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It doesn’t matter if you own a business or work for someone else, paying taxes is an essential part of life. You cannot avoid paying taxes. Not paying your taxes can result in expensive fines or even jail time, which is why you want to make sure to follow all the laws and processes and file your taxes accurately and on time.
If you’re not an accountant, taxes can be a hard thing to understand. There are so many different rules regarding filing, and there are so many different credits you can claim depending on income, filing status, employment, etc.
Although learning everything about taxes may require you to take some classes or do a lot of research, there are basic questions and answers that most people have regarding their taxes that are answered below. The following are some of the most common tax payment questions and answers.
Q: I want to claim my child as a dependent. Is there an age limit?
Yes, there are certain requirements in place in order to claim your child as a dependent. First, your child must be younger than you. While this may sound silly, the law refers to stepchildren, adopted children and conservatorships. Second, at the end of the calendar year, your child must be either younger than 19 years old or be enrolled as a student and younger than 24 years old.
Q: Who can I claim as a dependent?
Some people think that a dependent needs to be a child, but this is not true. You are allowed to claim a child or a relative as a dependent as long as they meet certain requirements that are related to relationship with you, residency, income, and financial support you have provided. Spouses can also qualify as dependents depending on the same requirements. Because the regulations are so in depth, it may be a smart decision to use an accountant or accounting package to process your taxes. These individuals or programs can help make filing taxes easier and explain all the items in more detail.
Q: Do I have to claim a child as a dependent in order to file as head of household?
In order to be considered a head of household, you must meet the following criteria:
- Be unmarried
- Have paid more than half of the cost of keeping up a home
- Have a qualifying dependent live in the home for at least half of the year
As for claiming a child, you do not have to claim a child as a dependent in order to file as head of household.
Q: What should I do if I made a mistake on my taxes that have already been filed?
Mistakes happen, and the IRS understands this. The IRS looks over the filed taxes before submitting refunds or other tax-related information. If the IRS catches your mistake, they will reach out to you with specific directions as to what you need to do in order to correct the mistake.
If the mistake is something you noticed that the IRS may not catch, such as forgetting to report all income, you will need to file an amended tax return. This is done by filling out Form 1040X, and you have up to three years to report an amended tax return. Amended tax returns are usually not processed as quickly as original taxes, so if your amendment will result in a refund, do not expect it to land in your bank account for at least two to three months.
Q: I have my own business. What can I deduct on my taxes?
There are many different items you can deduct for business on your taxes, including company vehicles, home office supplies, and even mortgage or rent payments. See a list of deductible home office expenses in order to receive a more detailed list.
A current Internal Revenue Service employee revealed during a closed-door interview with congressional staffers that the agency is still subjecting Tea Party groups with a level of scrutiny that it doesn’t apply to other applicants for nonprofit tax exempt status.
The news comes three months after the IRS was forced to admit it targeted conservative organizations with special screening based on ideological suggestive words in their names.
The employee, whose job entails evaluating new tax-exempt applications, told House Ways and Means Committee investigators that “secondary screening” is still employed inside the IRS because no one has told rank and file workers how to handle applications from Tea partiers.
Ways and Means chairman Rep. Dave Camp told the Washington Examiner that the continued targeting program is “outrageous”.
A committee aide added that “in plain English, the IRS is still targeting tea party cases”.
In an August 1 transcript released Thursday by Camp’s staff, a Ways and Mean committee staffer asked the newest IRS witness: “How do you analyze advocacy cases. If, for example, Tea Party of Arkansas came in today, how would you handle it?”
The IRS has faced angry opposition from conservatives since it admitted in May that it subjected tea party groups to more intense screening than it applied to other applicants for tax-exempt status
After clarifying that a previous “Be On The Lookout” list no longer targeted groups based on their names alone, the agent said: “If a political advocacy case came in today, I would give it – or talk about it to my manager because right now we really don’t have any direction or we haven’t had any for the last month and a half.”
