Self-Employeed

The Basics of Health Savings Account

An HAS is a kind of savings that lets the employer and the employee put aside some money as a pre-tax in order to pay for eligible medical expenses. It is important to note that an HAS can only be used if the employee has a HDHP or what is also known as the High Deductible Plan.

The HAS is also a medical savings that has a tax-advantaged made available to all taxpayers in the US. The over-all funds that are in the account may not be subjected to federal tax especially during the time of the deposit. The difference between the FSA or what is known as the Flexible Spending Account, is that the HAS can carry over and also accumulate every year if this has not been spent. The reason for this is because the HAS is owned by the employee, therefore setting it apart from the HRA or the Health Reimbursement Arrangement which is owned by the company. This is also an alternate source for tax-deductible funds. Both, however, are paired with standard health plans or the HDHPs.

HSA funds can also be used for eligible medical costs that have no liability or even penalty on federal taxes. Starting early 2011, the medications that are purchased over the counter can no longer be paid using the HSA if there is no prescription from the doctors. The withdrawals for these non-medical costs are also regarded in the same way as those of the IRA or the individual retirement accounts. This is because they can provide the tax advantages if these are taken after they retire. They can also incur penalties when these are taken earlier. These accounts are components of health care that is specifically targeted to consumers.

The HSAs and its proponents believe that these are necessary reforms that can reduce the increase in expenses regarding health care as well as the effectivity of the system. According to these proponents, the HSA can encourage people to save for their unexpected future health care as well as the expenses that go along with it. This allows patients to obtain the necessary care and there is no gatekeeper involved. Usually the gatekeepers determine what the individual can receive as benefits. Consumers are now more responsible when it comes to their own choices in their health care all because of the HDHP.

As for those who do not find the HSA necessary and are opponents of this, they believe that it makes the medical system worse. Health care in the US cannot improve through the HSA because individuals may even hold back on their expenses. They may also spend it in unnecessary circumstances simply because it has already accumulated the penalty taxes just by withdrawing it. Those who have problems in their health have annual costs that are predictable and choose to avoid the HSA so that the costs can be paid by their insurance. There is a current ongoing debate about the satisfaction of the customers who hold these plans.

These usually have lower monthly premiums than most plans that have low deductibles. Using the untaxed funds in the Health Savings Account allows the employee to pay for the medical costs even before the deductible has been reached. This also includes other deductibles such as copayments which are usually payments done from the employee’s pockets. This eventually reduces the over-all value of health care expenses.

The funds from the employee’s HSA carries or rolls over to the next year if it has not been spent in the year it was allocated. The HAS can also earn interest. It is possible for employees to open the HSA through their banks or financial institutions that they have access to.

History of the HSAs

 The Health Savings Accounts were established in compliance with the Medicare Prescription Drug, Improvement and Modernization Act. This is also the enactment of the Section 223 of Internal Revenue Code. This was signed on December 8, 2003 by President George Bush. They were also developed so that it can replace the account system for the medical savings.

Deposits of the HAS

 Deposits to the HSA fund can be made by any individual who holds the policy, as long as this also comes with a HDHP or the high deductible health plan care of the individual’s employer. If the employer makes the deposit to the plan for all his employees then everyone must be regarded equally. This is covered in the non-discrimination rules that is also stated in the act. If the contributions have been made via the plan stated in Section 125 then the rules for non-discrimination also do not apply. Employers have to treat the part time and the full time employees differently. Employers can also treat the family and individual participants n different manner. The treatment of the employees who have not been enrolled in the eligible and high deductible health plan covered by the HAS is not also considered solely for non-discrimination purposes. Employers can also contribute more than usual for the employees who have not been compensated as highly as the others.

The contributions from the employer and to the employee’s HSA can also be made on the pre-tax basis, depending on the preference of the employer. If the said option is not considered by the employer then these contributions are made on post-tax basis and also used to reduce the GTI or gross taxable income on the Form 1040 of the following year. The pre-tax contributions of the employer are also not subject to the Medicare Taxes as well as Federal Insurance Contributions Tax Act. It is important to note that the pre-tax contributions of the employee that were not made via the cafeteria plans cannot be subject to Medicare and FICA taxes. No matter what the method used or tax savings associated regarding the deposit, these can be made by persons that cover the HAS-eligible and high deductible plan that does not include coverage way beyond what is qualified and eligible for the health care coverage.

The maximum deposit on the annual HAS is also the lesser compared to the deductible or what is specified in the limitations of the Internal Revenue Service. Over time, Congress has then abolished this particular limit, basing this on the set statutory and deductible that limits the contributions to its maximum amount. Every contribution that is sent to the HAS, no matter the source, can also be included in the maximum annual amount.

The catch up and statute provision can also apply for the participants of the plan who are aged 55 and older. This allows the IRS to limit the increase. In the income tax year 2015, the limit to the contribution is $3,350 for single individuals and it is $6,650 for married individuals. There is an additional $1,000 increase for those who are older than 55.

Every deposit that is made to HSA can ultimately become the possession of the plan holder, no matter where the deposit comes from. The funds that have been deposited and are not withdrawn can be carried over to next year. Plan holders who also discontinue their qualified insurance coverage from the HSA can deposit even more funds, and the funds that are already placed in the individual’s HSA can still be used.

On December 20, 2006, the Tax Relief and Health Care Act was signed and put into law. It also added another provision that allowed the roll-over of all IRA assets for just one time so that it can equally fund up and amount to a maximum contribution for the HSA that is set for a year. However, the tax treatments on the HSA for every state varies. There are three states that do not let HAS contributions be deducted from the tax earnings or the state income taxes. These are Alabama, New Jersey and California.

Investments on the HAS

 The funds in the HSA can also be invested in the same manner as that of investments that have been done for the IRA or the individual retirement account. The investment earnings that have been sheltered from the taxation until the point that the money has been withdrawn can also be sheltered at that time.

Similar to the IRA that is self-directed, the account for health savings can also be treated as such. A usual HSA custodian offers investments like stocks, mutual funds, bonds, financial institutions and CDs. These also provide the accounts that offer alternatives on investments which can also be made through the HAS. The Section 408 of Internal Revenue Code does not prohibit the investment in collectibles and life insurance but HSAs can also be used to invest in various assets which also include precious metals, real estate notes, private and public stocks and more.

