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What is the Undeposited Funds Account used in Quickbooks?

Wednesday, May 16th, 2012

Authored by: Rod Washausen, CPA. Rod is an accountant in the Logan office of Cook Martin Poulson, PC. He specializes in the taxation of small businesses and individuals as well as QuickBooks setup and training. Rod is a CPA in Utah, Missouri and Illinois and a Certified QuickBooks ProAdvisor.

QuickBooks uses the Undeposited Funds account to hold customer payments and receipts until you are ready to deposit them into your bank account. It is one of the most misunderstood accounts in QuickBooks. However, the Undeposited Funds account will make your job much simpler when it’s used correctly.

You have two options when processing your Sales Receipts and Payments received. One way is to post the receipts and payments directly to your bank account, either through the register or using the “Record Deposits” window. The second choice is to collect the payments and receipts in the Undeposited Funds account and then later make the deposit to the bank account.

For those who only deposit one check at a time, the direct method may work just fine. However, in reality most of us deposit several checks at once. Entering each payment directly makes reconciling your bank statement a real chore because you have to go back (sometimes much later) and figure out which payments and checks constitute each deposit. Fortunately, the designers at Intuit created the “Undeposited Funds” account to alleviate this problem.

Think of the Undeposited Funds account as a bank bag or cash drawer that you would keep your checks and cash payments in until you deposit them at the bank. You’ve rung up the sale and collected the payment, but you haven’t deposited the money yet – you’re holding on to it until you make your weekly bank deposit. That’s exactly what the Undeposited Funds account represents when it is used correctly.

Using the Undeposited Funds feature is automatic when the preference is enabled in QuickBooks. To enable this feature, you go to Edit -> Preferences and select the “Payments” sub-menu on the left hand side. Next, select the “Company Preferences” tab. At the top, select the box that says “Use Undeposited Funds as a default deposit to account”.

Once you’ve enabled the Undeposited Funds account, the proper process of processing your accounts receivable is:

Create and invoice, sales receipt, or statement charge
Receive payments from your customers (and apply them to the appropriate invoice, if applicable)
Place the payments in the Undeposited Funds account (Note: QuickBooks will do this automatically for you)
Use Make Deposits to group multiple payments into a single deposit in the check register, which then matches the deposit amount on your bank statement

When you follow the proper procedures in QuickBooks, your accounts receivable reports will be correct, you will be able to easily reconcile the deposits on your bank statement, and there will be a zero balance in Undeposited Funds. If your A/R reports aren’t correct or there is a balance in Undeposited Funds even though you’ve deposited all of your customer payments, then something’s gone wrong.

Some users make a mistake when they follow steps #1 and 2 above, but then do not group the payments when making out their bank deposits. They instead go back to the “direct” method and enter deposits directly into the checking register or the Make Deposits window using an income account. When this happens, your income is doubled and your assets are overstated. If this problem isn’t caught by your tax preparer, you run the very real risk of paying tax on twice as much income! Since your receivable reports will be correct, the easiest way to see if this is happening to you is to check the balance in Undeposited Funds by running a Balance Sheet report. Alternatively, select “Make Deposits” on your home page. The Payments to Deposit window should appear if you have payments waiting to be deposited. (If nothing pops up, click the “Payments” icon at the top of the Make Deposits window just to be sure).

QuickBooks is a great program when it is used correctly. However, when something’s gone awry in the process it can be frustrating to figure out what the problem is and how best to fix it. If you need any help setting up QuickBooks or fixing existing problems, feel free to contact us and we’d be happy to help!

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Estate and Gift Planning for 2012

Tuesday, April 24th, 2012

By: Jared Ripplinger, CPA, MBA, CFP®

For several years now there has been a great deal of uncertainty regarding the estate tax law, and what will happen in the next several years. The following is a brief synopsis of the variability in the estate tax law over the past few years, as well as some opportunities that exist during the remainder of 2012.

Gift Tax is assessed against lifetime transfers of assets in excess of the annual exclusion amount. The annual exclusion is currently $13,000 per donor per donee, and is available each year. The donee’s don’t have to be related to the donor in order for the gift to qualify for the annual exclusion, but the gifts do have to be a gift of a present interest in the property. A future interest in property does not qualify for the gift tax annual exclusion.

The Estate Tax is assessed by the federal government and some state governments, against the value of assets transferring at the death of an individual (the decedent).

