DIVORCE AND MONEY MATTERS PART 1 - Taxes and the Single Parent

There is so much information out there for tax tips and great ways to reduce your taxable liability. The often forgotten group out there are single parents and there are many out there who might not be aware of what potential deductions and tax credits they may qualify for. We will be having a three part series on divorce and money matters over the next week.


Here are a few to consider:

1. File as Head of Household - This has two main advantages - paying less tax overall as well as being able to claim the higher standard deduction. How do you qualify? If you are unmarried on the last day of the year and you have provided over 50% of the funds needed to maintain a household and your children live with you for more than half the year - you qualify.

2.The Dependency Exemption - Single parents that do file "Head of Household"for 2011 will be able to claim an exemption of $3700 for themselves and for each qualifying child. Note - only one parent can claim each child as a Dependant for tax purposes. It must be decided amongst both parents who will claim each child.

3. Child Tax Credit - What is the difference between a credit and an exemption? A credit is subtracted from the total amount of taxes you owe. The maximum credit per child for 2011 is $1000. This can have a great impact on reducing your taxes. The qualifying child must be under the age of 17 on the last day of the year.

4. Child Care Credit - If there is someone who cares for your child while a single parent works, they may be eligible for the child and Dependant care expenses. The child must have been under the age of 13 for at least part of the year. The childcare provider may not be the child's other parent or anyone who can claim the child as a dependent. There must be actual earned income during the year in order to qualify as well.

5. Earned Income Tax Credit - This credit was designed for low-income working families.


Common Questions often asked by single parents

1. Who gets to claim the children?
Typically it is the custodial parent. Whomever the children are living with for the majority of the year will claim the children unless an agreement states otherwise.
Also, the parent who claims the dependent exemption also has the right to claim the Lifetime Learning credit.

2. Is child support taxable or deductible?
Child support has no affect on your taxes (or your ex’s). It doesn’t count as income. It’s not deductible.

So why should you outsource bookkeeping?

Wading through invoices, bank statements and mounds of receipts can be quite the task, especially when small business owners are trying to put their priorities on what they originally set out to do, run successful businesses. Before you know it what should have been done last week, two months ago; before you know it another year has passed and you don't even know how your business really did this year. Did you make money? Did you over spend in certain areas?

What good would a business be without its accounting systems? Without keeping track of its finances, a business can't go anywhere. No matter the size of the business, whether big or small, accounting is the heart of what determines a business' success. With it, you can find out just how much profit the business is making or losing. You can't overlook such an integral component of business as this one.

1) How much is your time worth?
Most business owners who do their own books contend that they want to maintain privacy of their financial matters. However, most of them spend far too much time focusing on keeping their books in order and therefore, forfeit time that could be spent on other tasks or with family, friends, or even relaxing.

2) Find yourself scrambling to get your books in order for tax season?
If your books aren't in order, you risk having your Tax preparer (who can cost as much as $150/hour) having to organize them prior to doing your taxes. By having them ready to go and properly prepared, you can save valuable time and money.

There is a huge difference between a bookkeeper that primarily does data entry bookkeeping and an accountant that not only is providing data entry service but is looking in greater depth at the financials and your business.

After making the decision to outsource, make sure to check the qualifications of the accountant and be sure to ask for current clients as references.

Accessing 401 (k) Funds before Retirement – What are your Options

Accessing 401 (k) Funds before Retirement – What are your Options?

It can happen – you are in dire need of cash fast and do not have enough funds in your bank account. An unanticipated event has happened and you need money. You begin to questions accessing money from your 401 (k) retirement account. Here are some possible options you have if you need to access your funds before reaching the age of 59 ½:

Early Withdrawal One option is just to withdraw the funds you need. This comes with a 10% federal tax penalty, however, and also must be stated as income on your present year tax return. This is the most costly and least efficient means of accessing funds from your account.

Loan Many 401 (k) plans allow for loans to be taken out for accessing 401 (k) plans early. These loans accrue interest, and the 10% tax penalty will be issued if the loan is not 100% serviced.

Hardship Withdrawals If there are justifiable causes as to why you need to access the money before retirement, there may be a way to access the money penalty-free before the age of 59 ½. What is a justifiable cause? Some examples are medical expenses, preventing foreclosure on your primary residence or providing necessary repair work on that residence, and burial costs. Consult your tax professional for more information.

