.S. person who has a financial interest in, or signature or other authority over, any foreign financial accounts must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Let’s explore more of the pertinent details.
Persons and Accounts
A “U.S. person” is generally a U.S. citizen, including a child. However, a U.S. person may be an individual who’s a resident alien of the United States, District of Columbia, Native American lands (as defined in the Indian Gaming Regulatory Act), or the Territories and Insular Possessions of the United States.
Also qualifying as a U.S. person is an entity — including a corporation, partnership, trust or limited liability company — organized or formed under federal law or the law of any state, the District of Columbia, U.S. Territories and Insular Possessions, or Native American tribes.
A “foreign financial account” is a financial account located outside the United States. For FBAR purposes, the United States includes the states themselves as well as the District of Columbia, U.S. Territories and Insular Possessions, and Native American lands.
An account maintained with a branch of a U.S. bank that’s physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that’s physically located inside of the United States isn’t a foreign financial account.
What Defines Interest
A U.S. person has a financial interest in a foreign financial account if the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person.
A financial interest may also exist if the owner of record or holder of legal title is one of several listed entities. These include entities controlled by the U.S. person or an agent, a nominee, an attorney or someone acting in another capacity on behalf of the U.S. person.
Penalty Amounts
Civil penalties for non-willful violations can exceed $10,000 per violation, as adjusted for inflation. For willful violations, civil penalties can range up to the greater of $100,000 as adjusted for inflation or 50% of the amount in the account at the time of the violation. Contact us for more information.
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Contact: Robin Lutz, CPA
Phone: 608.793.3120
Email: rlutz@hawkinsashcpas.com
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Reconsidering Your Personal Emergency Fund
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When the COVID-19 pandemic first hit, many people’s emergency funds were suddenly put to the test — if the funds existed at all. Now, about a year later, and presumably with the benefit of some hindsight, you might want to reconsider your savings for a rainy day. You’ve probably heard that, to guard against an emergency, you need to save enough to cover three to six months of living costs. But this rule isn’t as straightforward as it may sound.
An emergency cushion is indeed important — and it’s certainly better to be conservative rather than cavalier when estimating your financial requirements. However, believe it or not, there may be a danger to saving too much in certain vehicles. For example, if you put away substantially more than you’ll reasonably need in a low-interest savings account, you may lose money to inflation over time. Plus, you might miss out on opportunities to invest those funds in tax-advantaged retirement accounts or other assets.
Rather than blindly following a rule of thumb, tailor your emergency savings to your financial situation. A smaller emergency fund may suffice if, for instance, your spouse has a reasonably secure job; you have relatives who can provide financial assistance in an emergency; or you have reason to believe that you’d be able to find other work quickly should you lose your job. Conversely, if you’re the sole breadwinner or you simply have a low tolerance for risk, a bigger emergency fund is likely appropriate. Our firm can help you find the right balance.
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Contact: Dianna Streed, CPA
Phone: 507.453.5967
Email: dstreed@hawkinsashcpas.com
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More Resources from CPA-HQ
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6 Key Tax Questions and Answers for 2021
Right now, you may be more concerned about your 2020 tax bill than you are about how to handle your personal finances. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2021.
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Numerous Payroll Benefits to Employers with Recent Legislation
There are several provisions from the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March that are extended in the December 2020 legislation.
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What's Your Taxpayer Filing Status?
Are you thinking about the filing status you’ll use when filing your tax return for the year? The one you use depends partly on whether you’re married on that date.
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Part of your business. Part of your life. | www.HawkinsAshCPAs.com
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