HSAs can roll over from one fund to another and HAS cannot roll into the IRA or the 401k. Funds from these investment vehicles can also be rolled into the HAS, except for the IRA transfer that is done one time as mentioned in the previous paragraph. Unlike the contributions to the 401k plan, the HAS contributions that belong to the plan holder, no matter the deposit source, is already his or her possession. An individual that is contributing to the HSA has no obligation whatsoever to contribute to the HSA that is sponsored by his or her employer. However, employers require payroll contributions be made to the HSA plan that is sponsored.

Withdrawals for HSA

 Policy holders of the HSA do not have to get the advance approval are of the trustee of the HSA or the medical insurer for them to withdraw their funds. Funds are not also subject to taxes if these are for eligible medical costs. The costs include expenses for items and services that have been covered by the plan but is also subject to the cost-sharing of the company like coinsurance, copayments and deductible. This can also over the expenses that are not included in the medical policies. These are vision, dental, chiropractic care as well as the medical equipment that should last for a long time, specifically hearing aids and eyeglasses. Transportation that is connected to medical care are also included in this health plan.

There are many ways to fund the HSA can be obtained. There are HSAs that come with a debit card. There are others that give the policy holders checks so that this can be used. Some have reimbursement processes that is close to having a medical insurance. A number of HSAs also have a number of possible methods for withdrawal of the HSA. The methods that are available vary from one HSA to another. The debits and checks cannot be made payable to provider of the health plan. The funds can also be withdrawn for this reason. Withdrawals are not documents when it is not a qualified and eligible medical costs. These are subject to taxes with a penalty of 20%. This is waived for individuals who are aged 65 and older and have unfortunately become disabled during the time when the withdrawal is done. The only tax that is paid in this situation is taken into effect when the account has already become tax-deferred, somehow similar to the IRA. Medical expenses remain to free of taxes.

The account holders are also required to retain their documentation to show the qualified medical costs. The failure to do this and to show documentation can also cause Internal Revenue to rule out the withdrawals that have not been qualified for the medical expenses along with the over-all costs and subject to the additional penalties of the taxpayer.

Self-reimbursements have no deadline for qualified medical costs that are incurred after HSA has been established. The participants can also make the most of paying for these medical costs fresh from their pockets and also retain the receipts as long as their accounts are tax-free. Money can also be withdrawn for reasons to the value of the recipients.

Self-Employed Individuals are Still Entitled to Health Insurance Deductions

Self-Employed Individuals are Still Entitled to Health Insurance Deductions

IRS makes it a point to inform individuals that there is a certain kind of tax deduction that is specifically available to those who choose to be self-employed and not work for any corporation. This deduction that the establishment speaks of is targeted to dental, medical and insurance premiums that are for the long-run. Usually, self-employed people pay for these bills themselves. They even cover those of their spouse as well as their dependents. This insurance also covers children who are under the age of 27 toward the end of the year 2016, even if said children are not dependents of the self-employed individual. Definition of a child is the daughter, son, stepchild, foster child or adopted child or the self-employed. Foster child defined is a child that has been placed with the self-employed individual by a placement agency that is authorized or by a decree, order or judgement of a court and of any competent jurisdiction.

Self-employed individuals who are entitled to this deduction meet the following requirements:

  • They have net profit that they received from their self-employment. They report and list this on Schedule C (this is the profit or the loss generated from a business), Schedule C-EZ (this is the net profit that is garnered from a business) or Schedule F (this is the profit or the loss that is obtained from farming.)
  • They have earnings from their self- employment as partners and have been reported on Form 1065 which is also Schedule K-1. This is the Partner’s Share on the income, credits, deductions and the like.
  • They figure out their net earnings and income from being self employed by using a method that is optional and this is listed on Schedule SE which is also the known as the Self-Employment Tax.
  • They have paid wages that have been reported on Form W-2 which is the Statement on wages and taxes. They are regarded as shareholders and they own more than 2% of the over-all stock of a corporation listed as a S-corporation.

There are rules that apply to how exactly this insurance plan can be established. Self-employed individuals must follow the guidelines and make sure that they qualify:

  • If they are self-employed and have filed Schedule C, Schedule C-EZ or Schedule F and the policy is possible to be listed under the individual’s name or the business’ name.
  • If they are partners of a business, the policy is listed in their name or the name of the partnership and the partners pay premiums. If the policy is in the name of the self-employed individual and he or she pays the premiums, then the partnership must reimburse said individual and include these premiums and regard them as income and list it on their Schedule K-1.
  • If they are shareholders of an S-corporation, the policy is listed in their names or the name of the S-corporation. Either the self-employed individual or the corporation pays the premiums. If the policy is under the name of the individual and he or she pays the premiums, then the S corporation reimburses the individual and also include this premium and regard is as some kind of wage income and list it on the Form W2.

As for Medicare premiums, these are voluntarily paid to obtain the insurance under the name qualified for a health insurance that is private and possible to be used in order to figure out the deduction. The total amount that is paid for coverage of health insurance obtained from distributions on retirement plans that are nontaxable cannot be used to calculate this deduction.

Health Insurance Deduction Worksheet for Self-Employed Individuals

Each business or trade must be listed under a separate worksheet which has been established by an insurance plan.

