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Work and Taxes

Most families have one or more family members working. If you or a loved one loses a job, you'll need resources to assess your current situation and try to make the best use of the money you have. Understanding how taxes work and maximizing tax credits is one strategy for saving more of the income you earn throughout the year.

The following resources will help you find options when income changes, and better understand taxes and tax credits.

Flexible Savings Account (FSA) for Health Care Rules Modification

Rosemary K. Heins,

One way people save on taxes is through the use of flexible spending accounts or FSA’s through employer benefit plans. FSA’s allow employees to contribute pre-tax dollars to pay for out-of-pocket expenses, such as deductibles and co-pays for medical, dental and vision care.  There are also flexible spending accounts for child or elder care expenses. These lower taxable income.

The challenge for some people is spending the money set aside for medical care within the calendar year or losing it. FSA’s are similar to health savings accounts but health savings accounts allow participants to build up savings over time. Now FSA’s for health care will become more flexible for the 2014 plan year. They will allow employees to roll over up to $500 of unused funds at the end of the plan year.

This change came about due to over 1,000 public comments received by the US Department of Treasury. For many employees, it was difficult for them to predict future health care expenses. At the end of the year, people would scramble to purchase possibly unnecessary medical services or supplies. Many people did not enroll in this benefit due to a fear of losing money. This change may make enrollment more attractive for low-to-moderate income people to use this as a savings option.
Under the Affordable Care Act the amount an employee can set aside in a flexible spending plan for health care drops to $2,500.   Talk with your worksite human resources department for more information on flexible spending plans available. Participating in a flexible spending account could save you tax dollars.

Source

http://www.treasury.gov/press-center/press-releases/Pages/jl2202.aspx

Health Care Plan Essential Services

Rosemary K. Heins, Extension Educator — Family Resource Management

November 2013.

Health care insurance coverage has changed!  The details in the health care law set guidelines for what a health care insurance policy needs to cover. This ensures that health plans offered in both inside and outside the health insurance marketplaces, offer a package of essential services.
Essential health benefits must include:

  • Ambulatory patient services
  • Emergency services and hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder services, including behavior health treatment
  • Prescription drugs
  • Rehabilitative and facilitative services and devices
  • Laboratory services
  • Preventive wellness services and chronic disease management; and
  • Pediatric services, including oral and vision care

Additional health care plan changes brought about by this law include insurers cannot discriminate based on pre-existing conditions or gender, and there can be no annual dollar limit or lifetime limit on coverage. There are caps on out-of-pocket expenses in a calendar year. Insurance plans are required to spend 80-85 cents of every premium dollar paid on delivering or improving health care. If they do not it may mean an insurance company refund.
One other requirement went into effect in 2008 in Minnesota and some other states. That is allowing young adults to stay on their parents health insurance policy until age 26, unless they had access to coverage from an employer.
Be in the know about what your health care insurance plans covers. More information is available from the healthcare.gov website or in Minnesota from the MNsure.org websites.

Source

www.healthcare.gov  and www.MNsure.org

Tax Benefits for Higher Education

Rosemary K. Heins, Extension Educator — Family Resource Management

September 2013.

Higher education is costly. Tax benefits can be used to get back some of the money spent on tuition, loan interest paid or to maximize savings for future college expenses. The Internal Revenue Service publication titled, Tax Benefits for Education, reviews federal income tax benefits.

Two tax credits offset costs by reducing the amount of income tax owed. The American Opportunity Credit allows one to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential. The Lifetime Learning Credit allows a claim of $2,000 per student per year for any college or career school expenses required for a course. This is includes people taking courses to improve their employability or continuing education.

These two tax credits could put money in your pocket even though you normally would not need to file a tax return, because of low income.

There are tax benefits savings account programs for future education expenses. They are the Coverdell Education Savings Account and the Qualified Tuition Programs, also known as 529 Plans. Each state has a 529 Plan plus there are other broker sold plans available.

A tax benefit is available during loan payback years; there is a tax deduction for the interest paid on student loans up to $2,500 of interest per year.

