Six Important Facts about Dependents and Exemptions

While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2012 tax return.

1. Exemptions reduce taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.

2. Personal exemptions.  You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.

3. Exemptions for dependents.  Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for information about dependents who do not have Social Security numbers.

4. Some people do not qualify as dependents.  While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.

5. Dependents may have to file.  If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.

6. Dependents can’t claim a personal exemption.  If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.

Remember that a person must meet several tests in order for you to claim them as your dependent. See Publication 501 for the tests you will use to determine if you can claim a person as your dependent.

You can view or download Publication 501 at IRS.gov or order it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at IRS.gov to find out if a person qualifies as your dependent. The ITA is a helpful tool that can answer many of your tax law questions.

Missing Your W-2? Here’s What to Do

It’s a good idea to have all your tax documents together before preparing your 2012 tax return. You will need your W-2, Wage and Tax Statement, which employers should send by the end of January. Give it two weeks to arrive by mail.

If you have not received your W-2, follow these three steps:

1. Contact your employer first.  Ask your employer – or former employer – to send your W-2 if it has not already been sent. Make sure your employer has your correct address.

2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, Social Security number and phone number. You should also have the following information when you call:

• Your employer’s name, address and phone number;

• Your employment dates; and

• An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.

3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2. Use the form to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time. File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  If you are requesting an extension, you must file this form on or before April 15, 2013.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return. File Form 1040X, Amended U.S. Individual Income Tax Return to amend your tax return.

Forms and instructions are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Eight Tax Benefits for Parents

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

Forms and publications on these topics are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676

Determining Your Correct Filing Status

It’s important to use the correct filing status when filing your income tax return. It can impact the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return.

Are you single, married or the head of your household? There are five filing statuses on a federal tax return. The most common are “Single,” “Married Filing Jointly” and “Head of Household.” The Head of Household status may be the one most often claimed in error.

The IRS offers these seven facts to help you choose the best filing status for you.

1. Marital Status.  Your marital status on the last day of the year is your marital status for the entire year.

2. If You Have a Choice.  If more than one filing status fits you, choose the one that allows you to pay the lowest taxes.

3. Single Filing Status.  Single filing status generally applies if you are not married, divorced or legally separated according to state law.

4. Married Filing Jointly.  A married couple may file a return together using the Married Filing Jointly status. If your spouse died during 2012, you usually may still file a joint return for that year.

5. Married Filing Separately.  If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately.

6. Head of Household.  The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

7. Qualifying Widow(er) with Dependent Child.  This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

IRS e-file is the easiest way to file and will help you determine the correct filing status. If you file a paper return, the Interactive Tax Assistant at IRS.gov is a tool that will help you choose your filing status.

You can also find more helpful information in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. This publication is available at IRS.gov or by calling 1-800-TAX-FORM (800-829-3676).

Changes to Michigan Tax Laws

 INCOME TAX CHANGES FOR INDIVIDUALS AND TRUSTS

EFFECTIVE TAX YEAR 2012 (FOR RETURNS FILED IN 2013)

During 2011 and 2012, Governor Rick Snyder signed legislation amending the Michigan Income Tax Act. This legislation does not apply to or otherwise impact income tax returns that are due in April 2012. Instead, the first returns that are affected by this legislation are those returns that are due in April 2013. Important changes that you should be aware of include the following:

Tax rate

  • The rate reduction from 4.35% to 4.25% was delayed until October 1, 2012.
  • The 2012 annualized rate is 4.33% and applies to all of 2012 regardless of when income was received. For 2013 and each tax year thereafter the rate is 4.25%.

Exemptions

  • The personal exemption was increased from $3,700 to an annualized personal exemption of $3,763 for 2012. The personal exemption is $3,900 for 2013.
  • Special exemptions for seniors are no longer allowed.
  • The $600 exemption for children 18 and under is no longer allowed.
  • Special exemption for unemployment compensation greater than 50% of adjusted gross income (AGI) is no longer allowed.
  • Special exemption for disabled and exemption for disabled veterans remain unchanged.
  • Phases out certain pension and retirement income subtractions based on date of birth. See Retirement Benefit Changes for more detailed information.

Deductions/Subtractions

  • The deduction for reinvestment of gain from Michigan Strategic Fund investments is no longer allowed.
  • Certain miscellaneous deductions (political donations; prizes won in state-regulated bingo, raffle, or charity games; charitable gifts from retirement plans) are no longer allowed.
  • Removes both the gross income and the related expenses from oil and gas production if the gross income was subject to severance tax.
  • Renaissance Zone deduction for zones certified or renewed after December 31, 2011 is no longer allowed.

Non-refundable Credits

  • The credit for city income taxes is no longer allowed. The credit for public contributions is no longer allowed.
  • The credit for contributions to homeless shelters, food banks, and community foundations is no longer allowed.
  • The credit for contributions to medical savings account is no longer allowed. The credit for donations to Family Development Program is no longer allowed.

Non-refundable Credits (continued)

  • The film credit for wage withholding is no longer allowed. The credit for automobile donations is no longer allowed. The credit for college tuition and fees is no longer allowed.
  • The credit for an historic rehabilitation plan certified after 2011 is no longer allowed.