  1. Enter the over-all amount that has been paid for the year 2016 that is solely for coverage of health insurance that is established and listed under the business. This can also be listed under an S corporation that the individual has more than 2% in shares. The mentioned health insurance is for the self-employed individual, the spouse as well as the dependents.
  2. List any amounts for the months that the self-employed individual is eligible in participating in health plans that are subsidized by the individual or the employer or the spouse or the employer of the dependents or the child who is below 27 by the last leg of 2016.
  3. List any amounts that have been paid from distributions of the retirement plan that were considered non-taxable because the self-employed individual was a safety officer for the public and is retired.
  4. List any health insurance that is a coverage payment and is included on the Form 8885 and specifically on line 4 in order to obtain the HCTC.
  5. List any monthly payments for HCTC that were made in advance and that was received by the administrator of the health plan from IRS, as depicted on the Form 1099-H.
  6. List any qualified health insurance that is a coverage payment that were paid for coverage months that are considered eligible and the self-employed individual has received in the form of a benefit through the monthly payment in advance of the HCTC program.
  7. For coverage that is listed under long-term insurance and is a qualified contract, every person that was covered must be entered. Total payments that were made for the specific person during the whole tax year must be listed.
  8. The amount depends on the age of the person by the end of the said tax year. It is $390 for individuals who are 40 or even younger, $730 for those between the age range of 41 and 50, $1460 for those who are between the age range of 51 and 60, $3,900 for those between the age range of 61 and 70 and $4,870 for those who are between the ages of 71 and older.
  9. The payments that were made for months that were eligible but subsidized by the insurance plan of the self-employed individual’s spouse or the employer of the spouse. Remember that if there are more than one individuals that were covered, the amount should be entered separately. Then, once completed, enter the over-all amount.
  10. Add Line 1 and Line 2.
  11. Enter the net profit as well as earned income from the business or trade that the plan of the insurance was established. Do not put the payments for the program of Conservation Reserve because these payments are exempted from self-employment. If the business is listed as an S-corporation, proceed to Line Eleven.
  12. The amount of all profits that have been listed from Schedule C on Line 31 which is Form 1040, Schedule C-EZ on Line 3 which is Form 1040, Schedule F on Line 34 which is Form 1040, or Schedule K-1 on Box 14 and Code A which is Form 1065. Include any income that is allocable to the said profitable businesses. Do not include the payments made from the program of Conservation Reserve because these are already exempted from the tax of the self-employed. Check the instructions that are listed for Schedule SE which is also Form 1040. Net losses must not be included on any schedule.
  13. Divide Line 4 from Line 5.
  14. Multiply the Form 1040 or the Form 1040 NR which is found on Line 27 by the percentage amount listed on Line 6.
  15. Subtract the amount listed on Line 7 from the amount listed on Line 4.
  16. If there is any amount listed on the Form 1040 or 1040 NR which is on Line 28 that is considered to be attributable to the business or trade in which the plan for the insurance has been established, then this must be entered.
  17. Subtract the amount in Line 9 from the amount in Line 8.
  18. Enter the Medicare wages that are listed in the Form W-2 and on Box 5 from the S corporation in which the self-employed individual has more than 2% of the shares and which established the insurance plan.
  19. Enter the amount that is listed on the Form 2555 and Line 45 and the attributable amount that is listed on Line 4 or Line 11. Any amount that is listed from the Line 18 of Form 2555-EZ can also be attributed alongside the amount that has been entered above Line 11.
  20. Subtract the amount from Line 12 from the amount in either Line 10 or Line 11.
  21. Enter the smaller amount between the one in either Line 3 or the one in Line 13 along with the amount on either Form 1040 or Form 1040 NR which is on Line 29. When figuring the total of the deduction on the medical expense listed on Form 1040 or Schedule A, this must not be included.

 Sounds complicated – that is why people specialize in accounting. Please consult with your local CPA to discuss this.

How to Claim Health Insurance Deductions from Self-Employment

One of the reasons why more and more people choose to be self-employed is that they can deduct what they usually spend on premiums of health insurance which can be found on page 1 and above a line on the individual’s tax return. These self-employed individuals can also claim their medical expenses as a form of deduction, and this includes premium on health insurance. The catch is that they have to itemize the tax returns to get this done. The downside is that this is not always end up being a good deal to the individuals.

 Eligible Policies

The over-all cost of premiums that have been paid for insurance that is specifically for medical, dental and long-term purposes can be deducted in the policies that cover the individual, the individual’s spouse and the individual’s children, who are below the age of 27. If the self-employed individual pays supplemental premiums to Medicare, then these can also be deducted. Policies can be listed under the name of the business.

 Limitations to Claiming the Health Insurance Deduction

Self-employed individuals cannot deduct costs of insurance from their health benefits if they or their spouses were found eligible in participating in the subsidized health plan for groups that is obtained via the employer.

This is the case for those who work regular jobs and have their own businesses or their spouses are employed and is found eligible for the coverage that is under the health plan for the group.

The individual’s self-employment over-all income can be calculated and totaled on Schedule F and Schedule C and this must be the same amount or go beyond the amount of the deduction. Take this for an example. If the business has earned a total of $12,000 but the premiums cost $15,000 then the individual cannot claim the whole $15,000. He can claim only the $12,000 amount. If the business reports some kind of loss, then the individual will not be considered eligible for health insurance deduction. He or she can still obtain the health insurance amount that has been itemized on the medical deduction that is listed on Schedule A but the amount that is listed “above the line” and its adjustment is more advantageous to the self-employed.

Self-employment taxes are also based on the total business income minus the other expenses – this is the income that is calculated and listed on Schedule C, but this is not less than the individual’s insurance premium. That is regarded as a break in the double tax.

When claiming the deduction, the self-employed individual can enter this on Form 1040 located in Line 29. There is a worksheet that is provided in the Instruction Guide for Form 1040 and provides a step by step on how to calculate the total amount of the deduction. A more detailed practice worksheet can be located in the Publication 535 guide. These worksheets can be used for practice and can also amount to the deduction that can be obtained in health insurance for the self-employed individual. Worksheet P can also be used and is found in Premium Tax Credit which is Publication 974.

Everything Everyone Must Know About Medicare

Medicare is the single payer and social insurance health policy program in the national setting that is administered by the federal government. This has been around since 1966. It is also currently using 30 to 50 privately owned insurance companies all over the United States and is also under contract in the administration.

The Medicare in the US is funded by payroll taxes, surtaxes, and premium from the beneficiaries as well as the general revenue. It also provides the health insurance for Americans who are also over the age of 65 and are 65 years old, as long as they have worked and paid the system through the deductions in their payroll in the form of taxes. Medicare also offers health insurance to the young generation who have disability status as long as it is determined by the SSA or the Social Security Administration. They also consider the individuals who are suffering the end stages of renal diseases as well as the end stages of amyotrophic lateral sclerosis.

On average, the health policy Medicare covers half of health care plan policies and charges for those who have been enrolled. These enrollees and participants must also cover the remaining costs using their supplemental insurance or their separate insurance. There are others who even get the payments fresh from their pockets. These costs also vary and depend on the total of the health care policy that the enrollee from the Medicare needs. There might also be costs of the services that have been uncovered. For example, for the long-term policies, these include the hearing, dental as well as vision care. These also include insurance premiums that are supplemental.

It is important to know that Medicare has four Parts. Part A covers the hospice and hospital services and costs. Part B covers the costs for the outpatient services. Part D is the portion that covers the prescription drugs that are self-administered. Part C serves as the alternative to all the other parts that are allowed to experiment with structured plans that are set up differently which also reduces the costs to the government. This lets patients decide which plans to choose and they usually opt for one that has the most benefits.

