Month: February 2020

Claiming an Elderly Parent or Relative as a Dependent

Are you taking care of an elderly parent or relative? Whether it’s driving to doctor appointments, paying for nursing home care or medical expenses, or handling their personal finances, dealing with an elderly parent or relative can be emotionally and financially draining, especially when you are taking care of your own family as well.

Fortunately, there is some good news: You may be able to claim your elderly relative as a dependent at tax time, as long as you meet certain criteria.

Here’s what you should know about claiming an elderly parent or relative as a dependent:

Who Qualifies as a Dependent?

The IRS defines a dependent as a qualifying child or relative. A qualifying relative can be your mother, father, grandparent, stepmother, stepfather, mother-in-law, or father-in-law, for example, and can be any age.

There are four tests that must be met in order for a person to be your qualifying relative: not a qualifying child test, member of household or relationship test, gross income test, and support test.

Not a Qualifying Child

Your parent (or relative) cannot be claimed as a qualifying child on anyone else’s tax return.

Residency

He or she must be U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; however, a parent or relative doesn’t have to live with you in order to qualify as a dependent.

If your qualifying parent or relative does live with you, however, you may be able to deduct a percentage of your mortgage, utilities, and other expenses when you figure out the amount of money you contribute to his or her support.

Income

To qualify as a dependent, income cannot exceed the personal exemption amount, which in 2019 was $4,200 ($4,300 in 2020). In addition, your parent or relative, if married, cannot file a joint tax return with his or her spouse unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

Support

You must provide more than half of a parent’s total support for the year such as costs for food, housing, medical care, transportation and other necessities.

Claiming the Dependent Care Credit

You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

In addition, expenses you paid for the care of a disabled dependent may also qualify for a medical deduction (see next section). If this is the case, you must choose to take either the itemized deduction or the dependent care credit. You cannot take both.

Claiming the Medical Deduction

If you claim the deduction for medical expenses, you still must provide more than half your parent’s support; however, your parent doesn’t have to meet the income test.

The deduction is limited to medical expenses that exceed 7.5 percent and you can include your own unreimbursed medical expenses when calculating the total amount. If, for example, your parent is in a nursing home or assisted-living facility. Any medical expenses you paid on behalf of your parent are counted toward the 7.5 percent figure. Food or other amenities, however, are not considered medical expenses.

What if you share caregiving responsibilities?

If you share caregiving responsibilities with a sibling or other relative, only one of you – the one proving more than 50 percent of the support – can claim the dependent. Be sure to discuss who is going to claim the dependent in advance to avoid running into trouble with the IRS if both of you claim the dependent on your respective tax returns.

Sometimes, however, neither caregiver pays more than 50 percent. In that case, you’ll need to fill out IRS Form 2120, Multiple Support Declaration, as long as you and your sibling both provide at least 10 percent of the support towards taking care of your parent.

The tax rules for claiming an elderly parent or relative are complex but if you have any questions, help is just a phone call away.

• By Leon Clinton
• February 14, 2020

ACA Reporting Requirements for Employers

The health care law contains tax provisions that affect employers and it is the size and structure of a workforce that determine which parts of the law apply to which employers. Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates during the year.

Two parts of the Affordable Care Act apply only to applicable large employers. These are the employer shared responsibility provisions and the employer information reporting provisions for offers of minimum essential coverage.

The number of employees an employer has during the current year determines whether it is an applicable large employer (ALE) for the following year. For example, you will use information about the size of your workforce during 2019 to determine if your organization is an ALE for 2020.

Applicable large employers are generally those with 50 or more full-time employees or full-time equivalent employees. Under the employer shared responsibility provision, ALEs are required to offer their full-time employees and dependents affordable coverage that provides minimum value. Employers with fewer than 50 full-time or full-time equivalent employees are not applicable large employers.

Who is a Full-time Employee?

There are many additional rules on determining who is a full-time employee, including what counts as hours of service, but in general:

• A full-time employee is an employee who is employed on average, per month, at least 30 hours of service per week, or at least 130 hours of service in a calendar month.
• A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.
• An aggregated group is commonly owned or otherwise related or affiliated employers, which must combine their employees to determine their workforce size.