Technically, there is no estate tax exemption, but there is a credit against estate tax, which effectively exempts a certain amount of assets transferring at death to the decedent’s heirs. For simplicity we will refer to this as the exemption equivalent.

Prior to 2001 the unified credit was large enough to equate to an exemption equivalent of $600,000 in 1997 to a projected estate/gift exemption equivalent of $1 Million in 2006. In May, 2001 EGGTRA was passed, accelerating the $1 Million exemption equivalent to be effective as of that date, and scheduling an increasing exemption equivalent amount over the next several years.

We saw the exemption equivalent for estate tax increase to $1.5 Million in 2004, then to $2 Million in 2006, followed by $3.5 Million in 2009. In 2010 the estate tax was repealed for most of the year, until congress passed a retroactive estate tax in December, 2010, combined with a $5 Million exemption equivalent. From 2004 through 2010 the gift tax exemption remained capped at $1 Million, but in 2011 the $5 Million exemption equivalent once again applied to both gift and estate taxes. That $5 Million exemption equivalent has been adjusted for inflation to $5,120,000 for 2012, which opens up some estate and gift planning opportunities.

Note that the unified credit (exemption equivalent) is scheduled to sunset (or expire) after 2012, which would result in the return of the $1 Million exemption for both gift and estate taxes, unless congress passes an extension of the law, or a new law to prevent the sunset of the 2001 estate tax law, with its subsequent modifications.

With that background, some opportunities that exist in 2012 include the following:

- Maximize the usage of annual exclusion gifting ($13,000 per donor per donee)

- Consider using some or all of the credit against gift taxes to reduce the size of the estate, or to utilize the credit while it is at its historically highest level.

- Beware of potential pitfalls in making gifts or bequests to grandchildren or other “skip persons”. There is another tax that may apply to generation-skipping gifts/bequests (not addressed in this blog post).

- Consult your CPA and your estate attorney to make sure your estate plans and documents are up to date and are structured to handle the unknown variables in the estate planning area.

As with anything estate planning related, each individual case can vary greatly from the next individual’s case, so make sure you meet with an estate planner who is familiar with all aspects of estate planning, and is up on the latest tax law and developments. Also keep in mind that a lot, if not most, of estate planning isn’t even directly tax related. In looking at estate tax reduction strategies, don’t let the tax purpose of a strategy undermine your ultimate estate plan, or non-tax purposes for estate planning.

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Cost Segregation

Monday, April 9th, 2012

Authored By: Daniel G. Smith, CPA. Daniel is a shareholder at Cook Martin Poulson, PC.

Be sure to consult your tax advisor as you plan the tax benefits of cost segregation. Owners of real property have faced limitations on the way they determine the allocation of tax basis in real property to deducible depreciation expense. Historically before 1981 real estate was allocated into components to qualify for investment credit. The Economic Recovery Act of 1981 repealed component depreciation but permitted 15 year life for building depreciation. The Tax Reform Act of 1986 increased the life of buildings to 27.5 for residential buildings and 39 years for non-residential buildings. After the 1997 tax case of Hospital Corp. of America the IRS agreed that cost segregation did not constitute component depreciation. IRS audit manuals and revenue procedures outline the requirements of a valid cost segregation report. In the April 2012, Journal of Accountancy, Larry Maples and Robert D. Hayes authored the Side Effects of Cost Segregation. In this article they suggest that your tax advisor should tally the pros and cons of cost segregation.

Shortened depreciation lives for part of a building will accelerate tax deductions but there may be unfavorable side effects of cost segregation. These side effects include, in taxable exchanges of cost segregated property, possible recapture under Section 1245. This recapture is subject to ordinary tax rates that could be higher than the 25% recapture rate for real property under Section 1250. Recapture can be a particular hazard for boot gain realized in like-kind exchanges. A further complication is that in a like-kind exchange components are grouped according to kind or class.

Bonus depreciation and cost segregation is often friendly to the taxpayer. The IRS has given liberal definition of “components” of self constructed property that qualifies for bonus deprecation. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided for a new bonus deprecation of 100% or 50% depending on when the property was placed in service.

Cost segregation can complicate allocating costs to deductible repairs rather than capitalizing them. The IRS is scrutinizing accounting method change requests where the definition of “unit of property” may have changed. IRS audit technique guides reveal that the IRS believes some taxpayers are taking inconsistent positions when they segregate costs for depreciation purposes compared to when they deduct some costs as repairs or maintenance. The IRS audit technique guide states that a tax examiner should verify whether a new method of determining repairs is consistent with claimed dispositions. The underlying message is that taxpayers that use cost-segregation studies will have to live with their unit–of-property choices. The Maples and Hayes article concludes that the smaller the unit of property the more likely subsequent expenditures related to it will add to the value or appreciably extend the useful life of the property and the tax payer will need to capitalize the expenditure instead of expensing them as a repair.