History of Medicare

 Medicare has always been known as Medicare. This was the original name given to the program that has provided medical care for different families of the people who were serving in the military. They were part of the military and members of the Dependent’s Medical Care Act. This was passed in Congress in 1956. It was President Eisenhower who held the very first White House Conference on the topic of Aging. This was in January 1961. This was also the time when the program for health care that would provide social security benefits was proposed. In July 1965, when Lyndon Johnson was the president, the Congress has enacted under the benefits of Medicare as stated in Title XVIII and stated in the Social Security Act. It also provided the health insurance coverage and policies to individuals aged 65 and even older, no matter how much they earn and their medical history. Johnson then signed the bill and it became a law on July 30, 1965. This was done at the Presidential Library named after Harry S. Truman in Independence, Missouri. The first recipients of the said program were Former President Truman along with his wife, the former First Lady named Bess Truman.

Before Medicare was created, around 60% of individuals who were over the age of 65 had access to health insurance. The coverage, unfortunately, was often unaffordable and unavailable to most, simply because the older individuals paid more than thrice as much for the younger people who had health insurance. Many of this younger group have become eligible for both Medicaid and Medicare because the law was passed and this gave them the benefit.

In 1966 Medicare combatted the racial integration of many people who were in the waiting room. They also promoted desegregation in hospital floors as well as physician practices and made sure that any race is equal whenever they made payments to their health care issuers and providers.

Medicare has been operating for almost half a century and it has gone through several changes. For example, since 1965, the provisions of Medicare have already expanded and included benefits for physical, chiropractic therapy and speech in 1972. Medicare also added the beneficiaries to opt and pay for the health maintenance in the 1980s. Through the years, Congress has already expanded the Medicare eligibility to younger individuals who have been diagnosed with permanent disabilities and also received the SSDI or the Social Security Disability Insurance payments. Those who have also been diagnosed with ESRD or the end-stage renal disease are also eligible for this.

In the 1980s, the association of Medicare with HMOs has begun and it was formalized under the presidency of Bill Clinton. It started in 1997 in the form of Part C of Medicare. In 2003, under the presidency of George W Bush, the program under Medicare that covered almost every drug was submitted to the congress and was passed as the bill. It was also taken in effect in Part D of Medicare.

In the year of 1982, the government has also added the benefits to hospice in order to assist the elder policy holders but only on a temporary basis. It became permanent in 1984. Congress has also expanded this further in 2001 to include the younger individuals with Lou Gehrig’s disease, also known as ALS or the scientific name being amyotrophic lateral sclerosis.

Administration of Medicare

 The CMS or the Centers for both Medicare as well as Medicaid Services is the component of the HHS or the Department of Health and Human Services that also administers Medicaid, Medicare, CHIP which is also the Children’s Health Insurance Program, CLIA and Clinical Laboratory Improvement Amendments and also parts of the ACA or the Affordable Care Act. Along with the Department of Treasury and Department of Labor, CMS also looks into the implementation of the insurance reform and the provisions on the Accountability Act of 1996 which is Health Insurance Portability. This is also known as HIPAA. Most aspects and parts of the PPACA or the Patient Protection and Affordable Act. The SSA and the Social Security Administration is also responsible in determining the eligibility for Medicare, payment and eligibility for Extra Help as well as the Low Income Subsidy Payments that are related to the Part D of Medicare. It also collects the payments that are premium for the program that Medicare conducts.

The Chief Actuary of the CMS is also responsible in providing the necessary cost projections and accounting information to the Trustees of the Medicare Board. It is essential in assisting them and also assessing the financial care and health of the Medicare program. The Board is also required by the law to give out annual reports regarding the financial status of the Trust Funds of the Medicare. Those reports are also required to contain the actuarial opinion statement from the Chief Actuary.

Since Medicare programs started, CMS has always been the institution that was contracted with the insurance companies that are privately owned in order to operate the intermediaries between the medical providers and the government to be responsible for administering Part B as well as Part A benefits. The processes that are contracted also include the claims and the processing payment along with clinician enrollment, call center services as well as fraud investigation. In 1997, other insurance and policy plan companies started administering Part C. In 2005, other insurance plans started administering Part D.

The RUC or the Relative Value Update Committee or what is also known as the Specialty Society Relative Value Scale Update Committee is composed of a group of physicians that are associated with the AMA or the American Medical Association. This institution advises the policy holders as well as the government regarding the pay standards for the insurance plan of Medicare as well as the procedures that patients should be performed by professionals as well as doctors under Part B of Medicare. A similar yet difference CMS system that also determines the rates that are paid for hospitals along with acute care. This also includes nursing facilities that are under Part A of Medicare.

Financing of Medicare

 Medicare has also several sources where it gets its finances. The inpatient under the portion Part A can be admitted in skilled nursing and hospital coverage and this is largely funded from 2.9% of the revenue and payroll tax. The law also provided a maximum amount when it comes to the compensation of the Medicare tax as well as its being imposed every year. The social Security tax also works in the similar way. On January 1, 1994, the government removed the compensation limit. Employees who are also self-employed are required to pay the full 2.9% on the net earnings of the self-employed individual because they are for the employer as well as the employee. They can also deduct half of the taxes from their income through calculating the income tax.

Starting 2013, the portion of Part A and its taxes from the earned income has exceeded $200,000 for every individual plan. As for married couples that filed jointly, this reached to $250,000. It also rose an additional 3.8% so that the portion of the subsidies can also be paid and mandated by the PPACA.

Parts D as well as Parts B are funded partially by the premiums that have been paid by the Medicare enrollees and these are also considered as the general revenue fund. In 2006, Medicare started adding surtax on the premium of Part B. This was targeted to seniors who earned a higher income in order to fund Part D partially. In the PPACA legislation of the income tax year 2010, Medicare added surtax to the premium portion of Part D and also targeted these to the seniors who were earning lots of income. This is also conducted so that the PPACA can be partially funded along with the beneficiaries from Part B and subject to the double surtax. There is a double amount so that it can also partially fund PPACA.

Parts A, B and D all use trust funds that are separate from one another so that there can be a reimbursement of both the receipt and disbursement of the funds that are mentioned. Part C utilizes all these trusts funds in proportion to one another so that it can be determined by the CMS and reflect that all the beneficiaries of Part C are complete in the full parts of Part A and Part B. Medicare as well as the medical needs for each capita are regarded as fee for service or what is also known as FFS.

Medicare and its spending amounted to 15% of the whole federal spending of the United States. Research all show that this can even exceed 17% by the year 2020.

