Month: July 2019

If you adopt a child in 2019, you may qualify for a tax credit, and if your employer helped pay for the costs of an adoption, you may be able to exclude some of your income from tax. Here are ten facts you should know about the Adoption Tax Credit.

1. Credit or Exclusion. The credit is nonrefundable. This means that the credit may reduce your tax to zero. If the credit is more than your tax, you can’t get any additional amount as a refund. If your employer helped pay for the adoption through a written qualified adoption assistance program, you may qualify to exclude that amount from tax.

2. Maximum Benefit. The maximum adoption tax credit and exclusion for 2019 is $14,080 per child.

3. Credit Carryover. If your credit is more than your tax, you can carry any unused credit forward. This means that if you have an unused credit in 2019, you can use it to reduce your taxes for 2020. You can do this for up to five years, or until you fully use the credit, whichever comes first.

4. Eligible Child. An eligible child is under age 18. This rule does not apply to persons who are physically or mentally unable to care for themselves.

5. Qualified Expenses. Adoption expenses must be directly related to the adoption of the child and be reasonable and necessary. Types of expenses that can qualify include adoption fees, court costs, attorney fees, and travel.

6. Domestic Adoptions. For domestic adoptions (adoption of a U.S. child), qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment even if the adoption is never finalized.

7. Foreign Adoptions. For foreign adoptions (adoption of an eligible child who is not yet a citizen or resident of the U.S.), qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.

8. Special Needs Child. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you didn’t pay any qualified adoption expenses.

9. No Double Benefit. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you can’t claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

10. Income Limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on the amount of your income.

Please contact the office if you have any questions or would like additional information about this tax credit.

• By Leon Clinton
• July 18, 2019

Active members of the U.S. Armed Forces should be aware that there are special tax benefits available to them such as not having to pay taxes on some types of income or more time to file and pay their federal taxes. If you’re an active member of the armed forces, here’s what you should know about these important tax benefits.

1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.

2. Combat Pay Exclusion. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

3. Earned Income Tax Credit (EITC). You can also elect to include your nontaxable combat pay in your “earned income” when claiming the Earned Income Tax Credit. In 2019, this credit is worth up to $6,557 for low-and-moderate-income service members. A special computation method is available for those who receive nontaxable combat pay. Choosing to include it in taxable income may boost the EITC, meaning that you owe less tax or get a larger refund.

4. Extension of Deadline to File a Tax Return. An automatic extension to file a federal income tax return is available to U.S. service members stationed abroad. Also, those serving in a combat zone typically have until 180 days after they leave the combat zone to file and to pay any tax due.

5. Joint Returns. Both spouses normally must sign a joint income tax return, but if one spouse is absent due to certain military duty or conditions, the other spouse may be able to sign for him or her. A power of attorney is required in other instances. A military installation’s legal office may be able to help with this.

6. ROTC Students. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.

If you have any questions about this topic, don’t hesitate to call.

• By Leon Clinton
• July 14, 2019

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive a Form 1099-C, Cancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. Creditors who forgive $600 or more of debt are required to issue this form.

If you receive a Form 1099-C and the information is incorrect, contact the lender to make corrections. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Please call if you have questions regarding joint liability of canceled debt.

Exceptions and Exclusions

If you have debt forgiven or canceled and receive a Form 1099-C, you might qualify for an exception or exclusion. If your canceled debt meets the requirements for an exception or exclusion, then you don’t need to report your canceled debt on your tax return. Under the federal tax code, there are seven exceptions and five exclusions. Here are the five most commonly used:

1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances

In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance. For example, if an acquaintance or family member loaned you money (and for whom you signed a promissory note) died and relieved you of the obligation to pay back the loan in his or her will, this exception would apply.

2. Cancellation of certain qualified student loans

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as a result of this type of provision, the cancellation of this debt is not included in your gross income. You may also qualify for this exception if you receive student loan repayment assistance or you become permanently and totally disabled.

3. Canceled debt paid by a cash basis taxpayer (most taxpayers) would be deductible

If you use the cash method of accounting, then you do not realize income from the cancellation of debt if the payment of the debt would have been a deductible expense.

For example, in 2018, you own a farm and hire an accounting firm, paying for their services with credit. In 2019, due to financial troubles, you are not able to pay off your farm debts and your accountant forgives a portion of the amount you owe for their services. If you use the cash method of accounting you do not include the canceled debt as income on your tax return because payment of the debt would have been deductible as a business expense.

4. Debt canceled in a Title 11 bankruptcy case

Debt canceled in a Title 11 bankruptcy case is not included in your income.

5. Debt canceled during insolvency

Do not include a canceled debt as income if you were insolvent immediately before the cancellation. In the eyes of the IRS, you would be considered insolvent if the total of all of your liabilities was more than the Fair Market Value (FMV) of all of your assets immediately before the cancellation.

For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).

Here’s an example: Let’s say you owe $25,000 in credit card debt, which you are able to negotiate down to $5,000. You have no other debts and your assets are worth $15,000. Your canceled debt is $20,000. Your insolvency amount is $10,000. Because you are insolvent at the time of cancellation, you are only required to report the $10,000 on your tax return.

Reporting Canceled Debt

If you receive a Form 1099-C, don’t ignore it. Although you may not have to report the entire amount shown on Form 1099-C as income unless you meet one of the exceptions or exclusions discussed above, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on one of the following:

• Schedule 1 (Form 1040 or Form 1040NR), if the debt is a nonbusiness debt;
• Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;
• Schedule E (Form 1040), if the debt is related to non-farm rental of real property;
• Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or
• Schedule F (Form 1040), if the debt is farm debt and you are a farmer.

If you exclude canceled debt from income under one of the form 1099-C exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. If this is the case, then you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.

Exceptions do not require you to reduce your tax attributes.

Please call if you have any questions about whether you qualify for debt cancellation relief.

• By Leon Clinton
• July 11, 2019