The interviewer asked what would happen: “If today … a case from a tea party group came in to your desk, you reviewed the file and there was no evidence of political activity, would you potentially approve that case? Is that something you would do?”
“At this point,” the agent replied, “I would send it to secondary screening, political advocacy … based on my current manager’s direction.”
In an August 6 Washington Post op-ed, Camp and House oversight committee chairman Rep. Darrell Issa wrote: “The White House and its allies have engaged in a flailing effort to put this scandal behind them.”
But the new revelations will practically guarantee that the IRS scandal will continue to consume committee hearing time when Congress returns from its month-long recess.
“When the scandal was first revealed,” wrote Darrell Issa, “the president promised the American people that the administration would <<hold the responsible parties accountable>>. Yet upon the direction of the president, new IRS acting Commissioner Daniel Werfel ordered a 30-day review, upon which Werfel claimed the agency found no “evidence of intentional wrongdoing by anyone in the IRS.”
The White House, they claimed, “has vacillated between indifference and acknowledgment of inappropriate IRS behavior”.
“Consider this: On the same day President Obama bemoaned the <<phony scandals>> plaguing his administration, his chief spokesman, Jay Carney, allowed that <<we need to get to the bottom of what happened at the IRS>>. Which is it?”
Acting head of the US Internal Revenue Service (IRS) Steven T. Miller has quit after it emerged his staff singled out conservative groups for extra scrutiny, President Barack Obama has announced.
Treasury Secretary Jack Lew had asked for and accepted the resignation of IRS Acting Commissioner Steven Miller, he said.
“I will do everything in my power to make sure nothing like this happens again,” Barack Obama told a news conference.
The scandal has been one of several to rattle the White House in recent days.
Earlier on Wednesday, Attorney General Eric Holder faced four hours of questioning at a Congressional hearing on the IRS, the secret seizure of phone records from the Associated Press news agency, and the attack on the US consulate in the Libyan city of Benghazi.
Eric Holder told the House judiciary committee that it would take time for the FBI to determine if any laws had been broken by IRS personnel.
In a short statement to reporters at the White House, President Barack Obama said he had reviewed the Treasury Inspector General for Tax Administration (TIGTA) report on the IRS’s targeting of conservative groups and found the “misconduct” uncovered was “inexcusable”.
“Americans are right to be angry about it, and I am angry about it,” the president said.
“I will not tolerate this kind of behavior in any agency, but especially in the IRS, given the power that it has and the reach that it has into all of our lives.”
“The IRS has to operate with absolute integrity.”
Steven T. Miller has quit as IRS head after it emerged his staff singled out conservative groups for extra scrutiny
To that end, Barack Obama revealed that the treasury secretary had requested and accepted the resignation of acting commissioner of the IRS.
“It’s important to institute new leadership that can help restore confidence going forward.”
Barack Obama said the treasury department would also put in place new safeguards to “make sure this kind of behavior cannot happen again” and that the IRS would begin implementing the TIGTA’s recommendations immediately.
In a letter to colleagues, Steven Miller said he would leave his role in June.
“There is a strong and immediate need to restore public trust in the nation’s tax agency,” he added.
Steven T. Miller took over leadership of the agency in November, when the five-year term of Commissioner Douglas Shulman ended.
At the time when conservative groups were targeted, Steve Miller was a deputy commissioner who oversaw the division responsible.
On Tuesday, the Treasury Inspector General for Tax Administration’s report on the scandal placed the blame on “ineffective management”.
It found IRS managers had allowed “inappropriate criteria” to be developed and stay in place for more than 18 months, resulting in “substantial delays” in processing applications for tax-exempt status, and requests for “unnecessary information”, such as lists of donors.
Among the criteria used by the IRS Determinations Unit to flag groups for review, the TIGTA said, were having words like “Tea Party”, “Patriots” and “9/12” in their names; or manifestos that focused on the government’s fiscal policy and educating the public to “make America a better place to live”, or criticized how the country was being run.
