According to Dean Miner, Utah County Extension Agent, some Utahns have already completed their tax returns for this year, and the rest are reminding themselves that they only have until April 15. Either way, take a few minutes to review your 1040 form to see if some of these circumstances apply to you this year, or if they can be used next year.
* Among the most frustrated filers each year are those who did not anticipate changes in dependency exemptions and possible associated filing status changes. Most parents recognize that each dependency exemption can reduce their taxable income for 2012 by $3,800. However, if a son or daughter you claimed this year will no longer be your dependent for the 2013 tax year, it could be an expensive adjustment. Depending on your marginal tax rate, the amount you will owe Uncle Sam could go from $380 to $950.
* Keep this tax implication in mind as the year rolls along. You may be thrilled that a less-than-ambitious son turns 19, finally gets a job and moves into an apartment with his posse (just a wild stab at the current vernacular) and has the opportunity to learn that it may not be as easy as he thought it would be on his own. Just remember, that experience could have a financial impact for you at tax time.
* It is not unusual for taxpayers to be unaware of a dependent exemption change until after someone has already filed his or her return. For example, a young woman filed her return and indicated that she could be claimed as a dependent on her parents’ return. However, when her parents prepared to file, they were told their daughter no longer qualified as their dependent. The parents, of course, had to deal with the added tax obligation, but their daughter also had the inconvenience and added costs of having to file an amended return.
* The ramification is greater if there are education credits involved. Young men and women in college often qualify for education credits. If the young people still qualify as dependents, those education credits are claimed on the parents’ return. The impact of education credits can be quite substantial, especially if the student qualifies for the American Opportunity Credit. This credit includes a refundable portion that is available, even if there are no taxes due. For families with low-to-moderate levels of income, this can be a critical help in providing a college education.
* For parents who enjoyed the tax benefits of having a dependent who also qualified for education credits, losing both the exemption and the credits can be a wallet-opener. If your collegiate dependent looks like he or she might marry this year or otherwise no longer be your dependent by year’s end, you may want to plan for some additional tax costs.
* The biggest tax surprise can occur when a single parent realizes at tax time that when the last child moved out on his or her own, that child took not only the dependency exemption and the education credits, but also the ability for that parent to take advantage of the head of household filing status.
A taxpayer had this dilemma last year. She no longer had her daughter’s $3,700 dependent exemption; she no longer benefited from the $2,700 difference between the standard deduction for head of household filing and that of filing single; and she lost $900 in education credit-related income reduction, not to mention a $350 refundable education credit. The net result of these changes was a $1,445 increase in her federal tax bill.
* As you look at this year’s return, consider the dependents you are able to claim. If your family structure changes, be aware of tax implications that will become reality next spring.
Available in Utah is the statewide Volunteer Income Tax Assistance program, an initiative that provides free tax preparation for qualifying low and moderate-income households. For further information, visit Utahtaxhelp.org.
By: Dean Miner and Julene Reese - Mar. 19, 2013