One final tax benefit is being able to use funds from an IRA to pay higher education expenses without paying an early withdrawal penalty. However, federal income tax will be owed on the amount taken out.

Learn more about how tax benefits can help through the IRS publication cited and information available from the Minnesota Office of Higher Education. Planning for higher education includes figuring out how to pay for it.

Source:

Internal Revenue Service Publication 970 (2012). Tax Benefits for Education, retrieved from http://www.irs.gov/pub/irs-pdf/p970.pdf.

Minnesota Office of Higher Education, Paying for College, retrieved from http://www.ohe.state.mn.us/mPg.cfm?pageID=888.

IRS Offer in Compromise

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

Times have been tough for many people. It may be because of unemployment or from other challenges of the economy. Some may even be concerned about outstanding bills and one bill may be with the IRS!

The IRS does have some options available to help people with their tax obligations due to unemployment or other financial problems. One of the options is called an offer in compromise. This is an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed.

IRS employees are permitted to consider a taxpayers current income and potential for future income when negotiating an offer in compromise. Normally, the standard practice is to judge an offer amount on a taxpayers earning in prior years. Since March of 2010 this greater flexibility has been allowed. The IRS may require that a taxpayer entering such an offer in compromise to agree to pay more if the taxpayer’s financial situation improves significantly.

Where do you find this help? The IRS has toll-free telephone assistance lines and regularly scheduled hours at local Taxpayer Assistance Centers. Minnesota IRS Taxpayer Assistance Centers are located in Bloomington, Duluth, Mankato, Minneapolis, Rochester, St. Cloud and St. Paul.

To find the closest Taxpayer Assistance Center or for more information on help available to unemployed taxpayers in dealing with past due tax payments check out the IRS website at www.irs.gov. There is a toll-free number as well. It is 1-800-829-1040.

Adult Childrens' Knowledge of Retired Parent Finances

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

How much do adult children know about the income and expenses of their retired parents? This can be an important issue when health changes requires caregiving.

Recent research by the nonpartisan Employee Benefit Research Institute asked this question. The results, part of the 2010 Health Confidence Survey, were released in October 2010. Here are the findings:

  • Adult children with retired parents were asked if they had detailed discussions with their parents about their parents’ income and expenses. Slightly less than half of the children reported they had those discussions.
  • Retirees were asked whether they had detailed discussions about their own income and expenses with their children. Slightly more than half of retired parents reported that they had those discussions.
  • Adult children with retired parents were asked if they knew the approximate amount of their parents’ income. Again, less than half or 42 percent of the adult children reported they did know.
  • Retirees were asked whether their children knew the approximate amount of their income. Well over half or 63 percent of retired parents reported that they thought their children knew this information.

In essence the study showed that adult children felt they knew less about their retired parents income than the parent felt their children knew. This is an important factor to remember when having family caregiving discussions. For full results of the 2010 Health Confidence Survey go to the website www.ebri.org.

Source

Employee Benefit Research Institute. (2010, September - 2011, February). Health confidence survey: 2010 results. Washington, D.C.: Employee Benefit Research Institute.

Revenue Recapture Through Tax Refunds

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

Some tax payers will not receive the refund shown on their Minnesota State tax returns. In some cases it is because their refund has been taken to pay another debt as a part of the revenue recapture program. The Minnesota revenue recapture program allows certain agencies and hospitals to capture a taxpayer’s refund to repay a debt owed to the agency.

What agencies can use this tool to claim the money owed them? In general it is state agencies, like the Revenue Collection Division, the University of Minnesota, any district court of the state, any county, any city, hospitals, public agencies responsible for child support enforcement, court ordered restitution or low-income public housing, and some private ambulance services.

In order to use the revenue recapture process an agency must send a letter verifying the debt to the Department of Revenue as well as to the taxpayer. The taxpayer then has 45 days to contest the validity of the claim. (More information at: www.lawhelpmn.org/issues/taxes/tax-liens-revenue-recapture)

In the revenue recapture program, the debt does not include any legal obligation to pay a claiming agency for medical care, including hospitalization if the income of the debtor at the time when the care was received did not exceed the income limits outlined in Minnesota statue.