72(t) Distributions If you have retired before the age of 59 ½, there is a way to access money from your 401 (k) penalty-free. After you have quit working and are officially retired, the 401 (k) rolls over into an IRA. Once the roll-over has completed, you apply with the IRS for a 72(t), which allows you to take out an equal amount of money every year, either until you have reached 59 ½ or you have been receiving a stream for at least five years, whichever comes first. This amount that is distributed is set-up through a calculation based off of several components including age and amount of funds within the account. Your tax professional will be able to give you more information about this means of early access.

Accessing at 55 Another penalty-free access to needed funds from a 401 (k) plan is accessing from a plan with a company you no longer work with. Once you reach the age of 55, you may access these funds.

These are just some of the options you have for prematurely accessing funds from your 401 (k) account. Before pursuing any of the above options, consult with your tax professional, as there may be particular circumstances to your situation which do not allow for a penalty-free withdrawal.

Choosing an Entity Structure

One of the first questions a new business owner must consider is what type of entity structure is best for their particular business. As if it isn’t stressful enough with all the decisions needed to be made when you first start your business, deciding what business entity can often be very overwhelming. It is beneficial to seek out a professional’s advice in helping to analyze which structure is the right fit.

PacWest Accounting assists many new businesses in making those often difficult decisions in the beginning stages. Here is a brief outline of the most popular types of entity structures

1. Sole Proprietorship: The most popular entity structure among small business owners; it is the most basic of the entities and meant solely for a single individual opening a business. Sole proprietorships have limited life, meaning that the business ceases once the owner is no longer alive. It is the easiest to file for a license, and a major benefit is single taxation, meaning that profits flow-through directly to the owner’s personal tax return.

However, the owner of the business assumes unlimited liability, meaning that he or she is personally liable for any debts the business might face. Creditors and individuals can go after your personal assets if business assets are insufficient in fulfilling obligations. This factor makes sole proprietorships the riskiest business model an entrepreneur can assume

2. Partnerships are essentially sole proprietorships for businesses where there are two or more owners. Unlimited liability is still present, and for the most basic partnership all owners assume equal liability. Partnerships also possess limited life, so transfer of ownership after a partner’s death can become logistically difficult.

3. Corporations are owned by shareholders of a company. Managers control day-to-day operations of the company, and may or may not hold company shares. One of primary reasons to incorporate is the benefit of limited liability. Corporations are seen as living entities, and therefore liability is limited to the corporation itself. Because the corporation is an entity, it assumes unlimited life, and shares can easily be sold or transferred.

Corporations are not perfect, though. The largest disadvantage of forming a corporation is what is known as double taxation. The corporation pays taxes based on its profits just as a sole proprietorship or partnership does. Those profits are then distributed to shareholders in the form of dividends. Dividends themselves are then also taxed.

4. S Corporations are corporations that elect to pass corporate income, losses, deductions and credit through to the shareholders and assessed tax on their individual income tax rates. One of the greatest benefits is the avoidance of the double taxation of corporate income. In order to qualify as an S corporation, the business must be a domestic corporation, have no more than one hundred shareholders and issue only one class of stock.

5. A Limited Liability Company (LLC) is a business structure allowed by state statute and is popular because of the limited personal liability for the debts and actions of the LLC similar to corporations. Most states do not restrict ownership so members can be individuals as well as corporation, other LLC’s and foreign entities.

If you have more questions on which entity is best suited for your company, please contact us and we can assist you in finding the form to best serve you and your company’s needs.

What exactly is a miscellaneous deduction?

Often one of the most asked questions when preparing tax documents. There are certain employee expenses and many other expenses that can be classified as a miscellaneous deduction taken on Schedule A of form 1040. Of course these deductions are subject to the 2% limit. What does this limit mean? You can deduct the amount left after you subtract out 2% of your adjusted gross income from the total.