Senior IRS officials told the watchdog that the decision to focus on conservative groups had not been influenced by any individual or organization outside the agency.
Some Republicans, including two high-profile governors, have called for a special prosecutor to investigate.
House Speaker John Boehner told reporters earlier on Wednesday: “My question is, who’s going to jail over this scandal?”
At least three Congressional panels are planning hearings, and House judiciary committee member Representative Darrell Issa said he had asked five mid-level IRS employees be made available for questioning.
Dionne Warwick has filed for bankruptcy in the US after amounting debts of almost $10 million in taxes since 1991.
Dionne Warwick’s liabilities include nearly $7 million owed to the Internal Revenue Service (IRS) from 1991 to 1999 and more than $3 million in business taxes owed to the state of California, where she lives.
The singer has sold more than 100 million records since the 1960s.
Dionne Warwick’s publicist said she had been the victim of poor financial management.
Dionne Warwick has filed for bankruptcy in the US after amounting debts of almost $10 million in taxes since 1991
He added that the 72-year-old singer had paid back the actual amount of the taxes but not penalties and interest that had accumulated over the years.
In documents filed in her home state of New Jersey this month, Dionne Warwick listed about $21,000 in monthly income and a similar amount in monthly expenses.
Her publicist said she had “repeatedly attempted to offer re-payment plans and proposals to the IRS and the California Franchise Tax Board for taxes owed”.
Dionne Warwick, cousin of the late Whitney Houston, won her first of five Grammy awards in 1968 with Do You Know The Way To San Jose?.
The second award came two years later, for the album I’ll Never Fall In Love Again.
Dionne Warwick has sold more than 100 million records and has enjoyed more charts hits than almost any other female singer.
Last March, Dionne Warwick celebrated 50 years in show business with a special event at the Grammy Museum in Los Angeles.
To mark the anniversary Dionne Warwick released Now, an album featuring new versions of some of her most famous songs.
Lindsay Lohan’s bank accounts have been seized by the Internal Revenue Service (IRS) so the US government can recover some of the huge outstanding tax debt she owes.
The government previously filed liens against Lindsay Lohan for 2009 and 2010, claiming she owes $233,904 in unpaid federal taxes.
Lindsay Lohan, 26, has already been helped out by her friend Charlie Sheen, who gave her $100,000 to help her get back on track with her finances, but sources tell website TMZ she’s still falling dramatically short, as she also owes money for 2011.
She has spent most of this year trying to get her career back on track, and after filming roles in TV movie Liz and Dick and The Canyons as well as stripping off naked for a Playboy photo shoot, she is set to earn more than $2 million by the end of this year.
After a lengthy bout of legal troubles and spells in jail and rehab came to an end earlier this year, last week she was involved in an altercation at a New York nightclub, leading to charges of third degree misdemeanor assault, which she denies.
Lindsay Lohan’s bank accounts have been seized by the IRS so the government can recover some of the huge outstanding tax debt she owes
Lindsay Lohan had also been charged with lying to police about being behind the wheel of a car accident in June, and could have her probation revoked.
She is also reportedly refusing to enter rehab, telling friends who are trying to get her to seek help she doesn’t need to go to a treatment facility for the sixth time.
Sources have said she has been drinking up to two liters of vodka a day.
Meanwhile it has emerged Lindsay Lohan is “freaked out” about the possibility of spending Christmas behind bars.
Republican presidential candidate Mitt Romney has released his much-anticipated 2011 tax return, which shows he paid a rate of 14.1%.
Mitt Romney paid $1.9 million in taxes in 2011, on $13.7 million of income.
The private equity tycoon has already released his 2010 tax return, for which he paid about $3 million, a 13.9% rate.
The top rate of income tax in the US is 35%, but Mitt Romney lives mainly on income derived from his investments, for which only 15% tax is payable.