If a taxpayer’s refund is being captured by the Department of Revenue and turned over to a claimant for medical care the taxpayer should verify the year the care was received. People with questions about receiving a notice of revenue recapture action may want to seek out legal representation. If a persons’ income is low, Legal Aid offices should be able to assist them in understanding the action taken against them and possibly stop the recapture. It’s important to verify the validity of the claim.

Source

LawHelpMN.org. (2001-2013). Tax liens/revenue recapture. New York: ProBonoNet.

College Student Children and Earned Income Credit

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

The Earned Income Credit (EIC) is important to low- and moderate-income families. Did you know a child who is a full-time student and still a dependent on their parents tax return can be claimed for the Earned Income Credit until age 24? If the student lives away from home to attend school, it is considered a "temporary absence" and the student can count as a qualifying child.

What if the student is getting financial aid? Can the family still get Earned Income Credit? Non-taxable scholarships and grants are not considered income in determining eligibility for the Earned Income Credit. Taxable grants and scholarships also are not considered "earned income" but are included in determining "adjusted gross income." This may affect eligibility for this credit.

One final question a family may ask, if we get the tax credit, does it mean our student won’t qualify for financial aid? The Earned Income Credit is counted as family income in determining financial aid eligibility. However, that doesn’t mean the Earned Income Credit will prevent the student from getting financial aid. The amount of the credit is added to the other income and this often will not cause the family to exceed the income limit for financial aid.

Claim the credits you qualify for! You earned it, claim it!

Savers Tax Credit

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed and updated January 2014 by author.

The Savers Tax Credit reduces or eliminates the income tax a taxpayer may owe. This also encourages people to contribute to retirement plans or an IRA. A taxpayer can receive a tax credit of up to 50 percent of a maximum annual $2,000 contribution.

For example, if a taxpayer makes a $1,000 contribution to their employer's retirement plan, their taxable income is reduced by $1,000. They may also claim up to a $500 credit.

Who is eligible?

The taxpayer must be at least 18 years old, not be a full time student and can not be claimed as a dependent on someone else's tax return.

The income limitations for tax year 2014 are as follows:

The adjusted gross income must be not higher than:
$60,000 if married filing jointly
$45,000 if filing as head of household or
$30,000 if filing single or married filing separately.

If you fit within these income limitations and the other eligibility criteria, don't forget to claim this on your tax return. Generally, only taxable earned income is counted in figuring the Earned Income Credit (EIC). If your income is in the upper ranges of the EIC eligibility, salary deductions made for retirement reduce taxable income making you eligible for a larger EIC benefit.

If you are not contributing to a plan, this is another reason to start. And if you find you owe taxes for the past year, you can still open a retirement savings account prior to the April filing due date, and get the credit that lowers or possibly eliminates your tax bill. The money will be yours to keep.

Source

Internal Revenue Service, Plan Now to Get Full Benefit of Saver’s Credit (4 December 2013), retrieved from: http://www.irs.gov/uac/Newsroom/Plan-Now-to-Get-Full-Benefit-of-Saver%E2%80%99s-Credit

College Student Children and Earned Income Credit

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

The Earned Income Credit (EIC) is important to low- and moderate-income families. Did you know a child who is a full-time student and still a dependent on their parents tax return can be claimed for the Earned Income Credit until age 24? If the student lives away from home to attend school, it is considered a ‘temporary absence’ and the student can count as a qualifying child.

What if the student is getting financial aid? Can the family still get Earned Income Credit? Non-taxable scholarships and grants are not considered income in determining eligibility for the Earned Income Credit. Taxable grants and scholarships also are not considered "earned income" but are included in determining "adjusted gross income". This may affect eligibility for this credit.

