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.

Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for 4 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.

People should be concerned with safe guarding their identities and personal information during all economic times, but during periods of economic downturns it would seem that people need to be especially vigilant.  The IRS encourages people to avoid being the victims of tax scams.  While the IRS acknowledges that, “most paid tax return preparers provide honest and professional services, there are some who engage in fraudulent and other illegal activities.”  The IRS lists the following areas that taxpayers should be wary of:

• Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
• Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
• Unfamiliar for-profit tax services teaming up with local churches.
• Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
• Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.

Another area to be aware of is that with the promulgation of e-mails and phishing scams there are e-mails out there that profess to come from the IRS, hoping that people will respond solely because the e-mail says IRS.  The IRS does not notify people of audits or potential changes to their return or refund via e-mail.  Should you receive an e-mail from the IRS they advise you to relay that e-mail to a new IRS mailbox, phishing@irs.gov.  The IRS can use the URLs and links in the suspicious e-mails you send to trace the hosting Web site and alert authorities to help shut down the fraudulent sites. Unfortunately, due to the expected volume, the IRS will not be able to acknowledge receipt or respond to you. 

If you have any questions regarding suspicious e-mails, advertisements or claims from tax preparers please feel free to contact us.

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.

Many businesses incur expenses for travel, meals and entertainment in the ordinary course of business.  However, absent proper documentation, even legitimate expenses can be disallowed by the IRS.  The purpose of this article is to give you the information needed to properly track and document your travel, meals and entertainment expenses in order to protect your deductions.

If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined.  While not required, it is advisable to keep a record book or log of your travel, meals and entertainment expenses in addition to your receipts and other documentation.  At a minimum, your records should show:

1. The amount of each expense,
2. The time and place of the expense,
3. The business purpose of the expense, and
4. The names and business relationship of the persons involved

For your records to be considered “timely-kept”, you should record the expense and supporting information at or near the time of the expense.  However, that does not mean that you have to write down each of your expenses each day.  If you maintain a log on a weekly basis that accounts for expenses incurred during the week, the log will be considered a timely-kept record.  The IRS considers a timely-kept record more valuable than a statement prepared later when you may not remember the details accurately.

You will find record keeping much easier if you always remember to get a receipt!  The amount, date and location of the expense are usually printed on the receipt.  You should then write the remaining information (business purpose, names and business relationship of the persons involved) on the receipt.  In addition, we recommend making copies or scans of all of your receipts.  Many receipts tend to fade in as little as a year, so your documentation could disappear.  Electronic copies will not fade and can be easily backed up to a CD or portable storage device.

If you do not get a receipt, you should enter the applicable information into your log and attach your supporting documentation (e.g. canceled checks and bank or credit card statements).  Please keep in mind that a canceled check alone does not prove a business expense without other evidence to show the business purpose of the expense.  Also, you cannot deduct amounts that you approximate or estimate, so proving the amount of the expense is important in substantiating your deductions.

A hotel receipt will be sufficient to support business travel expenses if it contains the name and location of the hotel, the date(s) of your stay, the business purpose of your trip and separate charges for lodging, meals and telephone calls.   A restaurant receipt should contain the name and location of the restaurant, the date, amount, number of people served, business purpose of the meal and the business relationship of the individuals served.

Finally, don’t deduct personal expenses that you know don’t have a business purpose.  You may risk your other expenses being more heavily scrutinized (and possibly disallowed) if the Service finds that you’ve deducted personal expenses.