Posts Tagged adjusted gross income
Earned Income Tax Credit Requires Tax Preparer Ethics
Posted on July 25, 2011 | Tax Studies.
The incidents of IRS audits are increasing and about 40 percent of audited tax returns last year involved the Earned Income Tax Credit (EITC). Examination of a tax return by the IRS is time-consuming and frustrating. Although there is no sure way to avoid an audit, choosing a high quality tax preparer is especially valuable.
A report by the National Taxpayer Advocate states that 60 percent of individuals use paid tax preparers. If the IRS suspects that a particular tax return preparer is consistently engaged in erroneous acts, all the work of that preparer is at risk for examination. Consequently, taxpayers benefit by careful selection of a professional who has completed an IRS registered tax return preparer program.
The EITC is a refundable credit. Therefore, if it exceeds tax liability, it increases a tax refund. Although many who qualify for the EITC fail to apply for it, there are also ineligible taxpayers claiming the credit. The IRS has implemented tight standards of tax preparer ethics for addressing EITC situations.
One of the common errors the IRS has identified involves claiming a child for the EITC that is not eligible. Although a child is not required for the credit, taxpayers with qualifying children are entitled to the EITC at lower income levels than a childless taxpayer.
A qualifying child for the EITC must have lived in the US with the taxpayer for half the year. The child’s relationship with the taxpayer must be son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. Finally, an EITC qualifying child must be under age 19, a full-time student under 24 or totally disabled. A child who files a joint tax return is ineligible unless filing only to claim a full refund of withholding.
Registered Tax Return Preparer training provides all the conditions taxpayers must meet for the EITC. Although earned income is required, the adjusted gross income of the taxpayer must not exceed income limits based upon filing status and family size. Individuals who are married filing separately cannot claim the EITC. An important part of RTRP guidelines is avoiding incorrect claims of Head of Household status in order to obtain the EITC.
Taxpayers claiming the EITC must be US citizens at least 25 years old and under age 65. They are also required to have lived for more than half the year in the US and cannot be claimed as dependents of someone else.
The highest EITC is available to taxpayers with three qualifying children. This is an expansion of the previous threshold allowing two children as the maximum.
Claiming Qualified Long Term Care Expenses As Medical Tax Relief and Deduction
Posted on July 22, 2011 | Tax Studies.
Under the Federal tax code, long-term care services provided for medical reasons are an allowable expense to deduct. However, according to Sec. 7702B(c)(1) of the Federal law, a licensed physician must prescribe such care as being fundamental for the well-being of the patient. Long-term care deductions allows for people who have chronic diseases and conditions of incapacitation to receive long-term care, including an attending nurse or caretaker, without paying taxes for such services. There are various rules and qualification guidelines that govern the application of this tax deduction.
Qualification Requirements
The long-term medical care can only be claimed by taxpayers who itemize their tax deductions as opposed to using standard deductions. You therefore, need to use the right Form 1040 to benefit from these long-term care expenses and have them deducted. The expenses also need to have support documentation. The person claiming the deduction must maintain the doctor’s statement that prescribed the care, including the diagnosis of the medical condition. Besides the doctor’s statement, one also needs to keep the receipts or payment vouchers for such medical care. All other tax requirements, including withholding of taxes for any employees involved in the long-term care, need to be adhered to.
Itemized Deduction
Itemizing of tax deductions is more complex than taking the standard deductions route. A taxpayer itemizing deductions needs to schedule all the tax-deductible medical expenses that need to be itemized and determine if the expenses exceed 7.5% of his or her Adjusted Gross Income (AGI). Therefore, for itemized expenses to qualify for deduction, a taxpayer must have above this 7.5% threshold in total medical expenses. There is however, no cap or maximum for these itemized deductions.
Case in Point – IRS vs. Estate of Baral
In some instances, the IRS has differed views with taxpayers on what qualifies as long-term care as prescribed by a physician. This was the case for Lillian Baral, who had been diagnosed with dementia. The doctor recommended long-term care and Baral’s brother, who was her financial trustee, employed two caretakers to attend to her. The condition of her illness deteriorated her mental and physical capacity and she finally succumbed to her infirmity in 2008. Due to her condition, she did not manage to file a return in 2008 for the 2007 tax year. Since no tax return was filed, the IRS decided to use their estimate and determined that she had earned incomes of $94,229.00 and had underpaid taxes by $17,681.00. However, in their calculations, the IRS did not allow for the inclusion of her long-term care expense – Baral’s brother had paid $49,580.00 to the caretakers and had also reimbursed expenses of $5,566.00.
The issue was referred to a tax court to determine if the IRS was just in their actions. In the ruling, the court held that the wage payments to the caretakers qualified as long-term care for tax purposes and that the IRS was out of order to have these expenses excluded for tax deductions. The court however, held that the reimbursed expenses could not pass for the deductible of long-term care expenses as there were no receipts (support documentation) to support these expenses.