I prepared two tax returns this week, each of which presented a scenario that required some thinking related to Head of Household filing status and the Other Dependent Credit, with a smidgen of Social Security learning thrown in!
First was a young man who recently had a baby with his girlfriend. He and his girlfriend lived together all year. He was filing as Head of Household with his baby as a Qualifying Child dependent (and eligible for the Child Tax Credit (up to $2,000)). However, by asking a few more questions, we were able to determine that his girlfriend could also be claimed as a Qualifying Relative dependent, thus making him also eligible for the Other Dependent Credit (up to $500). Specifically, we determined that 1) she was a U.S. Resident Alien with a valid SSN; 2) she lived with him all year as a member of his household; 3) she did not work outside the home (thus had gross income less than $4,700); and 4) he fully supported her financially. Because the ODC is a non-refundable credit and his tax liability was less than $900, he didn't get the full $500 ODC, but he did receive part of it, as well as $400 for the Child Tax Credit. The remainder of the $2,000 CTC was paid as the refundable Additional Child Tax Credit at the maximum of $1,600 for one child.
Second was a woman whose retired mother lived with her. The taxpayer filed as Head of Household last year with her mother as her dependent. However, we wanted to double-check that this was the correct way to also file her 2023 return. We confirmed that the taxpayer's mother: 1) was a U.S. Citizen with a valid SSN; 2) lived with her daughter all year; and 3) was financially supported by her daughter with the exception of her $19,000 Social Security benefit (in total, her daughter provided more than half of the mother's financial support). Although the Social Security income exceeded the gross income limit for a Qualifying Relative dependent of $4,700, there is a note in IRS publication 4012 stating, "Don’t include Social Security benefits unless the person is married filing a separate return and lived with their spouse at any time during the tax year or if 1/2 the Social Security benefits plus their other gross income and tax exempt interest is more than $25,000 ($32,000 if MFJ)." So the taxpayer was able to continue receiving the higher standard deduction benefit by filing as Head of Household and also to receive the $500 Other Dependent Credit.
As a side note, the calculation of "1/2 the Social Security benefits plus their other gross income and tax exempt interest" is the formula used to determine "combined income" which is used to determine how much of Social Security benefit is taxable... This link will take you to an IRS calculator to determine the taxable portion. Your total income for the year will determine how much of your Social Security benefit is taxable; the maximum amount that can be taxable is 85% of your benefit. FYI, most states exempt Social Security income from state income taxes, but 12 states also tax Social Security benefits to some degree.
And if Social Security is your only source of income, you may not need to file taxes at all. In the case above, the mother did not need to file for herself because she was considered her daughter's dependent and she herself did not have taxable income of $3,100 or more. Another client I helped earlier this week was single, retired, and receiving only Social Security benefits and a small pension. She also did not need to file because her taxable income was not $15,700 or more. Here is the IRS link for their "Do I need to file a tax return?" calculator. [Do note that even when you don't have to file, it can be a good idea to do so in order to help prevent identify theft.]
posted 02/18/2024
I've prepared dozens of tax returns and I've seen the results range from $10,000+ refunds to $10,000+ tax bills. I had two clients recently who ended up receiving $1 refunds. A colleague remarked that those were "perfect" tax returns (or about as close to perfect as you can get)! By not owing the IRS and by not receiving a large refund, these taxpayers made the tax system work for them and kept more of their income in their pockets all year long. This way their money was available to them to save or spend throughout the year.
Taxpayers with lower incomes who are receiving refundable tax credits (like the Additional Child Tax Credit and the Earned Income Tax Credit) will always have refunds. This is because they are actually getting additional money from the government to help support their families, over and above their tax liability. But it can still be a good idea for them to review and potentially adjust their withholding so they can have the most money possible in their paychecks all year long.
Our tax system is "pay as you go," meaning that the IRS expects you to be paying your taxes throughout the year, either through withholding from your earnings or via estimated tax payments. If you have a particularly large refund or if you owe money when you file your taxes, you should definitely use the IRS Withholding Estimator to plan for the next year. File a new W-4 with your employer or arrange to pay estimated taxes to the IRS. This is particularly relevant when a person has multiple jobs, or both spouses in a family work, or you get a new job. Estimated taxes should be considered for those who are self-employed and those who have significant investment and/or retirement income without withholding.
posted 02/18/2024