One final question a family may ask, if we get the tax credit, does it mean our student won’t qualify for financial aid? The Earned Income Credit is counted as family income in determining financial aid eligibility. However, that doesn’t mean the Earned Income Credit will prevent the student from getting financial aid. The amount of the credit is added to the other income and this often will not cause the family to exceed the income limit for financial aid.

Claim the credits you qualify for! You earned it, claim it!

Adoption Tax Credit Changes in Tax Year 2012

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

The Adoption Tax Credit is available to help more families lower their tax bill by claiming expenses they incurred in adopting a child. In 2012, the maximum adoption credit is $12,650. However, the credit will no longer be refundable. The amount of the credit or excludable assistance begins to phase out for taxpayers with incomes over $189,000.

The Adoption Tax Credit may be helpful for foster parents with modest earnings who are interested in adoption. Eligible children include those under age 18. The child may be a US citizen, resident of the US or a foreigner, so both domestic and foreign adoptions qualify. If the adoption was done within the US and the child has been determined by the state to be special needs, there are additional tax considerations. Generally, special needs adoptions are those children whom the state considers difficult to place for adoption; most foster care adoptions are considered special needs.

In the past, when the credit was refundable, taxpayers were required to file a paper returns and attach adoption-related documents to prove the credit. Since it is no longer refundable in 2012, taxpayers may file electronic returns and Form 8839 without attaching adoption-related information. Most VITA or free tax assistance sites will be unable to help filers claim this credit due to the complexity of the filing. Adopting parents should work with a tax professional familiar with the additional tax form.

Find more detailed information at the Internal Revenue website, www.irs.gov. Look for IRS Fact Sheet 607-Adoption Credit at http://www.irs.gov/taxtopics/tc607.html. Utilizing this tax credit provides some financial relief for the expenses of adoption and giving a child a permanent home.

Source

United States Department of Internal Revenue Service (IRS). (2013, January 17). Topic 607 — adoption credit and adoption assistance programs. Washington, D.C.: United States Department of Internal Revenue Service.

Minnesota K-12 Education Subtraction or Credit

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed June 2013 by the author.

August is usually a big month for families to be buying schools supplies, but any month of the year can mean school supplies are purchased!

If you have children in school, grades Kindergarten through twelfth grade, you need to be saving receipts for school supplies year round. When you save receipts you will save money on your state of Minnesota tax return! It’s very important to save receipts as documentation since the credit is a heavily audited item.

The expenses eligible must be for academically related expenses. Some examples of qualifying educational expenses include: pens, pencils, notebooks, folder, tutoring or instructor fees, music lessons and instruments, calculators. In addition, a portion of the cost of home computer hardware and educational software maybe eligible.

Whether the K-12 expenses are a subtraction or a credit on the Minnesota Tax form depends upon your income level. The income level rises with the number of eligible children in the household.

If you want more information on the Minnesota K-12 Education Tax Credit or Subtraction , go to the Minnesota Department of Revenue website at www.revenue.state.mn.us. Search for Fact Sheet 8 MN K-12 Education Subtraction and Credit. It includes information on what expenses would be acceptable academic expenses and which would not. It’s worth about 75% of your out-of-pocket school expenses back to you at tax time! Save those receipts!

Source

Minnesota Department of Revenue. (2013, March). K-12 education subtraction and credit (Fact Sheet 8). St. Paul, MN: Minnesota Department of Revenue.

Earned Income Tax Credit for Tax Year 2013

Rosemary K. Heins, Extension Educator — Family Resource Management

Reviewed January 2014 by the author.

The Earned Income Credit (EIC) is a tax benefit for working people who earn low or moderate incomes. It has several important purposes. It offsets taxes for workers, it supplements low wages and provides a work incentive. Workers who qualify for EIC and claim it on their federal tax return can receive a refund check even if their earnings were too small to owe income taxes. But they need to file a tax return to get the refund!

