Claiming your children as dependents as a divorced couple can be complex, since you are more than likely to file two separate tax returns. In this blog, we will review some exceptions for dependents of divorced parents and rules outlined by the IRS.
Only one parent can claim a child as a dependent in a tax year; divorced parents cannot both claim the same child as a dependent in a tax year. The custodial parent will generally claim the qualifying children as dependents on their return. However, some custodial agreements allow for yearly alternated claiming of children. According to the IRS, these common factors allow a custodial parent to claim a child as a dependent:
The parent that the child spends the most nights with during the year is the custodial parent. The other parent is the noncustodial parent.
The custodial parent typically claims the child on their tax return based on the residency test which states that the child must live with you for more than half of the tax year.
The parent with the higher adjusted gross income is the custodial parent if the child spent an equal number of nights with each parent over the course of the tax year.
There are tie-breaker rules if a child can be a qualifying child for both parents. Although a child may meet the requirements to be a qualifying child of both parents, only one of the parents can claim the child as a dependent. Please go to the IRS website for more information about tie-breaker rules.
In some cases, non-custodial parents may be able to claim a qualifying child if the custodial parent releases the dependency exemption for a given year. The custodial parent must fill out Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, and then give the signed form to the non-custodial parent to submit with their tax return. It’s important for parents to have clear communication regarding claiming a child and the resulting exemptions.
There are various credits and deductions that you may be able to qualify for when claiming a child as a dependent according to the IRS:
• Child Tax Credit (CTC)– provides tax credits for individuals who claim a child as a dependent, if the child meets certain conditions
• Additional Child Tax Credit (ACTC)– provides additional tax credits for individuals with qualifying dependents; you can claim the ACTC if you claim the CTC, but you cannot take the ACTC if you are only claiming the Credit for Other Dependents (ODC).
• Earned Income Tax Credit (EITC)– helps families and workers with low to moderate incomes to receive a tax benefit; if eligible, the credit can be used to lower your tax liability and possibly increase your tax refund.
• Child and Dependent Care Credit– You may be entitled to claim this credit for child and dependent care expenses if you hired someone to look after your child or another qualifying dependent so that you (and your spouse if filing jointly) could work or look for a job. By including the Credit for Child and Dependent Care Expenses on your tax return, you may be able to lower your federal income tax.
• Education credits– assist with the cost of higher education by lowering the amount of tax due on your tax return; you can receive a refund (up to $1,000) if the credit lowers your tax to less than zero.
• Medical expense deductions– You may qualify for this deduction if you have expenses associated with cure, diagnosis, mitigation, prevention, or treatment of a disease. Payments for legitimate medical services provided by doctors, surgeons, dentists, and other medical professionals are also included within these costs; they cover the price of the tools, materials, and diagnostic equipment required for these objectives.
Note that all the above credits have their own rules and qualifications, check the IRS website for the specific requirements. Also, refer to your local state websites for any additional credits and deductions.
This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding dependency exemptions, please do not hesitate to contact us at Lear & Pannepacker.
Did you know that to claim a childcare tax credit, you need to show expenses that qualify for the credit and have documentation to back up any childcare-related expenses? If you are thinking about claiming this credit, it is important to understand the process and how it works. If curious about state tax laws regarding childcare credits, your state tax website should have all the information you will need.
Your expenses will qualify if you pay someone to care for your child while you are at work for the day. However, when it comes to what expenses qualify for the childcare tax credit, you must prove that you are actively paying someone while you and your spouse are working. For example, if during the summer months you pay for a day camp to watch your children as you and your spouse work during the week, the cost of the camp would qualify as an expense for the childcare tax credit. However, if you decide to send your child to that same day camp on the weekend because you or your spouse wanted to go on a personal trip, it will not count as a qualified expense. It is important to note that if you and your spouse are filing separately, there are special rules and requirements you may have to follow. Please check the IRS website for more information.
In order to claim the childcare tax credit, you need to have earned income. You must summarize childcare expenses through the filing of Form 2441, Child and Dependent Care Expenses. You will need your childcare provider to fill out a Form W-10 in order to obtain pertinent information such as their name, address, and taxpayer identification number. If you are unable to get a W-10 you will need the following documents from the childcare provider: social security card, a copy of the provider’s W-4 or employee withholding certificate if they are a household employee, a copy of the statement furnished by your employer if they provide the service, and a recently printed letterhead or invoice that shows their name, address, and TIN. After obtaining these forms, you should have enough information to fill out Form 2441, Child and Dependent Care Expenses.