The retirement of individuals who are called the Baby Boom generation is expected to increase its enrollment by 2030 and reached up to 80 million because that was how the number of workers who are enrolled in the program has declined. The figures dropped from 3.7 and to a low of 2.4. There are the rising and total health care costs that also pose the financial challenges that are substantial to the program. Medicare spending is also projected to even get higher and reach $1 trillion by the year 2020.

It is important to note that for every three dollars, one dollar is spent on Medicare as part of the cost-reduction program. The cost reduction is also influenced by the various factors that include the reduction in unnecessary and inappropriate care through the evidence-based practices of evaluation along with reducing the total amount of duplicative health care. The cost reduction can also be affected by the medical errors that are done when administrative agency increases and the development of clinical guidelines reach the quality standards

Continuing Care Facilities and the Benefits Received from These

Continuing care facilities or what is also known as continuing care retirement communities, CCRCs for short, provide the residents the lifetime care that they need. They also assure that the care that the recipient receives is provided in the best way possible which also includes nursing assistance, especially when this is needed. This kind of living arrangement can also be useful specifically to couples who are financially stable and in need of different kinds of care and prefer to maintain their togetherness, even if the usual CCRC resident is a financially and physically independent, highly educated, single 80-year-old female.

Although the CCRCs have already gained a negative reputation during the 1980s due to some closed financial difficulty, the total number of the CCRCs available in the US has reached a high of 1,200 and it even continues to increase every year. There are around 350,000 residents residing in the not-for-profit as well as the for-profit facilities This number is predicted to increase because more and more people are expected to qualify and meet the requirements that are set for the CCRCs. The entrance restrictions do specify a specific minimum age, along with a certain statute of finances and health. CCRCs also look for the candidate who:

  • Has an annual earning of 1.5 to 2 times the monthly fee that they usually charge.
  • Will not cost more financially in their contributions especially when they become a resident.

Entrance lists for the qualified beneficiaries are for years and sometimes months. These are long-term residents in the facilities, therefore, it is suggested that individuals begin looking at care facilities that are long term and continue especially for their loved ones.

Levels of Continuing Care

 Most of the CCRCs offer three different levels of continuing care: these are the ILUs or the independent living units, the skilled nursing care and the assisted living. There are cases wherein the individual progresses through all these levels of care. For example, they require little care at the beginning and then as the days progress, they require more and more attention. There are also cases when the residents need additional care for a certain period and then they return to assisted or independent living over time.

  • At the beginning of these levels, especially the independent living units, the resident can choose to reside in his or her own place or residential unit. There are occupancy units that are for married individuals. The majority of this kind of care are for single individuals so they come in the form of single units like a studio apartment, a one-bedroom. For the residents who are married, two bedroom and larger units are also offered. During their stay, the residential services that the patient can acquire include laundry services, meals, and housekeeping. There’s the acute treatment through physical therapy and skilled nursing and the professionals nearby are there to assist them with their personal needs when needed. Most facilities include gardening areas, recreational facilities, swimming pools, walking trails, tennis courts, golf courses and craft rooms which must be taken advantage of especially when residents will stay there for the long run.
  • The assisted living is also a kind of intermediate level of care for residents that prefer to experience the balance between skilled nursing care along with independent living. It is during this period when residents who have been diagnosed with chronic illnesses and require assistance are attended medically and assisted in their personal tasks such as dressing, eating, and bathing.
  • Finally, the skilled nursing care set-up is offered in most CCRCs through short-term and long-term rehabilitative services and nursing care. These mentioned services are offered on the site and there are some facilities that are near these nursing homes, just in case they do not have this specific kind within the vicinity.

Under almost every circumstance mentioned, the individual that is a resident must reasonably independent and also healthy in order to be admitted to continuing care facilities. The levels of care that the resident requires is assessed initially and there is a process that must be explained in the contract. Usually, a group assesses the individual and also checks in with the family members and medical advisers of the individual. The residents are also re-assessed regularly – especially when their circumstances require them to change their level of continuing care over a period of time.

Here are some services that continuing care facilities:

  • Educational programs
  • Gardening space
  • Laundry services
  • On-site health care and nursing
  • Personal conveniences such as banks, haircutters and library)
  • Security Systems
  • Transportation
  • Processing of Medicare as well as insurance reimbursement forms
  • Organized social and recreational activities
  • Meal services
  • Housekeeping
  • Exercise classes
  • Craft and woodworking activities

 Fees and Payment of Continuing Care Services

 The activities mentioned in the previous part of this article are the reasons why there are continuing care facilities that are more expensive than the rest. All fees indicated must be detailed and clear even if it is just the initial contract for an individual who will be residing in the facility. Before the individual or a loved one, on behalf of the future resident, signs the contract, he or she should seek the advice of his or her financial advisor to check the finances so that it is possible to meet all the terms as stated in the contract through the years, since this is a continuing care facility. Additionally, financial advisors should check the finances of the continuing care facilities as well in order to decide whether it is a practical financial investment to make in the future.

There are three kinds of payments that exist for the continuing care facilities. This also include the plan with the monthly and entry fee as well as plan with the rental fee and the plan that is based on the equity of the

  • The monthly and entry fee plans are widely used the most. It is under this coverage that the resident is required to pay an expensive entry fee upfront and most of the time, this is non-refundable. If it is, then it is refundable but it decreases over time. It can also be partially refundable or completely refundable. The policies that concern most residents are the initial fee for entry because it really varies between the different continuing care facilities out there. It is strongly advised that individuals check the contract so that they can go for the specific facility that they feel worth paying for. On average, the entrance fees for these CCRCs range from $60,000 to as much as $120,000. Therefore, the monthly fees can be as much as $1,000 to $1,6000 and these are also charged in order to cover the expenses that are associated with the units that the residentials live in, the assistance services and the medical care.
  • Rental plans as stated on the contract resort to the monthly fee that comes in the form of rental to cover the services as well as the housing that the residents receive. There are times when health care is not included in these services so it is better to check carefully especially when looking at the said plans.
  • The equity based plans allow the individuals to buy their own residential areas. When they do this, the individuals can gain money all for their appreciation of the resident that they are living in. They can also resell the unit when they are deemed qualified to do so. When this is the case, then the owner’s association is the institution that governs the health care and the residential services, which the residents can purchase aside from the living area that they already are in.

No matter what kind of payment plan that the residents opted for the costs actually vary depending on the age, marital status, gender and location of the facility. Individuals must expect their loved one to pay even more than the average rate if he or she is:

  • Young and secure on the financial aspect and capable of consistently paying the monthly rate for a long period of time.
  • Female because it is believed that they live longer
  • Married because there is a higher possibility that the spouse will eventually become ill and both of them will move to a smaller unit, therefore increase the turnover in the residential area of the resident.
  • Looking for units in the West, South, Northeast regions of the United States.

