Summer Child Care Tax Tips

During the school year, your kids go to school then to after school care so you can work your full day and pick them up on the way home.  But, now you are looking down the barrel of summer vacation and trying to pick out something fun to keep your kids busy but also provide the child care for them so you can work all summer.  These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available all year long.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work.

2. You must have earned income meaning earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income or be a full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test.

4. Care at home, at a daycare facility outside the home or at a day camp may qualify for this credit.

5. You won’t get credit for 100% of your expenses, but depending on your income you may receive up to 35% credit.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent so you won’t be able to right off what you pay your oldest child to babysit for you.

8. Keep your receipts and records including the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return next year.

Tax Problems: Shouldn’t I wait until I get back on my feet to start fixing things?

Tax problems are sometimes the outward symptom of some other financial issue.  Perhaps, the business entered into a bad deal and got cheated out of money they were due by an unscrupulous supplier and you weren’t able to keep your taxes current because you had to pay your employees or other expenses just to keep the business going and the IRS seemed like a creditor that could wait because things weren’t urgent.  Or perhaps you lost your job and had to live on your IRA for a year before you were able to find any work.  Maybe you changed your W-4 with your employer so you would have a little extra money in your paycheck to buy Christmas presents for your children and forgot to change it back after the holidays and now you haven’t had any money withheld for your income taxes.

Any way you look at it, your initial problem turned into another headache because of the additional taxes that it caused you to owe.

So where do you turn from here?  Should you wait until you get back on your feet?  If there is one thing I know of entrepreneurs is that they believe they can fix any situation.  No matter where the business is now, a little more time, a little more money, just one more deal and the business will be turned around.  Or maybe you are looking for a new job, but the recruiter suggests that it won’t be available for another 9 months or so.

If you find yourself in this situation, now is the time to handle your IRS problem.  This blog outlines several of the means available to resolve your tax issues (offers in compromise, installment agreements, currently non-collectible, etc.).  All of the methods for dealing with your tax debt are functions of your current income, allowable living expenses, and the net realizable equity in your assets.  That means, while things are bleak for you financially, you are in a better position to negotiate a reasonable settlement of your tax problem with the IRS.  If you wait until you are back on your feet and financially stable to negotiate with the IRS, you will face much stiffer resistance and much higher settlement offers.  You may even earn yourself out of several of the more reasonable resolution possibilities.

Reviving Your credit after resolving your IRS Tax Debt

When you owe the IRS there is a “silent” tax lien that automatically attaches to a taxpayer when the IRS has assessed the tax against you, notified you of the tax that you owe and you have failed to pay it.  It is referred to as “silent” because there isn’t a form that is filed anywhere, it just happens by operation of law.  The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.  A lien is different from a levy because a levy is where the IRS physically takes your property (by wage garnishment, taking all of the money from your bank account, or selling your property).

The typical threshold for the filing of a formal Notice of Federal Tax Lien is at $10,000.00 owed in taxes, but depending on the circumstances, it could be filed when you owe less than that.  A tax lien is filed in the register of deed’s office for the county where the taxpayer lives.  That means your tax debt has now become a public record and this will also be included in your credit report so your credit score will drop having a negative impact on your ability to borrow.

The Notice of Federal Tax Lien has an automatic release provision built into it so that when the date listed on the form has passed, the lien is automatically released.  That’s great, but the big problem is that it remains on public record and doesn’t come off of your credit report automatically.

The good news is that we can help you resolve your tax issues, but if you have already resolved your tax problems by paying the taxes in full or by successfully completing an offer in compromise, we can help you get the lien removed from your credit report and improve your credit score.

What is Currently Not Collectible Status?

When a client owes money to the IRS, the two most common ways we attempt to resolve their problem is either through an offer in compromise or by negotiating a reasonable and affordable installment agreement where the tax is paid in monthly installments.  There is a third option: currently not collectible status.

No matter which option you select in resolving your IRS debt, one of the first things a tax professional is going to help you with is preparing IRS Form 433.  This is your financial statement that the IRS reviews along with all of the financial documentation (bank statements, mortgage statements, investment statements, paystubs, bills, etc.).  The IRS will review your assets and debts, along with you monthly income and living expenses.  Your living expenses will be compared to national standard living expenses and usually reduced to those standard amounts.

Current Not Collectible status or “uncollectible status” is a hardship status the IRS may place you in when your monthly allowable living expenses exceed your gross monthly income.  In essence, this is a statement by the IRS that they are going to give you some time to “get back on you financial feet again” before they begin taking collection action against you.  That means if the IRS places you in uncollectible status that they will cease any active collection action against you – no wage garnishments, bank levies, or property seizures.  But, the IRS will file a tax lien against you in your local register of deeds’ office to protect their interest in the event you attempt to transfer property out of your name.  It is also not a resolution to the tax debt and interest will continue to accrue on your balance.