Critics, including President Barack Obama, whom Mitt Romney will challenge for the White House in November, have called on him to release more tax returns.
Mitt Romney has released his much-anticipated 2011 tax return
Mitt Romney’s 2011 tax rate of 14.1% compares with a previous estimate of 15.4% for the year by his aides. The Romneys filed their 2011 return with the Internal Revenue Service on Friday after applying for an extension earlier in the year.
The campaign also released a letter from his accountants with a summary of his returns from 1990-2009, which said he paid an effective average of 20.2% over the period, with the lowest return at 13.66%.
The move came amid attempts by the Romney campaign to shift the focus of recent days away from remarks he made at a private donor dinner.
In the video secretly recorded earlier this year, he disparages Barack Obama voters, saying they pay no income tax.
Mitt Romney’s critics say he should follow the example of his father, former Michigan Governor George Romney, who released a dozen years of tax returns during his own unsuccessful run for president in 1968.
But the former Massachusetts governor has said he is following 2008 Republican White House candidate John McCain’s example of releasing two years of taxes.
Barack Obama’s 2011 tax return showed he paid an effective rate of 20.5%, on an income of $789,674.
On average, US middle-income families, those making from $50,000 to $75,000 a year, pay 12.8%, according to congressional research.
As he released his 2010 return in January this year, Mitt Romney said he had paid “all the taxes that are legally required and not a dollar more”.
But according to Brad Malt, the trustee that controls Mitt Romney’s wealth as he runs for president, the Romneys donated $4 million to charity in 2011, claiming $2.25 million of it as a deduction.
“The Romneys thus limited their deduction of charitable contributions to conform to the Governor’s statement in August, based upon the January estimate of income, that he paid at least 13% in income taxes in each of the last 10 years,” Brad Malt said.
The campaign has stressed that the blind trust run by Brad Malt means that the candidate is making no decisions on how his money is invested.
Tax law experts say the release of the 2011 return – and the summary of the past 20 years – will do little to silence questions about Mitt Romney’s past tax liability, including the source of a $100 million retirement account and the tax advantages of his offshore investments.
US medal-winning athletes at the Olympics will have to pay tax on their prize money – something which is proving controversial in the US.
But why are athletes from the US taxed when others are not?
The US, unlike most countries, has a “worldwide” system of tax, which means that money earned abroad is liable for US tax.
The US is right up there in the medals table, and has produced some of the finest displays in the Olympics so far.
Michael Phelps has broken the record for most Olympic medals ever, and 16-year-old rising star Gabby Douglas has won the all-round gold in the gymnastics – the first African-American woman to do so.
So the US is feeling pretty proud of its athletes right now. But not everyone is happy to hear that their Olympic medal-winning athletes are being taxed on their medal prize money.
Athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, a Republican, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money.
“Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home,” said Marco Rubio.
This, he said, is an example of the “madness” of the US tax system, which he called a “complicated and burdensome mess”.
US medal-winning athletes at the Olympics will have to pay tax on their prize money
The US Olympic Committee awards prize money to its medal winners – $25,000 for gold, $15,000 for silver, and $10,000 for bronze.
This money is considered taxable income by the US Internal Revenue Service (IRS).
According to the advocacy group Americans for Tax Reform (ATR), an athlete on the highest rate of tax (35%), could face a tax bill of $8,750.
The value of the medals themselves could be subject to tax too, according to the ATR – adding a further $236, $135 and $2 respectively for gold, silver and bronze.
The Olympic example highlights what they regard as the underlying problem of the US’ so-called “worldwide” tax model.
Under this system, earnings made by a US citizen abroad are liable for both local tax and US tax.
Most countries in the world have a “territorial” system of tax and apply that tax just once – in the country where it is earned.
With the Olympics taking place in London, the UK would, in theory, be entitled to claim tax on prize money paid to visiting athletes. But, as is standard practice for many international sporting events, it put in place a number of tax exemptions for competitors in the Olympics – including on any prize money.