Individuals are also greatly encouraged to have their lawyers review the contract of the CCRCs before signing this. The document because it is a contract legally binds the resident to the CCRCs for the remainder of his or her life.

The payment contracts of continuing care facilities are prepared in one of these three ways:

  • These are contracts that are quite comprehensive and completely cover the residential services, long-term nursing care, amenities and shelter and not increase the monthly payments that the resident has already signed up for. There is an excepti0on though and that is for the inflation adjustments if the situation calls for it. The set-up of this kind of contract spreads the risk in health on the residents in order for no resident would experience any form of financial ruin. A majority of the CCRCs offer this kind of agreement.

 Modified contract covers the residential services, shelter, and amenities of a specific amount of nursing care. After the period when the stated kind of nursing care has been utilized, then the resident pays for the required services on a monthly or even a daily basis.

 The fee-for-service kind of contract covers residential services, shelter, and amenities, as well as short-term nursing care and emergencies. Residents must then pay these fees in the long run but at a number of daily rates.

The overall fees for each kind of contract decrease for every kind of service provided and it decreases as well. It is very crucial to note the resident that a number of CCRCs are also participants of Medicaid and Medicare and sometimes even both of these programs.

Finding the Right Continuing Care Facility

 Since no federal regulations for the CCRCs get in the way, it is possible for everyone to look for their local or state guidelines. It is also crucial that they check which facilities are accredited by the CCAC or what is called the Continuing Care Accreditation Commission. This is an accrediting body that is independent and is also sponsored by what is called the Association for the Home and Services of Aging Individuals. The accreditation of the CCAC is required to submit all the financial statements that were incurred yearly and must also be renewed every fifth year of the resident in that said facility.

The same with all the residential communities, the loved ones should also sign the continuing care community facility once they have already checked the facilities. When interviewing prospective facilities, it is very important to have a long list of questions to ask. Here are examples of questions that can be asked especially when a loved one is investing in continuing care. These questions must be asked along with the basic questions regarding the facility.

  • Is it accredited by CCAC?
  • What kinds of recreational activities can residents engage in? How often are the activities conducted?
  • Can the residents have pets?
  • How much is the upfront entry fee? Is it refundable?
  • How do you calculate the monthly fees?
  • What kind of health care do you provide to the residents when they are in your facility? How often are the residents reassessed?
  • Do you provide long term or short-term health care?
  • Are there limits on the fees?
  • Will there be changes on the monthly rates? If so, why?

Once the individual has found the right facility for their loved ones and these fit the needs that they require then it is a good investment to let their beloved elderly stay there and be assured that the latter will be taken care of and looked after in the best way possible.

Discussion About EITC or Earned Income Credit

The EITC or EIC, also known as the Earned Income Tax Credit is what working people with low up to moderate income acquire as a benefit. However, there are qualifications to get this. They must meet specific requirements and also file their tax return. EITC also deducts the amount of tax that the taxpayers owe and can give them a refund.

The amount of the benefit from the EITC depends on the taxpayer’s income as well as the total number of children. For the individual to claim one or more EITC per qualifying child, there must be requirements like a relationship, shared residency and age, and these three must be met. Taxpayers with no child and earn income below the standard that is stated by the IRS receive a small amount of EITC benefit. The US tax forms 1040A, 1040 and 1040EX are used to claim EITC for those who do not have qualifying children as their dependents. Taxpayers with qualifying children can claim their credit by filling up forms 1040 and 1040A.

EIC phases slowly and has a medium-length plateau. After this, it phases slower than before because it constantly phases in. For example, if the credit phases at 21% for taxpayers that have more than one qualifying child, it has 16% of taxpayers who have one qualifying child. Therefore, taxpayers must always choose one more dollar of their actual wages or salary and increase this by fifty-dollar increments. It is also preferred to allot extra fifty-dollar increment per wages and salary by considering just the EITC. However, if the EITC is combined with other tested programs such as Temporary Assistance for Needy Families or Medicaid, the Marginal Tax Rate exceeds 100% in some circumstances. It depends on the state of residence of the tax payer. Under these circumstances, net income rises faster than the increase in the taxpayer’s wage due to the phasing in of the EITC.

History of the EITC

The EITC was enacted in 1975. It was created with the intention that it expanded by the tax legislation on certain occasions, which included the publicized Tax Reform Act of 1986. It was then expanded in the years 1990, 1993, 2001 and finally 2009, even though the act raised taxes in general (specifically 1990 and 1993) and lowered the taxes in 2001. It also eliminated the other credits and deductions in 1986. Nowadays, EITC is one of the largest anti-poverty tools that Americans turn to. However, it is important to note that most income measures that also includes the poverty rate, do not account this credit.

A qualifying child, when defined, can be the taxpayer’s son, daughter, adopted child, stepchild or foster child or even any descendent. It can also be the taxpayer’s sister, brother, half-brother, half-sister, stepsister, stepbrother or other descendants like nephew, niece, great nephew, great niece. A qualifying child can also be an adopted child provided that he or she has been placed lawfully in the home of the taxpayer.

When the taxpayer is claiming for the EIC from a qualifying child, he or she must be older than the latter. The only exception for this is if the qualifying child is classified as totally and permanently disabled for that specific income tax year. A qualifying child can be as old as 18. A qualifying child is also a full-time student who can be as old as 24. A qualifying child with no age limitation are individuals who are disabled. Taxpayers who are parents claim their child or children as their dependents unless they are also waiving the credit for that year to another family member who is an extended relative with a higher AGI. It is also important to note that there is no support test for Extra Income Credit. There is just the six month plus one day shared residency test.

When Are Refunds Expected?

If the taxpayer claims the EITC as well as the ACTC (which is additional tax credit) on the tax return that they filed, the IRS must hold onto the refund of the taxpayer – even if the portion does not have anything to do with the ACTC or the EITC.

Qualifications for Earned Income Credit

To qualify for the EITC, the taxpayer must have income because he has worked or he is running his firm or business and can meet the standard rules.

How to Claim EITC

Taxpayers must have filed a tax return before they can claim EITC. They need to submit the required documents and be on the lookout for the common errors that are made on filling up the forms. They should also be aware of the consequences when they file an EITC return, and an error was discovered. They should also be knowledgeable on how they can get help preparing for their return as well as what they should do just in case the EITC was denied. Most importantly, they need to know how they can claim the credit for previous tax years.