Other possible considerations for taxpayers using cost segregation includes alternative minimum tax liability and cost segregations effect on the domestic production activities deduction.

Cost segregation is a permitted tax planning strategy. It has significant benefits but make sure you and your tax advisor consider these and other pros and cons as you plan the tax impact of holding real property.

Posted in Blog, Tax Planning, Tax Tips | No Comments »

Online Payroll Service

Friday, April 6th, 2012

Authored by: Connie Ward, Bookkeeper at Cook Martin Poulson, PC

Cook Martin Poulson offers online payroll with paycheck direct deposit. Save time, save money and streamline your operation with this service.

Tax payments are electronically sent to the IRS and State Tax Commission. You don’t have to worry about mailing checks and vouchers. We take care of all the hassle of federal and state withholding checks. This service is customizable for your small business needs. Either call in the employees’ hours to our payroll specialists or enter the data on our secure online system.

We provide: support for a wide range of pay types; sick, vacation and holiday pay accruals; federal, state and local tax calculations; voluntary deduction calculations; paycheck printing; direct deposit with detailed pay stubs; secure online employee access to pay stubs; contractor payments; 100% accuracy guarantee.

Our payroll service includes federal tax deposits; quarterly 941’s; annual 940’s and 944’s; employee W-2’s; state tax deposits; quarterly state forms and annual state tax forms. Our pricing is simple and cost-effective! Contact us for a quote today.

Posted in Blog, Payroll Taxes, QuickBooks | No Comments »

Special Dietary Needs HSA Reimbursement

Wednesday, March 7th, 2012

Authored By: Dustin Wood, CPA. Dustin has been with the firm 7 years and is the audit manager here at Cook Martin Poulson, PC. He specializes in financial statement services.

Individuals with special dietary needs (gluten-free diet, salt-free diet, etc.) can reimburse themselves through their Health Savings Account (HSA) plan for the difference in cost of groceries between a “normal” diet and their special dietary needs. For products which don’t have alternative substitutes (such as xanthan gum used for gluten-free cooking) the full cost should be eligible for reimbursement.

It is recommended to have a doctor’s note regarding the special dietary needs, and good financial records should be maintained to substantiate any reimbursements. You should also contact your HSA account provider to verify whether special dietary needs can be reimbursed in the plan you participate in.

Special dietary needs can increase grocery costs significantly and this is one way to attempt to offset some of those costs by using pre-tax HSA contributions to reimburse grocery cost differences to accommodate the special dietary needs. The special dietary needs cost difference could potentially be reimbursed through flex spending funds (though flex spending limits are typically lower than those of HSAs and most individuals would use flex spending funds primarily for other medical expenses).

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Why are Health Savings Accounts so cool?

Thursday, March 1st, 2012

Authored by: Travis Landry, CPA. Travis is a Staff Accountant in the Salt Lake City office of Cook Martin Poulson, PC. Travis specializes in Tax reporting for small to medium sized businesses and their owners. He also is an expert in QuickBooks and provides some Contract Controller responsibilities.

Recently, one of our clients asked me if I knew of any tax planning strategies that he could try and take advantage of this coming year. As a CPA who makes his living by helping people plan and save in taxes, I was ecstatic. I told him about one of my favorite planning tools that involves putting your money in a special savings account that is set aside for medical expenses. This special savings account is called a Health Savings Account and I am a HUGE fan. Let me show you why…

Did you know that almost all of your out-of-pocket medical expenses aren’t deductible? It’s true! In most cases, if you or anyone in your household didn’t incur large medical bills, you won’t get to deduct any of your medical expenses. The reason is because the IRS says that if your medical costs aren’t more that 7.5% of your Adjusted Gross Income (AGI) then you can’t deduct anything. On top of that, if your medical expenses do, by chance, exceed the 7.5% of your AGI, you can only deduct the amount above the 7.5%. Here’s an example:

Joe & Jane AGI: $100,000

7.5% of AGI: $7,500

Out-of-pocket Medical Expenses: $9,000

Deductible Portion of Medical Expenses: $1,500 ($9,000 – $7,500)