What are some of these expenses?
• Employment related educational expenses
• Professional association dues
• Business association dues
• Costs associated with looking for a new job
• Professional books and magazines
• Any unreimbursed employee travel, meals and entertainment
• Home office expenses
• Safe deposit rental to store investment-related items
• Legal fees to collect taxable income such as alimony
• Tax preparation fees

Items which might be deductable but NOT subject to the 2% floor include:
• Moving expenses to a new job location
• Gambling losses to the extent of gambling winnings
• Jury duty turned over to your employer

Items that cannot be deducted include:
• Broker's commissions that you paid in connection with your IRA or other investment property.
• Burial or funeral expenses, including the cost of a cemetery lot.
• Campaign expenses.
• Club dues.
• Commuting expenses.
• Fees and licenses, such as car licenses, marriage licenses, and dog tags.
• Fines and penalties, such as parking tickets.
• Health spa expenses.
• Home repairs, insurance, and rent.
• Home security system.
• Investment-related seminars
• Losses from the sale of your home, furniture, personal car, etc.
• Lost or misplaced cash or property.
• Lunches with co-workers.
• Meals while working late.
• Personal legal expenses
• Personal, living, or family expenses.
• Political contributions.

Hope this makes it a little easier when preparing your documents for tax filing. Have additional questions, please feel free to contact us.

Qualified medical expenses - What is deductible?

With the official opening of the tax season last Friday, we thought it be best to address those popular questions often asked as you are preparing your tax file for 2010.

So what exactly are medical expenses in the eyes of the IRS?

They are those expenses that are for the diagnosis, cure, mitigation, treatment, or prevention of disease. It also includes the cost for treatment for payments for legal medical services rendered by physicians, surgeons, dentists and other medical practitioners.

Also included are the costs for equipment, supplies, and diagnostic devices needed for medical purposes. The premiums you pay for insurance coverage and any amounts paid for transportation to get medical care are deductable. Medical expenses also covers amounts paid for qualified long-term care services.

What does it NOT include?

They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Some other items that cannot be deducted include:

• Diet Foods
• Life Insurance or Income Protection Policies
• Maternity Clothing
• Surgery for purely cosmetic reasons
• toothpaste, toiletries and cosmetics
• nonprescription nicotine gum, patches or lozengers
• nonprescription drugs or medicine
• Teeth whitening
• Hair transplant

Please note that if your doctor has recommended a program as treatment for a specific condition and it is properly documented for expenses such as:

• Health club dues
• social activities such as swimming
• Weight loss program

The IRS has indicated that the cost would be deductable

Of course you will only get these deductions if you itemize on Schedule A and you can only deduct that amount of your medical and dental expenses that is more than 7.5% of your adjusted gross Income
These deductions can be taken for yourself, your spouse and your dependents (the person must have been a dependent either at the time of the medical services were provided or at the time you paid the expense).

When in doubt always ask your tax advisor if the expense is allowable.

Who gets a 1099?

Every year at this time, I get asked this question by many of my small business clients. It is up to you, the business owner to correctly determine whether individuals providing services require the issuance of a 1099. The best way to decipher this is to first understand the relationship with the worker performing the service and the degree of control and independence.
Do you have control over when the worker works? Do you have control over what they are working on and when?
Do you control the finances of the worker’s job to be completed? Are expenses reimbursed?
Are there any types of benefits paid? Is the work they do a key aspect of your business?
It is important to ask yourself these questions in determining whether or not the worker is in fact an employee or independent contractor.

Once you have determined if in fact the worker is an independent contactor, you must then determine if you have paid that worker over $600 for that year. If the answer is yes, they need to receive a 1099 from you.

Here is a helpful list of those payments requiring a 1099 – MISC:

• Any person who rendered service to your business and you paid more than $600 in compensation that are taxed as a sole proprietor

• Any person you paid over $600 in rent to for office space, machines or equipment (excluding corporations or real estate agents)

• Any person providing $600 or more in legal services to your business regardless of whether or not they are a sole proprietor, corporation or partnership need to be issued a 1099.


So as a general rule:

Sole proprietors, partnerships, and LLC’s taxed as sole proprietors or partnerships DO get a 1099.

C Corporations, S Corporations, and LLC’s taxed as C or S Corporations DO NOT need to be issued a 1099.

If you classify an employee as an independent contractor you may be held liable for paying employment taxes unless you have a reasonable basis for not treating the worker as an employee.

And as always, if you have specific questions, we are always more than willing to help you out.