Why did I receive a letter from IRS regarding EITC?

IRS sends letters out regarding EITC because they are suggesting the taxpayer to claim their EITC because, upon careful review of their taxes, they qualify for this. They also ask the taxpayers to follow up on the additional information and send these to the IRS so that their claim can be verified. IRS also calls to gather more information about the claim.

Who claims the credit and how to get the EITC

The taxpayer or his or her spouse (if a joint return was filed) and others listed as the dependents must all have SSNs that are valid and required for their employment and issued before the due date of the return. This is one of the requirements to claim the credit and also qualify for an ETIC. The taxpayers must also have enough earned income by working for a company or a business or running or owning his own.

If married, the IRS should not be filed separately. The taxpayer must also be a US citizen or a resident alien.  It is very important that the taxpayer is not a qualified dependent (whether qualified child or qualified relative) of another taxpayer.  He or she must also have met the earned income, investment income limits and AGI for the specific tax year.

If these requirements are all met, then the taxpayer is qualified for EITC. The next step is to file the tax returns with the IRS even if the taxpayer owes no tax or not required to file in the first place.

If IRS denied the taxpayer an EITC last year and he or she is qualified in the current income tax year, the taxpayer must attach the completed Form 8862 or what is also known as the Information to Claim Earned Income Credit After Disallowance to claim EITC. Taxpayers need not file Form 8862 if the IRS has decided to reduce or not allow the taxpayer to receive an EITC  due to intentional disregard or recklessness concerning EITC rules.

Earned income also includes wages and taxable income that the taxpayer obtains from working for a company or running or owning his firm or business.

Taxable earned income covers the following:

  • Salaries, wages, tips
  • Benefits from union strikes
  • Disability benefits that the taxpayer receives before reaching the minimum age for retirement
  • Net earnings from self-employment

Combat Pay

Taxpayers can choose to include their nontaxable combat pay in their earned income that is taxable to get the EITC. They either have to include it or not include it at all. If they choose to do this, then they have to check if they can include this whenever the taxable increases the refund or deducts the amount of tax that is owed. If the spouse of the taxpayer is also eligible for nontaxable combat pay, then both of them can opt for one that is best. The amount of the nontaxable combat pay is shown on the Form W2 in box 12 with the code Q.

How is credit calculated?

After the taxpayer determines that he or she does qualify for EITC, there are two choices to calculate the credit:

  1. Let the IRS do the work. Follow the instructions stated on Line 64 on Form 1040. It is found on Line 38a on the Form 1040 as well as on Line8a on Form 1040EZ.
  2. They can calculate the credit themselves. They must use the EIC Worksheet and follow the instructions stated in the booklet for Forms 1040, 1040A and 1040EZ as well as the EIC Table. They can also use online tools such as the EITC Assistant Tool which is available in both the English and Spanish language.

If taxpayers are prohibited to claim their EITC for years and the year after that due to an error from reckless or intentional disregard of the rules for EITC, then the taxpayer is prohibited to claim EITC for two years. If the error was because of fraud, they could not claim EITC for the next decade. The date that IRS denies the EITC of the taxpayer and the date on which the taxpayer files the return affects the next time frame of 2 to 10 years, then they will be barred from ever claiming their EITC.

Other Requirements for EITC

  • The investment income cannot be more than what is stated in the income tax year.
  • The taxpayer must be a US citizen or a resident alien. If he or she is married and is filing jointly and one is a citizen, and one is not, then the taxpaying couple must regard the non-resident partner as a resident who then concludes that their entire income would be subject to taxes. Only then will they be able to qualify for EIC.
  • Files with or without children that are qualified should have lived in the 50 states or District of Columbia for more than six months and one day. The Northern Mariana Islands, American Samoa and Puerto Rico are not included. However, a taxpayer who is on an extended military duty is still considered to have met the requirement of the duration of his stay even if he or she is serving time away.
  • Taxpayers who do not have a qualifying child must be 25 to 64 years old. Married couples without a qualifying child must only have one spouse within that age range. A single individual with a qualifying child has no age requirement, aside from the fact that he is not the qualifying child or dependent of another taxpayer. A married couple with one qualifying child is classified as claimable by a qualifying relative, and the couple must also have earned income before once can qualify for an EIC.
  • All taxpayers and qualifying children must have valid social security numbers. This includes the SSN cards that have “Valid for work only with DHS authorization” and “Valid for work only with INS authorization.”
  • For Single, Qualifying Widows, Qualifying Widowers, Heads of Households and Married but Filing Jointly taxpayers, they must have valid filing status for the EIC. It still depends on the total income of both the husband and the wife. Married couples who file jointly can have a better advantage depending on the phase out. A legally married couple can also file jointly despite that act that they have lived apart for the entire income tax year and even if they do not have any expenses or revenues that they share throughout the income tax year. As long as both the husband and wife agree to file together, then they can do so.

Finally, another important note to look at is that it phases out by the adjusted gross income or the greater of the total earned income. For example, a married couple whose overall income amounts to $21,500 but has $3,100 investment income is eligible for the maximum credit, depending on the number of their qualifying child. That investment income cannot get any greater than $3,100. They also receive zero EIC. There are some incomes that range beyond this, depending on the increase of dollar investment as well as the result of the losses after dollars that have been taxed.

Understanding Adoption Costs and the Deduction Taxpayers Can Claim

An adoption tax credit is the credit or tax deduction that adoptive parents receive which encourage adoption. It is stated in Section 36C of the Internal Revenue Code of the United States, and it provides credit for “qualified adoption expenses.” These are incurred or paid by taxpayers.

According to IRS, adoption costs and tax credit include qualified adoption expenses to pay for the adoption of an eligible child which also serves as an exclusion for the employer to provide adoption assistance.

Tax Year to Claim Adoption Costs

Domestic adoption expenses can be claimed for the tax credit of the given income tax year as long as both have been paid. Domestic and foreign adoption costs can be claimed in the given tax year when the adoption process is finalized. Domestic adoption expenses are also accepted even during the adoption process. The accumulated adoption expenses for every child are credited on the previous year as long as it has been evaluated and determined fit and suitable for the maximum tax credit.

