When to Stop Claiming your Children as Dependents

There has been a trend in recent years of kids returning home after college to save money.  Whether it's because they're still trying to find that great job, saving to buy a home, or don't know their next move, when it comes to supporting your kids, tax filing can get complicated.  Here are some scenarios in which you still qualify for filing your adult children as dependents, especially if they're still in college.  The limits for exemptions tend to change from year to year, so make sure you're up to date with what tax law requires of how much you're able to claim.

Can You Claim Your Adult Children on Your Taxes?
It's possible, but after they turn 19, the rules become complicated

By Penelope Lemov

All good things come to an end, and in the realm of taxes, that certainly applies to the dependency exemption parents can claim for raising their children. But when exactly does that exemption end?
The $3,800 exemption on 2012 tax returns is a tax break you can claim regardless of whether you itemize or how much money you earn, as long as your son or daughter was under 19 last year. But if your child was 19 or older, well, it’s complicated.

When You Can Claim Adult Children

Here are the rules:

Let’s start with the simplest case. If your child was 19 to 24 and a full-time college student for at least five months of the year, the exemption is yours for the taking, so long as you provided at least half of his or her support.

This isn't a high bar to meet for parents of undergrads or grad students. “If you’re paying for their education, it’s a no-brainer,” says Harold Miller, a CPA in New Haven, Conn. “That’s the largest expense in supporting them.”

When calculating whether you provided more than half of the support, you don’t need to factor in any scholarships or financial aid your child received. Nor do you need to count gifts from grandparents, as long as your son or daughter saved or invested the money.
“If you’re paying for more than half of their support while they are in college, they could have a summer job and earn $5,000, and that’s still OK,” says Barbara Weltman, an attorney and contributing editor at J.K. Lasser’s Your Income Tax 2013.

When Dependency Exemptions Get Complicated
When the kids have completed college and you’re still supporting them, however, the dependency exemption rules get far more complicated.

That’s an increasingly common phenomenon. In the wake of the Great Recession, with a great number of recent college grads unable to find work, many have moved back home. According to the most recent census data, 19 percent of men ages 25 to 34 — and 10 percent of women in the same age range — live with their parents.

For you to claim a child who’s no longer a full-time student, your son or daughter must be what the IRS calls a “qualifying relative.” This is the same category you might use to claim an elderly parent or child [with disabilities]. (For the rules on claiming your parents on your taxes, see “How to Claim Tax Breaks for Supporting Your Parents.”) Another thing you might have to consider: If you were divorced or separated last year, the decision over who gets to take the exemption would be a matter of negotiation.

The Tax Rules Regarding Support
To be a qualifying relative, your child didn’t have to live under your roof in 2012, but you had to provide at least half of his or her support. Here’s the catch: You can take the exemption only if your adult kid earned less in gross income than the exemption is worth ($3,800), regardless of how much you contributed to his or her expenses. So even though your daughter has been trying to gain traction in an exciting career, if she took a part-time gig tending bar in the meantime, that could be the kiss of death, taxwise.

Although the dependency exemption is fairly sizable, keep in mind that it’s a deduction from income, not a credit against your taxes. So its actual value depends on your tax bracket. For example, at the 25 percent bracket (taxable income between $70,700 and $142,700 for couples filing jointly), a $3,800 exemption is worth $950.

“It’s a nice amount, but not anywhere near what it costs to support a child,” says Marty Kurtz, president of the Financial Planners Association and a planner in Moline, Ill.

To read the original article, click here.

15 Things to Keep After Filing & How Long to Keep Them

In Kelly Phillips Erb's own words, a Forbes Tax writer, here are the things you need to keep after filing your return and for how long!

1. As a rule, keep your tax records and supporting documentation until the statute of limitations runs for filing returns or filing for refund. For most taxpayers, that means that you’ll want to keep those records for three years following the date of filing or the due date of your tax return, whichever is later.

2. If you don’t report all of the income that you should report (generally, if you omit more than 25% of the gross income shown on your return), the statute of limitations is extended: you’ll want to keep those records for at least six years. You may also want to get a better tax professional.

3. If you file a clearly fraudulent return or if you don’t file a return at all, the statute of limitations never actually runs. That means that there is no time limit on IRS action. In that event, you’ll want to hold onto your records forever. And in that case, you absolutely want to get a better tax professional and possibly a defense attorney on speed dial.

4. If you file a claim for credit or refund after you file your return, you’ll want to keep your records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.

5. If you are a partner or S corporation shareholder, the statute of limitations is generally controlled by the date of your individual return.

6. If you file an amended return, it does not extend the statute of limitations for your original return. The clock doesn’t restart: the original date determines the statute of limitations (some exceptions apply if you file within 60 days of the assessment window).

7. You’ll want to keep supporting documentation for as long as the statute of limitations runs. Supporting documentations for your tax returns includes not only your forms W-2 and 1099 but also bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

8. Don’t forget about those Obamacare requirements. Beginning with the 2014 tax year (the return you filed in 2015), you’ll need to keep records of minimum essential health insurance coverage or proof that you qualified for an exemption or premium tax credit (especially if you had to pay it back).

9. If you make nondeductible contributions to a traditional IRA, hold onto those records until you make a complete withdrawal/distribution: you don’t want to pay tax on those twice. But don’t stop there. As a rule of thumb, you should hold onto all IRA records – including Roth contributions – until you withdraw all of the money from the account.

10. If you claim depreciation, amortization, or depletion deductions, you’ll want to keep related records for as long as you own the underlying property. That includes deeds, titles and cost basis records.

11. If you claim special deductions and credits, you may need to keep your records longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for seven years).

12. If you have employees, including household employees, keep your employment tax records for at least four years after the date that payroll taxes become due or is paid, whichever is later. This should include forms W-2 and W-4, as well as related pay information including benefit forms.

13. If you claim any other special tax benefits not mentioned above (for example, the first time homeowner’s credit), a good rule of thumb is to keep your records for as long as the tax benefit runs plus three years.

14. If you own property that will result in a taxable event at sale or disposition (like stocks, bonds or your home), you’ll want to keep records which support your related tax consequences (capital gains, etc.) until the disposition of the property plus three years. That means, for example, that you should keep records related to your home, including home improvements, for as long as you own the house. Remember that you’re entitled to exclude up to $250,000 of gain on the sale of your home ($500,000 if married filing jointly) – so keep excellent records of the cost of the home as well as any improvements or other adjustments to basis.

15. If you receive property as the result of a gift or inheritance, you’ll want to keep records that support your basis in that property. Generally, if you inherit property, your basis is the stepped up value as of the date of death; if you receive a gift, your basis is the same as the donor’s basis. Don’t toss those old records just because you’re the new owner of the assets.

The full article "Tax Records You Should Keep After Tax Day (And How Long to Keep Them)" By Kelly Phillips Erb can be found here.