Part of this agreement by the IRS is that they may revisit your finances a year or two after placing you into currently not collectible status to see if your finances have improved where you can now begin to repay your tax debt.  Occasionally, the IRS may never revisit your account and the collection statute of limitations will expire leaving you free from the tax debt.

Why does the IRS ask for my spouse’s financial information?

Question: I am filing an offer in compromise for taxes that I owe by myself.  I was married after my tax problems so my wife does not owe any of the taxes.  Why does the IRS want me to include her income information in the Form 433 that I have submitted with my offer in compromise?

The offer in compromise program is a voluntary program that allows taxpayers that owe the IRS taxes, penalties and interest an opportunity to settle their debt for a fixed amount of money that is typically much less than the total debt they owe the IRS.  The amount that the IRS will accept for your offer in compromise is a function of your gross monthly income, your household living expenses, and the net realizable equity that you have in assets that you own.  The IRS is interested in your wife’s income to determine what portion of your monthly household living expenses you will be able to claim.

Your monthly income ÷ (Your Monthly Income + Your Spouse’s Monthly Income) = Percentage of Household Income

Your “percentage of household income” will be the same percentage of the monthly household expenses that you will be allowed to claim for the “community living expenses” such as mortgages, utilities, food, clothing, and transportation.  You will be able to claim 100% of the individual expenses you have such as court ordered child support or alimony.

The one question that also comes up in conjunction with this request by the IRS – and often raised by the non-liable spouse – is by cooperating with the IRS’s request and providing this financial information, will this somehow make the non-liable spouse liable for the taxes?  The short answer is no.  For two spouses to be liable for each others’ taxes is by filing joint returns together.

Taxes from 401(k) Distribution

A recent question from a reader:

Last year, I moved from Georgia to South Carolina because I was laid off from work and wanted to move to be a little closer to family.  When I left my job I withdrew money from my 401(k) to help cover my moving expenses and to live off of since I was not working.  My plan administrator withheld some of the money I withdrew from my 401(k) for taxes so I thought I was good to go.  When I filed my return initially, I forgot about the withdrawal and now the IRS is asking for another big chunk of money from me for taxes.  Help!  Do I owe more money?

Good question.  Your 401(k) account through your employer is what is known as a “qualified retirement plan.”  That means that the employer created this plan for their employees in accordance with Internal Revenue Code §401 that allows the employer to receive tax advantages by depositing into this account for their employees and allows the employees tax advantageous saving because you pay no tax on the money deposited into this account until you later withdraw the money.

The goal for this type of account is long term savings, so in exchange for the tax benefits you must pay a tax penalty if you withdraw money from the qualified account prior to you reaching the age of 59 1/2.  In addition to the penalty you must also pay your income tax on the money received.  This tax is paid based on your tax rate for the year of the withdrawal.  Some employers withhold 20% of the funds you withdraw to pay to the IRS on your behalf towards those taxes.  But that may not be the complete amount of tax that you owe because the tax is based on your tax rate – not just a flat 20%.

So what do you do now?  I would encourage you to take this new information to your tax preparer, CPA or tax attorney to seek to file an amended return.  Often this comes to light after the IRS has performed an examination (or “audit”) of your return in house because the income you filed on your return did not match up with the income reported to you for that year.  In addition to the early withdrawal penalty and additional tax you owe, you are going to receive additional penalties for the under-reporting of taxes and late payment of taxes not to mention the additional interest that will have accrued on this additional tax.  However, when you file your amended return, you often owe less than what the IRS has declared because of the other deductions and exemptions you are allowed.  If you still owe more than you can pay you should look into your other options such as a payment plan, currently non-collectible status, or an offer in compromise.

Using Home Equity to Pay an Offer in Compromise

Question: Can I use the deed to a house we own free and clear to make an offer in compromise to the IRS for back taxes?

Answer: The short answer is no.  Basically, in determining whether you qualify for an offer in compromise, the IRS will examine you entire financial “self.”  You can kind of compare this to an audit.  The IRS will want to see a financial form (433-A for individuals) that shows all the assets that you own including real estate, stocks, bonds, checking accounts, cash, cash-value insurance, vehicles, etc.  You will also be required to show back up documentation for most of these assets as well as account statements for the past three months and receipts for payments that you have made.  You will also be required to disclose your monthly income and expenses to the IRS (as well as the income of any non-liable person who lives with you such as a non-liable spouse).

You will gather all of this information so that you can properly prepare your offer in compromise to the IRS.  Based on your particular financial information you will be able to determine the amount of your offer in compromise.