Figuring the Size of the Workforce

To determine your workforce size for a year, you add your total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divide that total number by 12. If the result is 50 or more employees, you are an applicable large employer.

Employers with Fewer than 50 Employees

If an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is not an ALE for the current calendar year. Therefore, the employer is not subject to the employer shared responsibility provisions or the employer information reporting provisions for the current year.

Information Reporting (Including Self-Insured Employers)

All providers of health coverage, including employers that provide self-insured coverage, must file annual returns with the IRS reporting information about the coverage and about each covered individual. The coverage is reported on Form 1095-B, Health Coverage and the employer must also furnish a copy of Form 1095-B to the employee by March 2, 2020.

Tax Credits

Certain employers may be eligible for the small business health care tax credit if they:

1. cover at least 50 percent of employees’ premium costs
2. have fewer than 25 full-time equivalent employees with average annual wages of less than $54,200 in 2019 (indexed for inflation)
3. purchase their coverage through the Small Business Health Options Program.

Employers with fewer than 50 full-time employees or full-time equivalent employees are not subject to the employer shared responsibility provisions.

Employers with 50 or More Employees

Information Reporting

All employers including applicable large employers that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.

Applicable large employers must file an annual return–and provide a statement to each full-time employee–reporting whether they offered health insurance, and if so, what insurance they offered their employees.

ALEs are required to furnish a statement to each full-time employee that includes the same information provided to the IRS by March 2, 2020. ALEs that file 250 or more information returns during the calendar year must file the returns electronically.

Employer Shared Responsibility Payment

ALEs are subject to the employer shared responsibility payment if at least one full-time employee receives the premium tax credit and any one these conditions apply. The ALE:

• failed to offer coverage to full-time employees and their dependents
• offered coverage that was not affordable
• offered coverage that did not provide a minimum level of coverage

Questions? Don’t hesitate to call.

• By Leon Clinton
• February 12, 2020

2020 Tax Withholding: the new Form W-4

Form W-4, Employee’s Withholding Certificate has been redesigned for 2020. Previously, income tax withholding was based on an employee’s marital status and withholding allowances or tied to the value of the personal exemption. With the revised Form W-4, however, income tax withholding is generally based on the worker’s expected filing status and standard deduction for the year. Furthermore, workers can also choose to have itemized deductions, the Child Tax Credit and other tax benefits reflected in their withholding for the year.

The redesigned Form W-4 makes it easier for withholding to match tax liability. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.

Here’s what taxpayers should know about the new Form W-4 for 2020:

The form is divided into 5 steps. The only two steps required for all employees are Step 1, where you enter personal information such as your name and filing status, and Step 5, where you sign the form – the form is not valid unless it is signed and dated by the employee. Taxpayers should only complete Steps 2 – 4 only if they apply to your tax situation because doing so will make your withholding more accurately match your liability.

All new employees starting employment in 2020 are required to fill out the new Form W-4; however, employees who have furnished Form W-4 in any year before 2020 are not required to furnish a new form merely because of the redesign. Employers will simply continue to compute withholding based on the information from the employee’s most recently furnished Form W-4.

Employees with a change in life events such as marriage, buying a house, or the birth of a child, however, may want to fill out the form, however.

It is important for people with more than one job at a time (including families in which both spouses work) to adjust their withholding to avoid having too little withheld. For most taxpayers, using the Tax Withholding Estimator located on the IRS website is the most accurate way to do this, although they may fill out the Multiple Jobs Worksheet found in the instructions instead.

If a spouse works both should check the box on their respective Forms W-4; however, only one spouse should fill out the rest of the form (i.e., Steps 3 and 4). If not, and both spouses claim the child tax credit, for example, it is possible that not enough will be withheld and they will owe money at tax time.

Withholding will be most accurate if the highest paid spouse completes Steps 3–4(b) on the Form W-4.

As in the past, employees can also choose to have an employer withhold an additional flat-dollar amount each pay period to cover, for example, income they receive from the gig economy, self-employment, or other sources that are not subject to withholding.

If you have any questions about tax withholding, need assistance filling out the redesigned 2020 Form W-4, or would like more information about this topic, don’t hesitate to call.

• By Leon Clinton
• February 9, 2020