That means that only athletes from countries with a worldwide tax system on individual income are liable for tax on their medals.
And there are only a handful of them in the world, says Daniel Mitchell, an expert on tax reform at the Cato Institute, a libertarian think tank – citing the Philippines and Eritrea as other examples.
But with tax codes so notoriously complicated, unravelling which countries would apply this in the context of Olympic prize money is a tricky task, he says.
Daniel Mitchell is a critic of the worldwide system, saying it effectively amounts to “double taxation” and leaves the US both at a competitive disadvantage, and as a bullyboy, on the world stage.
“We are the 800 lbs [360kg] gorilla in the world economy, and we can bully other nations into helping enforce our bad tax law.”
The tax burden may not be as heavy as it first appears, however, as there are a number of credits and tax treaties which can either exempt or reduce the amount due, says tax lawyer and blogger, Kelly Phillips Erb.
She believes that the US tax system needs to be modified, and – most importantly – simplified.
The Rubio bill – by adding another exemption to the already complicated tax code – would only make matters worse, she says.
Congress is about to go off on a one-month recess, and with the Olympics already well underway, this is, says Kelly Phillips Erb, more about “political grand-standing” than anything else.
Not all athletes get prize money along with an Olympic medal – it depends what country you come from.
Money is not awarded by the International Olympic Committee. The decision whether to offer prize money is made by the national Olympic Committees in each individual country, who also set the sum.
At the opposite end of the scale is Singapore, which is offering $800,000 (£515,000) for a gold medal.
Many countries in Central Asia are also offering large sums to medal winners.
John Hoberman, a sports historian and expert on doping at the University of Texas at Austin, says Americans are focusing on the wrong issue.
The real question, he believes, is whether athletes should be awarded prize money at all at the Olympics – and he is firmly in the “no” camp.
“Cash incentives are just an incentive to cheat,” says John Hoberman.
He believes the more money you offer, especially in poorer countries, the greater the chance an athlete will be tempted to dope.
How much for a gold medal at London 2012 Olympics:
• Singapore – $800,000
• Kazakhstan – $250,000
• Kyrgyzstan – $200,000
• Uzbekistan – $150,000
• Russia – $135,000
• Tajikistan – $63,000
• US – $25,000
• Australia – $20,000 plus face on a stamp
• UK – No money – but their face on a stamp
In 2011, almost 1,800 people renounced their U.S. citizenship or handed in their Green Cards and many of them said it was because of tax reasons.
That’s a record number since the Internal Revenue Service began publishing a list of those who renounced in 1998. It’s also almost eight times more than the number of citizens who renounced in 2008, and more than the total for 2007, 2008 and 2009 combined.
The United States is one of the only countries to tax its citizens on income earned while they’re living abroad. And just as Americans stateside must file tax returns each April – this year, the deadline was yesterday, April 17 – an estimated 6.3 million U.S. citizens living abroad brace for what they describe as an even tougher process of reporting their income and foreign accounts to the IRS. For them, the deadline is June.
The National Taxpayer Advocate’s Office, part of the IRS, released a report in December that details the difficulties of filing taxes from overseas. It cites heavy paperwork, a lack of online filing options and a dearth of local and foreign-language resources.
For those wishing to legally escape the filing requirements, the only way is to formally renounce their U.S. citizenship.
In 2011, IRS records show that at least 1,788 people did, and that’s likely an underestimate. The IRS publishes in the Federal Register the names of those who give up their citizenship, and some who renounced say they haven’t seen their name on the list yet.
In fact, Superman declared plans to renounce his U.S. citizenship a year ago, in Action Comics.
“Truth, justice, and the American way – it’s not enough anymore,” the comic book superhero said, after both the Iranian and American governments criticized him for joining a peaceful anti-government protest in Tehran.