Single or married people, those who worked full-time or part-time at some point in 2013 can qualify for the EIC based on their income and marital status. The qualifying incomes are as follows:

  • Workers who were raising one child in their home and had income of less than $38,511 or $43,941 for married workers.
  • Workers who were raising two children in their home and had income of less than $43,756 or $49,186 for married workers.
  • Workers who were raising three or more children in their home and had income of less than $46,997 or $52,427 for married workers.
  • Workers who were not raising children in their home and were between ages 25 and 64 and had income below$14,590 or $20,020 for married workers.

This refund money can put can be used for buying groceries, paying the bills and hopefully with some money left over for saving or rainy days funds.

After completing the federal tax return those eligible for the EIC should also file a Minnesota tax return. The Working Family Tax Credit offers an additional tax credit to Minnesotan's eligible for the federal credit.

You earned so claim it!

Source

Internal Revenue Service, www.irs.gov/pub/irs-pdf/p596.pdf

Tax-Related Identity Theft

Rosemary K. Heins, Extension Educator — Family Resource Management

January 2014.

Becoming a victim of identity theft can become a nightmare and it can happen with tax refunds, too. The IRS uses Social Security Numbers to make sure filings are accurate and that you get the refund you are due. If the IRS mails you a notice saying their records show you were paid by an employer you don't know or more than one tax return was filed using your Social Security Number, you need to respond back immediately.

Notice I said the notice is mailed; the IRS doesn't contact people via email, text or social media message. If you do get an email that claims to be from the IRS, do not reply or click on any links. Instead, forward it to phishing@irs.gov.

If someone uses your Social Security Number to file for a tax refund before you do, the IRS might think you already filed and got your refund. When you file your return later, IRS records will show the first filing and refund and you'll get a letter from the IRS saying more than one return was filed for you.

If someone used your Social Security Number to get a job, the employer may report that person's income to the IRS using your Social Security Number. When you file your tax return, you won't include those earnings. IRS records will show you failed to report all your income. The agency will send you a letter saying you got wages but didn't report them.

If any of these scenarios happens, contact the IRS immediately. Specialists will need to work with you to get your tax return filed, get you any refund due, and protect your IRS account from identity thieves in the future.

Source

Tax-Related Identity Theft, www.consumer.ftc.gov/articles/0008-tax-related-identity-theft

Splitting Federal Income Tax Refunds

Rosemary K. Heins, Extension Educator — Family Resource Management

January 2014.

Taxpayers have options and flexibility for choosing how to receive their federal income tax refunds. There is the 'old-fashioned' way — a paper check and there's direct deposit into a bank account which means that refunds arrive much faster.

With direct deposit there is an option of splitting the refund among two or three checking or savings accounts with U.S. financial institutions regardless of which 1040 form is filed. Refund dollars can also be used to purchase US Savings bonds.

In 2014, when people file tax year 2013 forms, those who choose to split their refund and have at least $50 go into a savings account, may take part in the national “Save Your Refund” sweepstakes. There will be a weekly drawing for a $100 prize. Those who submit a photo depicting what they are saving for can have their name entered for a national prize of $25,000.

If one is having their taxes prepared by a professional it’s a good idea to bring account and routing numbers to the tax preparation appointment and double check the accuracy of the account numbers entered on tax returns. The IRS assumes no responsibility for taxpayer error!

Using direct deposit and splitting a refund into different accounts may help you save and manage your refund dollars better. Learn about it through the IRS website at www.irs.gov or ask your tax preparation professional or the volunteer tax assistance site worker. More information about the sweepstakes is available through the Save Your Refund website.

Those who choose to save part of their refund, are winners whether they enter their name in a sweepstakes or not.

Sources

Internal Revenue Service, Frequently Asked Questions About Splitting Federal Income Tax Refunds, www.irs.gov/Individuals/Frequently-Asked-Questions-about-Splitting-Federal-Income-Tax-Refunds

Save Your Refund, hwww.saveyourrefund.com/home/

Tax-Related Identity Theft — What you need to do to protect yourself. Transcript and audio (2:00)

Health Care Plan Essential Services — Be in the know about what your health care insurance plans covers. Transcript and audio (1:58)

Flexible Savings Account (FSA) for Health Care Rules — Be in the know about what your health care insurance plans covers. Transcript and audio (1:58)

Adjusting to Suddenly Reduced Income (9.9 MB PDF) — Take into account both the emotional and financial aspects of sudden income loss.