To get back to your specific question, if you own your home free and clear that will simply be a much larger amount that you offer the IRS for your offer in compromise because you have 100% equity in the home with no debt.  The IRS, however, will not want the deed to your house.  They are not in the real estate business.  They want the money you can get for the house.  So it will be up to you to either sell the house, refinance or take out an equity line on the house and give the IRS the proceeds.

Now, as a practical matter, I would not recommend that you immediately go out and refinance your house or put it on the market.  I would suggest that you do some research and make sure you will qualify for a refinance by speaking with several banks.  Then you can submit your offer in compromise and if it is accepted you can then go out and refinance your home or take out an equity line that you can then use to pay off your offer in compromise.

Can the IRS Levy my Social Security Benefits?

Occasionally, I receive a call from a prospective client who has just found out that his/her Social Security benefits are being levied by the IRS for back taxes.  Most of the time, the factual situation surrounding the back taxes that are owed are the same: the things that caused the tax liability are old, from years ago when the prospect was working, but now their only source of income is the Social Security benefit – which usually is not enough for the taxpayer to maintain the same lifestyle they enjoyed while they were working before a levy or garnishment from the IRS.

It is legal for the IRS to garnish your Social Security benefits pursuant to the Federal Payments Levy Program (FPLP) whenever you owe back taxes, penalties and interest and the levy will normally continue until all of your debt is paid, you make other arrangements to pay your taxes (such as an offer in compromise, installment agreement, or currently not collectible status) or until the collection statute of limitations expires and the debt becomes unenforceable.  Through the FPLP, the IRS can levy 15% of your Social Security benefits.

Before the IRS can levy your benefits you must receive a notice.  This notice typically comes to you by certified mail and will inform you that you have 30 days to contact the IRS to work out your debt or they will begin garnishing your Social Security Benefits.  So if you have recently received this letter you need to call the IRS or consult with a tax professional who can assist you with this process.

But, some Social Security Benefits are not subject to Levy

Your typical retirement type benefits are subject to levy, but children’s benefits, supplemental security income benefits and lump sum death benefits are not subject to levy by the IRS.

What if You Don’t Qualify for an Offer in Compromise?

Most people I meet with to discuss they IRS tax problems want to talk about how I can help them qualify for an offer in compromise so they can pay less than what they actually owe to settle their tax debt.  While that is an outstanding way to resolve tax problems it isn’t the only way and sometimes it is not an option at all.

An offer in compromise is relief allowed by the IRS and it is based on a calculation of your income, monthly allowable living expenses, and the net realizable equity you have in your assets.  Plus, the remaining term of the collection statute of limitations must be examined to determine if you could full pay your tax liability before the collection period expires.  Sometimes it is a combination of all of the factors that disqualify a client from filing an offer in compromise.  Other times it is a single factor like the balance in a retirement account or extraordinarily low living expenses or even a very generous income.  No matter what the reason, an offer in compromise just isn’t going to work for every tax client.

So if you are not a candidate for an offer in compromise, what can you do?

The first option you have is to negotiate and installment agreement with the IRS.  This process varies a little depending on what you owe the IRS and what you can afford to pay each month.  Generally, what the IRS expects you to be able to pay each month and the reality of what you can afford are very different numbers.  But once you have negotiated a payment amount with the IRS you can continue making monthly payments until your IRS debt (taxes, penalties, and interest) have been retired or until the collection statute of limitations has expired.

Sometimes, your finances are upside down.  Any sort of payment would put your family in a hardship position where you could no longer afford to pay your bills and provide shelter, food, medical care, and transportation for your family.  In these instances, another option will be to request to be placed in “currently not collectable” status.  This means that the IRS has reviewed your finances and agrees that at this time you cannot afford to make any payments towards your tax debt.  The good news with this resolution is that the IRS will not take any active collection measures against you such as wage garnishments or bank levies.  In fact, that is true for all solutions to your tax problems, but this is the only option where you do not have to pay for this relief.   The typical period for this relief is one to two years and the IRS may ask you to provide new financial information so they can determine if you can begin paying on your tax debt at that time.  Occasionally, they don’t ask for any updates and you remain in non-collectable status until your tax debt expires.

One point to note for either of these relief options is that the IRS will place a lien against you for the total debt amount you owe.  This will be recorded in the county register of deeds where you live and protects the IRS’s interest in your property so that if you attempt to sell your property while owing the IRS you will have to pay the proceeds you would receive to them.  This is a passive form of collection from the IRS and the lien is active for ten years or until the debt expires by statute of limitations.

IRS to Begin Accepting E-filed Returns on January 30th

The IRS announced this week that they will begin accepting your e-filed 2012 returns on January 30, 2013.  While that may frustrate some people because they are ready to go ahead and file and receive their refund, that’s pretty impressive turn-around time for just receiving a bunch of tax law changes from Congress on January 2nd.