This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding child and dependent care expenses, please do not hesitate to contact us at Lear & Pannepacker.
Remaining compliant with IRS guidelines and regulations is essential for any individual and business. Forms 1099 play a major role during tax preparation since they are a resource for the IRS to verify the accuracy of income being reported. It is important to have proper guidance regarding 1099 filing requirements and deadlines since it could potentially impact your own tax filings and those of others within your business network. The summary below outlines the purpose of a Form 1099, how to recognize if any 1099s required to be filed on your behalf, and the necessary steps to report income if you receive a 1099.
Form 1099 Overview
Form 1099 is an informational tax document which reports certain financial transactions that occurred during the year. Under federal law, individuals and businesses are required to issue a 1099 to any independent contractor to whom they have paid more than $600 throughout the year. In general, you are required to issue 1099-NEC and/or 1099-MISC forms to non-employees (independent contractors, partnerships, LLCs, etc.) who were paid $600 or more for services they provided to your business (like cleaning services, IT support, repairs and maintenance, accounting, consulting, etc., and also rent and royalties). In addition, you may file Form 1099-NEC or Form 1099-MISC to report direct sales totaling $5,000 or more of consumer products to a buyer for resale or a deposit-commission. As of recent changes, taxpayers who have received $5,000 or more in payments for goods and services through any online payment app or marketplace, should expect to receive a Form 1099-K in 2024.
General exceptions:
You would not issue form 1099-MISC to (a) corporations, including LLCs treated as an S-Corp. or C-Corp., with the exception of payments for legal services; or (b) to vendors for payments for merchandise, freight, storage, and similar items. Payment made with a credit card will also be excluded from form 1099-NEC and 1099-MISC.
Independent contractors, who are usually paid on a per-job basis, normally do not have any taxes withheld throughout the year. Therefore, using the compensation reported on the Form 1099 they are able calculate how much tax they owe when preparing their tax returns.
Do I Need to File a 1099?
It is very important to keep in mind that 1099s are only used to report compensation paid to independent contractors who perform services that are exclusively for a trade or business. A 1099 is not required for personal/household services such as gardening and babysitting, but rather payments made as a small business or a self-employed individual.
If a 1099 is required to be filed on your behalf, it is your responsibility to gather the independent contractor’s personal tax information to accurately complete Form 1099.
Form W-9, Request for Taxpayer Identification Number and Certification, needs to be completed by the independent contractor who is being compensated. Form W-9 will include all the necessary tax information to report a payment on a Form 1099 including the name of the independent contractor and their Social Security Number (SSN) or Employer Identification Number (EIN).
1099-NEC vs 1099-MISC
Beginning with the 2020 tax year, Form 1099-NEC is strictly used to report compensation over $600 paid to independent contractors. NEC is an abbreviation for non-employee compensation.
In previous years, non-employee compensation was reported on Form 1099-MISC but is now just used to disclose miscellaneous income. Form 1099-MISC is typically used to report rent payments, royalties, and awards/prizes received, which are not subject to self-employment tax.
Form 1099-NEC, which must be filed by January 31st, was introduced to provide more transparency in relation to the due dates for 1099s. Prior to the introduction of the new 1099 form, businesses who filed Form 1099-MISC reporting non-employee compensation were required to issue them by January 31st. The remaining Forms 1099-MISC, which did not include non-employee compensation, were not due until February 28th which often created confusion. The due date for the new Form 1099-NEC was selected to match the due date for W-2s, which report wages and tax withholdings for employees on a company payroll and are typically also due on January 31st.
What Happens if I Receive a 1099?
Since the IRS receives a copy of every filed 1099, in the event a 1099 is issued with your SSN or EIN in the recipient’s TIN box, it is extremely important for the income to be reported on your tax return for the corresponding year indicated on the top right of the form. You do not necessarily need to have a business for services to be reported on Form 1099-NEC.