What a rip off, right? When’s the last time you paid more than 7.5% of your annual income on medical expenses? For me, and my short lifetime of 30 years, the answer is NEVER. That’s because anything short of a catastrophe just doesn’t cut it. With an HSA, it is possible to deduct every dollar of your out-of-pocket medical expenses. There is one catch however; you have to be enrolled in a high-deductible health plan(HDHP). This means that you are enrolled in an insurance plan with a minimum deductible of $1200Individual/$2400Family and a maximum out-of-pocket of $5,950Individual/$11,900Family. If you are unsure whether you qualify as a high-deductible health plan, ASK YOUR INSURANCE AGENT!

A majority of people opt for lower monthly insurance premiums which, in turn, means they have higher deductibles. Long story short, a good percentage of people qualify and you may be one of them. Once you qualify, you can open up a HSA at just about any bank or credit union. Do your homework and see which financial institution is best for you.

Here are some key things to know once the account is set up:

1) There is no annual minimum contribution.

This is awesome because you don’t have to put anything in it until you have to pay medical bills.

2) There is a maximum amount you can contribute.

2011

i. Single Insured – $3,050

ii. Family Insured – $6150 2011

iii. 55 or older Catch-up $1,000

2012

i. Single Insured – $3,100

ii. Family Insured – $6,250

iii. 55 or older Catch-up $1,000

3) It’s not too late to contribute for 2011 as long as you contribute by April 17th.

If you think you are going to owe some tax, and have a little cash to put away for a rainy day, ask your accountant if a HSA is right for you.

4) It’s not a use-it or lose-it type of account. The money stays in that account indefinitely until you use it, even if it is in there for 10 years or longer.

5) All of your contributions are either pretax or a deduction from your taxable income.

If possible, have your employer deposit the funds for you.

i. This makes it so the money is not included on your W-2 and not subject to Social Security and Medicare taxes.

6) The money you put into the account is your money. You can do whatever you want with it.

If you don’t use it for Qualified Medical Expenses, the money that you distribute from it will be taxable on your next tax return and you may have a 10% penalty.
If you made a distribution, you should receive a 1099-SA. Be sure and supply that with your tax information to your accountant, along with your out-of-pocket medical expenses.

Hopefully, this gives you a little more knowledge about another way to pay less in tax and still keep your money. If you set up an HSA, please please please use it to pay your medical bills; because if not, you most likely won’t be able to deduct them on your taxes due to the 7.5% of AGI limitation.

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Independence Requirements for Your CPA

Monday, February 27th, 2012

Authored By: Travis Shreeve, CPA Travis is a CPA with audit and review experience for both public and nonpublic companies. Travis also acts as a contract controller for several clients.

It’s a common occurrence that we, as accountants, have to turn work away or assist clients in finding another firm to prepare audit or review work. Clients often wonder why we wouldn’t be perfectly willing to perform an audit or a review when we are already so familiar with their accounting.

Although we may participate in an audit or review if we have prepared the company tax return, our independence may be impaired if we participate significantly in company accounting or act in certain consulting roles with the client.

We have prepared a short list of things that might prevent an accountant from being independent in regards to review or audit procedures for your company.

The accountant has a commitment to aquire a direct or indirect financial interest in your company.
The accountant has a joint investment with you or your company.
The accountant has acted as a director, employee, or trustee for your company during the period associated with the review or audit.
An accountant has a close relative working in a key position with your company or that relative has significant financial interest in your company.
Your company has threatened litigation against the accountant.

In order for the outside party to rely on an audit or review report, it is important that the independent accountant is truly independent in regards to your company. If the accountant’s opinion can be (or appears to be) swayed, the audit or review report provides no value for the users.

Here at Cook Martin, we are highly qualified accountants. We’d like to assist you by providing your accounting and controller needs. We’d also like to audit your company if it becomes necessary to have an audit performed. However, we will not act as both your controller and your auditor for the same period. Contact us if you need one or the other!

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Installment Agreement

Monday, February 13th, 2012

Authored By: Neal Machanic completed his Masters in Accounting at the University of Utah prior to qualifying as a Certified Public Accountant. He is also an Enrolled Agent authorized to represent taxpayers before the Internal Revenue Service. He is currently studying to become a Certified Valuation Analyst. Neal crunches numbers in his sleep!

