The real definition of “dependent” may surprise you.

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Many people think of a “dependent” as a minor child who lives with you. This is true, but it’s important to remember dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you.

Exemptions and your taxable income. Each dependent deduction is worth $4,050 on your 2016 and 2017 federal income tax returns. This exemption reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2016, the phase-out begins at $311,300 when you’re married filing jointly and $259,400 when you’re single.

Definition of a dependent. A dependent is a qualifying child or a qualifying relative. While there are specific rules, generally, a dependent is someone who lives with you and who meets several tests, including a support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply.

Who can’t be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.

Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.

Do you Need an Employer Identification Number?

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There are a few qualifications that determine if you need Employer Identification Number (EIN) from the IRS:

• If you operate your business as a corporation or partnership.

• If you file reports for employment taxes, excise tax, or alcohol, tobacco and firearms.

• If you have one or more employees.

• If you have a self-employed retirement plan.

• If you operate as any of several other organizations.

Obtaining an EIN is very quick and simple. Go to http://www.irs.gov. Once there, use the search box and type in “EIN” online. You will be taken to the page that allows you to answer questions online and you will get your EIN upon validation of your answers. You will be able to download and print your confirmation notice.

If you need assistance, please contact our office. We are here to help you.

Tidbits of Tax Information

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Retain tuition statements. Beginning on your 2016 tax return, you will need to obtain Form 1098-T in order to claim education tax benefits.

March 1 is the filing deadline for 2016 tax returns for farmers and fishermen who did not make 2016 estimated tax payments.

Employers: Paper Forms 1095-B and 1095-C are due to the IRS on February 29; electronic returns are due March 31.

Taxpayers voluntarily sent $2.7 million to the Bureau of Public Debt in 2016 to help reduce the national debt.

Don’t ignore notices from the IRS. Seek assistance early on to avoid possible penalty and interest charges. The IRS is persistent.

If you find errors on you 2016 W-2s, 1099s or other tax forms, contact the sender immediately to request a corrected copy.

File a gift tax return if you made 2016 gifts of more than $14,000 to any one individual. The due date is April 18.

If you receive a big tax refund for 2016, adjust your withholding or estimated tax payments for 2017.

February 28 is the deadline for payers to file most information returns, except 1099-MISC with box 7 compensation.

Identity theft protection services offered by your employer are not taxable even if your personal information has not been compromised.

If you had a name change in 2016, notify the Social Security Administration before filing your 2016 tax return.

The optional deduction for state and local sales tax in lieu of state and local income tax is available for your 2016 tax return.

You may be asked for more information if you claim certain credits

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Don’t be surprised if you’re required to answer additional questions this year if you claim the Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), or American Opportunity Tax Credit (AOTC). For the CTC and ACTC credits, you may be asked how long your children lived with you over the past year, or whether they lived with an ex-spouse, relatives or other guardian.

If you are eligible for the AOTC, which is a credit to defray as much as $2,500 in higher education costs for you or your children, you will need to provide Form 1098-T from the college or university. You will also need receipts for related expenses.

You may also be asked to double-check your forms for incorrect Social Security numbers and dates of birth for the dependents on your return, as these are two common sources of error.

These common errors have helped to make the EIC and the other credits a major source of what the IRS calls “improper payments.” The agency estimates that of the $66 billion in EIC funds paid in 2015, nearly a quarter were collected by filers who didn’t qualify to receive them. As a result, the IRS is requiring tax preparers to ask more questions. Starting this year, tax preparers who don’t document their compliance with these new requirements could face fines of up to $510 per return.

If you get more questions than usual or are asked for additional documents, be aware that it’s just a new requirement.

How to prevent identity theft from affecting you

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The IRS has made great strides in protecting taxpayers from identity thieves, but you must still be diligent to protect your information.

Identity thieves can steal a taxpayer’s personal information and use it to file a tax return claiming a refund under the taxpayer’s name. Then when the taxpayer actually files a return, the IRS won’t accept it and notifies the taxpayer that a return under his or her name and ID number has already been filed.

The IRS recommends that taxpayers should do the following in order to avoid becoming an identity theft victim:

* Guard your personal information. Identity thieves can get your information by stealing your wallet or purse, going through your trash, or posing as someone who needs your information for a legitimate reason.

* Watch out for IRS impersonators. Don’t fall for phone calls, faxes, e-mails, or other contacts made by people claiming to be from the IRS. Do not respond to the message, open any attachments in an e-mail or click on any links. THE IRS DOES NOT CALL YOU NOR DO THEY EMAIL YOU. THEY CORRESPOND IN WRITING. DON’T FALL FOR ANY PHONE CALLS OR EMAILS!

* The IRS recommends that you enter “phishing” in the search box at the top of its website (www.irs.gov) to get more information on avoiding tax scams. E-mail suspected scams to phishing@irs.gov.

* Protect information on your computer. Protect your tax information with a password, and once you’re finished with your tax data, take it off your hard drive.

Grandparents can help reduce the cost of college.

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A growing number of grandparents are helping raise their grandchildren. Grandparents are giving their time and money, helping with the cost of toys, clothing, education and extracurricular activities. This can add up to thousands of dollars. Many millennials indicate they could not afford their lifestyle if it were not for the help their parents provide. (This is a topic for another day…learning to live within your means while still saving….)

While helping to support grandchildren may improve the quality of life for the grandparents, it’s critical they build their own financial security first. One way for grandparents to benefit their grandchildren while protecting their own finances is contributing to a college plan. This provides a potential tax break while preparing their grandchildren for an education their parents might not be able to afford on their own. Be sure that the grandparents fund a college plan in the state of their residency for the state tax deduction. It matters not what state the money is funded into, it will be able to pay for any accredited school anywhere in the country and several outside the country. The state tax deduction is only available if you file in the state for which you are funding a college plan.

If you would like more information on tax breaks associated with education plans, give us a call.

2017 Section 179 deduction

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In 2017, businesses can expense up to $510,000 of qualified new or used business equipment purchases, with a $2,030,000 annual purchase limit. In addition, new equipment purchased in 2017 may qualify for 50% bonus depreciation. This rate drops to 40% in 2018, so plan your purchasing accordingly.

Contact us if you need your tax returns professionally prepared.  We specialize in small to medium size businesses and the individuals who own them.