Tax Treatment of 1099 Income
In most cases if you receive 1099-NEC you are considered to be self-employed and will be required to pay self-employment taxes. Currently, the self-employment tax rate is 15.3% and is made up of Social Security and Medicare taxes. Self-employed individuals are required to report their 1099 income using Schedule C, Profit or Loss from Business, when filing their income tax return. However, be mindful that although you may receive a 1099-NEC, you are not necessarily required to pay self-employment taxes on the entire amount reported on the form. Business expenses can also be included on Schedule C to offset the reported income and to compute total self-employment net earnings. This is important to consider since self-employment taxes are only paid on self-employment net earnings of $400 or more.
With the implementation of Form 1099-NEC, which as previously mentioned is exclusively used to report non-employee compensation, income reported on Form 1099-MISC is likely not subject to self-employment taxes. Nonetheless, this income is still required to be reported and taxed as ordinary income. 1099-MISC income such as rents and royalties should be reported using Schedule E, Supplemental Income and Loss, when filing your tax return. Similar to the 1099-NEC, you are not necessarily required to pay taxes on the entire amount reported on the form since expenses can be utilized to reduce the net profit and amount of taxes paid.
Filing Deadlines
The following deadlines are in effect for Forms 1099 related to the 2024 tax year:
Form
Electronic Filing Deadline
Paper Filing Deadline
1099-NEC
01/31/2025
01/31/2025
1099-MISC
03/31/2025
02/28/2025
1099-INT
03/31/2025
02/28/2025
1099-DIV
03/31/2025
02/28/2025
Late Filing Penalties
Failure to timely file Forms 1099 can result in penalties ranging from $60 to $660 per form. The following penalties can be imposed for failure to file by the corresponding deadline:
Penalty Amount
Late Period
Maximum Penalty
$60 per 1099
Within 30 days of due date
$232,500 – $664,500
$130per 1099
More than 30 days after due date but before August 1st
$664,500 – $1,993,500
$330 per 1099
Any time after August 1st
$1,329,000 – $3,987,000
$660 per 1099
No Filing Due to Intentional Disregard
No Maximum Penalty
The maximum applicable penalty ranges depending on whether the IRS considers you a small business ($5 million or less in average annual revenues for the previous three years).
Form 1096 Overview
Form 1096, Annual Summary and Transmittal of U.S. Information Returns is a summary document submitted to the IRS when filing informational returns such as 1099s. This summary provides details about the 1099s being filed and allows for information including the total number of forms filed and total amounts reported to be learned by just looking at a one-page document.
A separate Form 1096 is required for each type of informational return being filed. Therefore, if you are issuing both a 1099-NEC and 1099-MISC, then you are required to file two separate Forms 1096 – one for each type of return.
Changes Effective For 2024 Tax Year
New regulations implemented by the IRS state all filers who issue ten or more Forms 1099 will be required to file the forms electronically. Filers who do not comply with the electronic filing requirement will be subject to a “Failure to File Information Returns on Magnetic Media” penalty from the IRS which is equal to $250 per each paper filed Form 1099. This is a significant decrease from the previous threshold which only required electronic filing for 250 forms or more.
The IRS is also requiring all corrected Forms 1099 to be submitted in the same format as the original submission. For example, if a third-party vendor filed Forms 1099 electronically and corrections are required, the corrections must be filed electronically and cannot be submitted on paper or penalties will be assessed.
Current guidelines state third-party platforms such as Venmo and PayPal are only required to issue a Form 1099-K to merchants whose total transactions exceed 200 and the total amount of reportable payments exceed $20,000 in a calendar year.
The IRS previously attempted to implement a threshold of $600 total reportable payments for the 2024 tax year but backtracked in November 2024 and instead proposed a new phase-in threshold of $5,000 which is expected to be implemented starting with the 2024 tax year.
On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA), questioning its constitutionality and its impact on small businesses. While this litigation is ongoing, reporting companies are not currently required to file their beneficial ownership information report (BOIR) with the Financial Crimes Enforcement Network (FinCEN) and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. However, reporting companies may continue to voluntarily submit BOIRs.
Reporting companies should understand that the Court’s ruling is only preliminary and may change upon further court proceedings. The Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal on December 5, 2024.
While the injunction provides temporary relief, business owners should still be prepared to file their reports in case the preliminary injunction is overturned, or other actions reinstate the enforceability of the CTA.
Lear & Pannepacker will continue to monitor for any developments and provide updates. If you have any questions regarding the BOIR and how it affects your business, please do not hesitate to contact us at Lear & Pannepacker.