What happens when a taxpayer is ready to file their 2011 individual income tax return and they have a balance due? Well, the Internal Revenue Service wants them to pay it in full by April 15^th. Unfortunately, a taxpayer’s current fiscal situation might require a different response.

If a taxpayer is not going to pay their tax bill in full they usually have three options:

Ignore it, hoping it will go away (it never does)
Pay it off over time (very much like a loan)
Negotiate a reduction in the total amount due (such as with a short sale of a house)

We can assist you with all three options. In fact, many taxpayers who originally chose option one have come to us to help them out. We may have then chosen option two or three to assist them in getting their tax dilemma resolved.

The option that this article will focus on is number two, which in tax lingo is called an installment agreement. The condensed version goes something like this: a taxpayer cannot pay their balance due in full, they request an installment agreement. The IRS sets them up with monthly payments. They pay the tax bill over time with smaller, more manageable payments. The downside to this option is that the IRS will continue to charge them interest on the outstanding balance until it is paid in full.

Beginning in 2012, the 2011 tax filing season, the Internal Revenue Service has loosened its rules on who can qualify for an installment agreement and the amount of financial data the taxpayer is required to disclose in order to qualify for an installment agreement. They have also increased the maximum number of months generally allowed to pay off an installment agreement.

The IRS now requires only minimal disclosure for tax balances up to $50,000. They have identified three balance groups: balances up to $10,000, balances between $10,000 and $25,000 and balances between $25,000 and $50,000; with each group requiring progressively more financial disclosure. However, disclosure in the highest group listed is minimal as compared to the information the IRS requires for installment agreements over $50,000.

For those taxpayers who owe $10,000 or less in combined tax, interest, and penalties for all open tax years, the IRS will guarantee acceptance. The IRS cannot turn you down as long as you meet these three conditions:

During the past five years, you have filed all tax returns in a timely manner, paid any tax due, and did not enter into any other installment agreements.
The IRS determines you cannot pay the balance in full when due, and you provide the IRS any information it requires to make that determination.
You agree to complete the installment agreement within three years, and you comply with tax laws while the agreement is in effect.

For those taxpayers whose total balance owed is between $10,000 and $25,000; they are not guaranteed acceptance for an installment agreement, although most requests are granted. In this group, if accepted, they can have up to seventy-two months to pay off the balance owed.

For those taxpayers who owe between $25,000 and $50,000, they must provide answers to a number of basic financial questions in addition to the information provided with lower dollar balance owed installment agreement requests.

It should be noted here that balances owed that are greater than $50,000 are eligible for an installment agreement. But before the IRS grants such a request for these large balances, a taxpayer would be required to disclose substantial amounts of financial data, and fill out a significant amount of IRS forms.

Even though the IRS has relaxed its rules on what balances qualify for an installment agreement and how long a taxpayer can take to pay, the IRS does not want to be America’s money lender. They want taxpayers to try to obtain the funds from any and all other possible sources before resorting to an installment agreement.

So, if you are faced with a tax bill you cannot pay in full, an installment agreement is an excellent way of taking care of your tax responsibility. It sure beats the option of doing nothing because the IRS will find you eventually; they always, always do. It is also an effective method unless you are in dire financial straits, and cannot pay even with an installment agreement. Then an offer-in-compromise might be in order for you. But before this method is considered, remember that like a request for an installment agreement greater than $50,000, the amount of financial information that must disclosed and provided is significant.

The accountants of Cook Martin Poulson, PC are ready to assist you with this or any tax situation or problem.

Posted in Blog, Tax Tips | No Comments »

Partnership Interest Abandonment or Worthlessness

Wednesday, February 8th, 2012

Authored by: Troy Martin, CPA, Shareholder. Troy specializes in advance tax planning for individuals, businesses, estates, trusts, and pension plans.

Assessing the potential for an ordinary loss

A partner may own a partnership interest that becomes worthless (or nearly worthless). In these situations, it may be impossible to find someone to purchase or take the interest, and the partner is tempted to just “walk away” from the partnership. To the extent the partner has remaining adjusted basis in his partnership interest, he may be allowed a loss under IRC §165(a) for an abandonment or because the interest is worthless. Several factors must be considered in order for the taxpayer to properly deduct such a loss, including the following: establishing the abandonment or worthlessness of the interest, identifying the proper year of deduction, and determining the character of the loss as ordinary or capital.