In 2011, almost 1,800 people renounced their U.S. citizenship or handed in their Green Cards and many of them said it was because of tax reasons
The State Department said records it keeps differ from those published by the IRS. They indicate that renunciations have remained steady, at about 1,100 each year, said an official.
The decision by the IRS to publish the names is referred to by lawyers as “name and shame”. That’s because those who renounce are seen as willing to give up their citizenship primarily for financial reasons.
There’s also an “exit tax” for the very rich who choose to leave. During the last 25 years, a number of millionaires and billionaires have renounced their citizenship. Among them: Ted Arison, the late founder of Carnival Cruises, and Michael Dingman, a former Ford Motor Co. director.
But those of more modest means renounce, too. They say leaving America is about more than money, it’s about privacy and red tape.
Two filing requirements affect Americans abroad: the Report of Foreign Bank and Financial Accounts – which has been around since 1970 but now carries penalties for noncompliance – and the Foreign Account Tax Compliance Act, passed in 2010 with the aim of reducing offshore tax evasion.
The first regulation requires all Americans, including those living abroad, with at least $10,000 in overseas bank accounts, to file a supplementary form disclosing all of their foreign accounts.
That includes any accounts in which the U.S. citizen has a financial interest. That could include a joint account with a spouse or child, accounts for corporations in which the American owns more than 50% of the value of shares of stock, or any trust or estate that benefits the U.S. citizen.
The tax compliance act – the newer law – asks foreign financial institutions such as banks, hedge funds, and private equity funds to provide the IRS with information on U.S. clients.
The United States and five European Union countries recently announced their intent to allow institutions to report the information through their own governments, rather than directly to the IRS.
Institutions that do not comply will be subject to a 30% withholding tax on certain U.S. – sourced payments and proceeds of property sales beginning in the 2013 tax year – for instance, dividends on investments in U.S. companies.
Some expatriates say they were unaware of the first regulation for years and even decades. In 2008, the IRS received only 218,840 such filings. American nationality law grants citizenship to almost everyone born in the United States or born abroad to American parents, regardless of how much time they’ve spent in the United States. Many may not even know the extent of their U.S. ties.
In 2004, the stakes for noncompliance rose. Failure to file meant potential fines and criminal charges. Americans abroad can be punished for noncompliance even if they owed no income tax – and IRS data show that most of them don’t owe money.
Income up to $95,100 isn’t taxed under a rule called the Foreign Earned Income Exclusion. In 2009, the income cap was $91,400, and 88% of all taxpayers claiming the foreign earned income exclusion owed nothing.
Since 2008, the IRS has offered several voluntary-disclosure grace periods during which expatriates can file back taxes without facing criminal charges – but with the possibility of incurring penalties.
Marylouise Serrato, head of American Citizens Abroad, a non-profit organization based in Geneva, says that many members feel scared about reporting requirements they did not know existed. Their disenchantment, she says, is pushing some to renounce.
“Americans abroad are terrified. We’ve had people pay tens of thousands of dollars in fines. We’ve had people … pay huge amounts of back taxes,” Marylouise Serrato says.
“Up to this point, we never heard of anyone renouncing, or if they did, they didn’t talk about it,” says Marylouise Serrato, who says her group does not advocate renunciation.
“Now, we’re seeing a lot of people speak openly about it and come to us for information.”
Congress is taking note. “While I fully support measures that reduce fraud and address offshore havens, the U.S. should not have policies that place undue burdens on legitimate Americans abroad,” says Representative Carolyn Maloney, D-NY, and the chair of the Congressional Americans Abroad Caucus.
Carolyn Maloney says she has taken the matter to the Department of the Treasury, which oversees the IRS.
The IRS did not respond to requests for comment.
Lawyers report that banking is a big reason why people renounce.
“I hear about banking problems again and again and again,” says Phil Hodgen, an attorney who has been helping Americans expatriate since 2008.
The new reporting rules, he says, pose “a huge administrative burden. It’s made Americans too expensive to keep”.