Refundable Credits

  • Earned Income Tax Credit is reduced from 20% to 6%. The excess adoption expense credit is no longer allowed. The stillbirth credit is no longer allowed.
  • Changes to the homestead property tax credit:
  • Household income replaced by total household resources, which excludes losses from business, rentals and royalties, and also excludes net operating losses.
  • Taxable value cap
  • Credit is not available for homes with taxable value of more than $135,000. Cap only applies to the residential portion of farms.
  • Cap does not apply to rented homesteads. Senior claimants
  • Entitled to a credit equal to 100% if total household resources are $21,000 or less. Reduced by 4% for each additional $1,000 in total household resources until $30,000 is reached.
  • For total household resources of $30,000 to $41,000 senior claimants receive 60% of the credit.
  • Credit phase out applies.
  • Claimants who are permanently disabled, paraplegic, hemiplegic, quadriplegic, or deaf: Full credit of 100% if household resources are $41,000 or less. Credit phase out applies Alternative credit for eligible serviceperson/veteran is still available.
  • Other claimants: Entitled to a 60% credit. Credit phase-out
  • Begins at $41,001 of total household resources.
  • Reduced by 10% for each $1,000 increase for all claimants.
41,001- 42,000

10% reduction

42,001- 43,000

20% reduction

43,001- 44,000

30% reduction

44,001- 45,000

40% reduction

45,001- 46,000

50% reduction

46,001- 47,000

60% reduction

47,001- 48,000

70% reduction

48,001- 49,000

80% reduction

49,001- 50,000

90% reduction

50,001 or more

100% reduction

Miscellaneous  
  • Adopts 100% sales factor apportionment. is no longer allowed.
  •  The tax voucher program for Early Stage Venture Investment agreements entered into after 2011 is no longer allowed.

New MESC Quarterly Tax and Wage Detail Reports

MiWAM the Advent of MiWAM comes the elimination of manual data entry and the multiple forms employers must complete. Separate processes for the tax/payroll and wage detail reports have been consolidated into just one form.

Currently it takes six forms to report quarterly wage information to the UIA, but beginning with the 3rd quarter of 2012 (July 1 – September 30), employers will be relieved of six forms. The new Form UIA 1028-Employers’s Quarterly Wage/Tax Report, eliminates manual data entry by allowing you to import wage data from a text file.

The new Form UIA 1028 – replaces:

  • Form UIA 1017 – Quarterly Wage Detail Report
  • Form UIA 1019 – Amended Wage Detail Report
  • Form UIA 1020 – Employer’s Quarterly Tax Report
  • Form UIA 1020-R – Reimbursing Employer’s Quarterly Payroll Report
  • Form UIA 1021 – Amended Quarterly Tax Report
  • Form UIA 1021-R – Amended Reimbursing Employer’s Quarterly Payroll Report

MiWAM Toolkit Now Available Online!

The MiWAM toolkit, now available on the UIA web site will provide you with the information you need to successfully navigate MiWAM including:

  • Step-by-step instructions for logging onto MiWAM
  • How to navigate through MiWAM
  • Specs for setting up new bulk filing formats (for companies with 25 or more employees)
  • Information for service providers and Professional Employer Organizations (PEO’s)
  • Frequently Asked Questions
  • And much more…

Click here to view or download the MiWAM toolkit

Mileage Rates for 2012

IRS Posts Mileage Rates for 2012:

The IRS has announces that the standard mileage rate used by business drivers will remain at 55.5 cents per mile for 2012, the same as it was for the last six months of 2011.

 

 

Congress extends payroll tax cut for 2012

Payroll Tax Cut Extended

The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the payroll tax cut for employees, continuing the reduction of their social security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012.

The Act also includes a new “recapture” provision, which applies to those employees who receive more than $18,350 in wages during the two-month period (the social security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year.

Congress obviously wants accountants and payroll preparers to earn their keep by allowing the tax cut to expire mid quarter, creating confusing and double the tax calculations.

Social Security Increases for 2012

Social Security Increase for Retirees, Disabled Persons and Surviving Spouses

Announced on October 19th, Social Security Benefits will see a Cost of Living Adjustment increase of 3.6 percent next year. This is the first increase in benefits since 2009. Starting in January 2012, 55 million Social Security recipients will get increases averaging $39 a month, or just over $467 for the year. In December, more than 8 million people who receive Supplemental Social Security Income, the disability program for the poor, will get increases averaging $18 a month, or about $216 for the year.

The annual Cost of Living Adjustment (COLA) is tied to an inflation measure. There were no COLA adjustments for 2010 or 2011 due to such a low rate of inflation. Those were the first two years there was no automatic COLA increase since they were enacted in 1975. Social Security recipients did however receive a one time $250 payment from the 2009 economic stimulus package.

Social Security Agency will pay out $727 billion in benefits to retirees, disabled people, surviving spouses and children this year. That makes the average payment $1,082 per person. The COLA adjustment will add between $25 and $30 billion more, giving retirees and disabled persons some additional spending money.

Unfortunately some of this increase will be lost to higher Medicare premiums, which are deducted from Social Security payment. Medicare Part B premiums are expected to rise in 2012, the new premium rates are expected to be announced some time this week.

Social Security Increase for Working Taxpayers

The maximum amount of wages subject to Social Security taxes is $106,800, this limit will increase to $110,100 in 2012.

In 2011 workers got a break on the amount of Social Security withheld from their paychecks, they were taxed at 4.2 percent down from the normal amount of 6.2 percent. The employer was still responsible for their portion, which remained at 6.2 percent.

The new rate for 2012 is unclear at this time, President Obama is pushing for another decrease to 3.1 percent, or it may remain at the lower 4.2 percent or revert back to 6.2 percent as it is scheduled under current law. AFS will keep you updated as soon as they announce the new rate for 2012.

For example:

People making $110,100 in 2011 will pay $4,486, if the rate reverts back to 6.2% in 2012 they will pay $6,826 or $2,340 more.

If the rate stays at 4.2% the will pay only $139 more and if it gets reduced to 3.1% they will pay $1,073 less than in 2011.