Claiming a deduction

IRC §165(a) allows a loss that is not recovered through insurance or some other means of compensation to be deducted in the year sustained. Treas. Regs. §1.165-1 indicates that a loss is treated as sustained during the year that the loss occurs “… as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year.” Treas. Regs. §1.165-2 allows a deduction for the obsolescence of non-depreciable property. The loss incurred must 1) relate to a business or a transaction entered into for profit, 2) arise from a sudden termination of the usefulness of the property, and 3) be associated with either the discontinuance of the business or transaction or the permanent discarding of the property (e.g., abandonment) from use in the business. This provision does not apply to losses that are sustained upon the sale or exchange of the property.

Establishing partnership interest abandonment

In order for a taxpayer to establish the abandonment of an asset, he must show intent to abandon the asset and overtly act to abandon it. The partner should claim an abandonment loss in the year that he has intent to abandon the partnership interest and overtly communicates his intent to interested third parties (the other partners) his decision to walk away.1 In some states, withdrawal from a partnership is allowed only where provided in the partnership agreement.

Establishing partnership interest worthlessness

Although certain steps must be taken to establish an abandonment loss, there is some support that these steps are not necessary for establishing a deduction for a worthless asset. In Echols v. Commissioner, the court of appeals looked to the taxpayer’s subjective determination of worthlessness as “largely a judgment call by a taxpayer based on his own particular, highly personal set of economic factors, including tax effects.”2 The fact that other investors might have determined that the partnership interest was worthless in an earlier year or that other investors might be willing to hold on to the interest and infuse cash were not factors in determining the worthlessness of the partnership interest specific to the taxpayer. Nevertheless, it is prudent to do as much as possible to establish the worthlessness of the partnership interest.

Posted in Blog, Tax Planning, Tax Tips | No Comments »

Who is a Qualifying Relative?

Tuesday, January 31st, 2012

Authored by: Rod Washausen, CPA. Rod is a Senior Accountant in the Logan office of Cook Martin Poulson, PC. He specializes in the taxation of small businesses and individuals as well as QuickBooks setup and training. Rod is a CPA in Utah, Missouri and Illinois and a Certified QuickBooks ProAdvisor.

Questions regarding dependency exemptions are common. Figuring out the rules for who can be claimed as a dependent can quickly become confusing for a person who is supporting an extended family member or elderly parent, or who has a non-related individual living with them.

In general, you may always claim your child (including a step-child, foster child, adopted child, a child placed with you legally for the purposes of adoption, your brother or sister, or a descendant of any of these). The tax code calls these “Qualifying Children” (please note that there are age, residency and financial support tests that must be met to claim a dependent as a qualifying child).

However, the tax code provides for dependency exemptions for additional persons under special circumstances. The tax code refers to these individuals as “Qualifying Relatives”. These individuals are the subject of this article.

There are two general rules and four additional tests that must be met in order to claim someone as your qualifying relative.

General Rules:

1.The person in question must have been a U.S. citizen, U.S. resident alien, U.S. national or a resident of Canada or Mexico for some part of the year, and

2.They must not file a joint return with someone else (unless it’s only to claim a refund of the taxes they had withheld)

Additional Tests:

1.The person must be one of the following:

a.Your child, stepchild, foster child or a descendant of any of these

b.Your brother, sister, niece or nephew

c.Your father, mother, grandfather, grandmother, aunt or uncle

d.Your step-brother, -sister, -father, -mother

e.One of your in-laws (brother, sister, father, mother, son or daughter in-law), or

f.Any other person who lived with you for the entire year

2.The person cannot be claimed as someone else’s qualifying child (e.g. – if your child lived with your parents and was supported by them, then they are your parents’ qualifying child)

3.The person must have made less than $3,700 of gross income for the year

4.You must have provided more than one-half of the person’s financial support for the year

In short, the “Qualifying Relative” category can cover a number of special situations. If you financially support a parent (or child, sibling, step-sibling, in-law, etc.) financially, you may be able to claim a dependency exemption for them even if they do not live with you, as long as they do not have more than $3,700 of gross income for the year. Please note that tax-exempt income, such as certain social security benefits, is not included in gross income.

It is also important to note that unlike a qualifying child, a qualifying relative can be any age.

Lastly, in certain situations you may be able to claim a person who lives with you and whom you support, regardless of their relationship to you, as long as they do not make more than $3,700 during the year.

For more information, please give us a call or see the section entitled “Exemptions for Dependents” found in IRS Publication 501. This publication is available online at www.irs.gov.

Posted in Blog, Income Tax, Tax Tips | No Comments »

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