Action Page 3-4: Spending Plan — Short Form — Budgeting can help a bad situation from getting worse. Use this form to track your income and expenses. From Dollar Works 2.

Adult Children's Knowledge of Retired Parent's Income — How much adult children know about the income and expenses of their retired parents can be an important issue when health changes requires caregiving. Transcript and audio (1:52)

Federal Poverty Guidelines (2014) (200 KB PDF) — Dollar Works 2 Action Page 3-6 — This easy-to-use chart helps you see if you qualify for any federal or state assistance programs based on your income level and household size. English (35 K PDF) | Spanish (67 K PDF)

Savers Tax Credit — The Savers Tax Credit reduces or eliminates the income tax a taxpayer may owe and encourages contributions to retirement plans or an IRA. Transcript and audio (2:05)

Earned Income Tax Credit for Tax Year 2013 — The Earned Income Credit (EIC) is a tax benefit for working people who earn low or moderate incomes. Transcript and audio (2:05)

Adoption Tax Credit — The Adoption Tax Credit is available to help more families lower their tax bill by claiming expenses they incurred in adopting a child. Transcript and audio (2:12)

Minnesota K-12 Education Subtraction or Credit — The Minnesota K-12 Tax Subtraction or Credit can help a family with childcare expenses. Transcript and audio (1:49)

Tax Benefits for Higher Education — Tax benefits can be used to get back some of the money spent on tuition, loan interest paid or to maximize savings for future college expenses. Transcript and audio (2:10)

College Student Children and Earned Income Credit — A child who is a full-time student and still a dependent on their parents’ tax return can be claimed for the Earned Income Credit until age 24. Transcript and audio (1:33)

IRS Offer in Compromise: Dealing with the IRS — The IRS does have some options available to help people with their tax obligations due to unemployment or other financial problems. Transcript and audio (1:55)

Free Tax Preparation — Qualifying Minnesota individuals can get taxes prepared for free throughout the year.

Paid Tax Preparers Need IRS Identification Number — The IRS has initiated changes to strengthen the regulation of commercial tax preparers. Transcript and audio (2:15)

Tax Refund Decisions (436 K PDF) — Use Dollar Works 2 Action Pages to help you make decisions about maximizing your tax refund.

Revenue Recapture Through Tax Refunds — There are some situations when tax payers do not receive the refund shown on their Minnesota State tax returns. Transcript and audio (2:02)

Splitting Federal Income Tax Refunds and "Save Your Refund" Sweepstakes — Taxpayers have options and flexibility for choosing how to receive their federal income tax refunds. Transcript and audio (1:49)

Tax Credit Primer for Social Service Providers (2013) (137 K PDF) — Handbook used in the 2014 training for professionals about tax credits, free tax preparation sites, and tax reduction resources. You may also be interested in the recorded Tax Credit Training for Social Service Staff.

Other Recommended Resources

Deciding if Teens Should Work — Weigh the pros and cons of whether your teen should work when the family falls on hard financial times.

Teen Talk Fact Sheet: I Need to Get a Job (679 K PDF) — Fact sheet discusses how a job can have positive and negative consequences for teens. Also available in Spanish (316 K PDF).

Disaster Recovery — Resources for families who are experiencing, avoiding, or recovering from tough times. Materials for farm families, stress, disaster recovery, and more.

Dollar Works 2 — Teach others how to manage their personal finances and make sound decision about money. This comprehensive curriculum has a unit on Understanding a Pay Statement and Taxes.

Tax Credit Primer Trainings for Social Service Providers — Free in-person or online training for those who help clients claim tax refunds. Learn about free tax resources and support, and 2014 tax year changes.

Tax Topic IndexUnited States Department of Internal Revenue Service — Answers to common questions; includes individual and business tax information.

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