Qualified Adoption Expenses

As stated in the US tax law regarding adoption costs, the qualified expenses cover fees such as the adoption costs, attorney fees, court costs, traveling expenses (which also includes the cost of meals and lodging while on the road) and other miscellaneous expenses that are related to the taxpayer legally adopting a child that is deemed eligible. The adoption tax credit per child is doubled when two children are adopted in the same year. It is very important to note that this is credit and not deduction. This means there is a higher deduction considering it is the latter. To elaborate more,  the tax credit is a dollar for dollar reduction which means that the deduction from the credit is the total amount per dollar, which makes it a bigger deduction that what would have been subtracted if it were a mere deduction.

If the adopted child is one with special needs, the parents can claim full credit even without documenting the expenses. There are specific factors that determine the qualifications and the benefits of the child with the special needs and they vary from state to state. A qualifying child that has special needs because of a condition or factor may involve any of these:

  • Racial background or ethnicity
  • Age
  • Emotional, physical or medical disabilities
  • Risk of emotional, mental and physical disability due to birth family history
  • A condition that makes it difficult for the child to find a family that can adopt him or her

There are broader and more elaborate definitions of “special needs, ” and these can be used to determine if the child is qualified for the financial assistance from the Federal Government regarding the adoption of youth and children within the US foster care system.  There’s no single definition of what special needs are, but according to the Social Security Act, under Title IV-E, the child or the youth that has special needs must meet both requirements to be qualified for Federal Adoption Assistance:

  1. The child or the youth can no longer be returned to his or her biological parents, for any reason.
  2. It is the best interest of the child or the youth to be placed in a caring environment.

The adoptive parents must document the child with special needs every paper work that they get their hands onto. The documentation includes assistance for the adoption, the subsidy agreement concerning the adoption, and the letter from the state or county that the child welfare agency is situated.

Taxpayers should document all the financial records including the written adoption paperwork, home study paper work, and legal agreements. Most audits concerning adoption tax credit can be completed by correspondence through an audit. The taxpayer and the accountant can communicate with the IRS via fax or mail. Tax audits also occur every three years so records that are concerning adoption expenses should be kept and retained.

Internal adoptions also require more paperwork as well as registration when the child from abroad has been adopted and then starts living in the US. Social Security Numbers and Social Security Cards, as well as passports and birth certificates along with US readoption,  are also required.  Additional documents that are needed for a child to permanently reside in the US are of great importance, and taxpayers must keep this. Readoption is also a means of documenting the child-parent relationship as stated in US law.

Adoption Credit and Adoption Assistance Programs

Tax benefits for adoption can also include the tax credit for a qualified adoption cost that will be paid by the qualified child, as well as the exclusion from the income of the employer that provides the adoption assistance. The adoption costs are non-refundable which means that it is limited to the taxpayer’s liability for that income tax year. The credit in excess of the liability can be carried to the next five years.

Qualified adoption expenses

Expenses for qualified adoption an also include the home study if the child is physically or mentally incapable of attending a traditional school.

Qualified adoption expenses include the costs that are paid by the registered domestic partner of the taxpayer who lives in the same state for same-sex second parent or co-parents. Adoption of same-sex couples has already been defined so that the child they adopt is covered by adoption costs expenses and can, therefore, qualify for the credit.

Income and Dollar Limitations

There are limitations for credit and exclusion per child. The income limit on the adoption cost depends on the MAGI or the modified adjusted gross income. If that amount falls between the specific limit, then the credit of the taxpayer is excluded to the phaseout, whether it be eliminated or reduced.

The dollar limit for the specific income tax year must be reduced based on the amount of the qualified adoption expenses. These are then claimed in the previous years for the adoption effort. When computing for the dollar limitation, the adoption costs that are paid and claimed about the unsuccessful adoption effort should be combined with the qualified adoption costs that are paid in subsequent attempts, whether the adoption was successful or not.

The dollar limitation also applies to both the exclusion as well as the credit that the taxpayer can claim both of these for the adoption costs. However, if the taxpayer can claim the exclusion that is allowed before claiming any credit, then the expenses used for the exclusion that will be reduced from the amount of the adoption costs will be available for the credit. This results to the taxpayer not being able to claim both the credit as well as the exclusion from the adoption tax credit.

When can the Adoption Costs Credit be claimed?

The tax year for which the taxpayer can claim the credit depends on these:

  • Whenever all expenses are paid.
  • Whether the adoption is domestic or foreign.
  • Once the adoption has finalized.

The adoption costs that are allowed for domestic or foreign adoption depends on the timing rules that claim the credit, whether or not these are qualified. It depends entirely on the kind of adoption.

  • Domestic adoption is when the child is a US citizen (whether he is a natural citizen or a resident of the US during the adoption process) is eligible for the process, and all the expenses are paid even before the income tax year ends, and the papers have been finalized. The credit for the income tax year follows the coming years for the payment.
  • Foreign adoption is the adoption of a child that is qualified who is not yet a citizen, nor the resident of the United States. Qualified adoption costs that are paid before and even during the income tax year are allowed and considered as credit for the income tax year when the adoption is finalized.

Once the adoption is finalized and subject to the limitation, the adoption costs that are qualified are paid during and sometimes after the year as credit for the payment, whether the adoption is domestic or foreign.

Adoption of US children who have special needs

If the taxpayer adopts a child that is declared to have special needs by the state, then the taxpayer is eligible for the maximum amount of credit.  The maximum amount is then reduced by qualified adoption expenses for the qualified child in the previous years. The limitation regarding MAGI also applies.

If the taxpayer adopts a child whom the state has determined with special needs, then the employer of the taxpayer has written and qualified adoption assistance. This also makes the taxpayer eligible for the exclusion, even if the taxpayer and the employer have no records of adoption costs.

A child is considered to have special needs, as defined by the adoption costs, if:

  1. The child is a US citizen, or a resident of US during the adoption process started.
  2. A state has already determined that the child should not and cannot be returned to his or her biological parents.
  3. A state has already determined that the child should be put into someone else’s care.
  4. A common mistake is confusing “children with special needs” along with the whole point of having an adoption credit. Foreign children are not considered eligible to benefit from what is regarded as the special needs, simply for the purposes of claiming adoption credit. Even American children who are disabled cannot have special needs so that they can get deductions for the adoption costs. Special needs pertain to the children who are mentally, physically and emotionally disabled.

State Adoption Tax Credits

There are various states that offer additional tax credits regarding adoption to benefit their residents. If taxpayers live in such a state, then they are offered with a state-level adoption tax deduction and credit. Taxpayers can add their tax experts if they are eligible for these.

Adoption Disruption Still Applies for Tax Credit Benefits

Families who have gone through situations wherein an adoption process has been disrupted can still benefit from the tax credit. Families that qualify for these can also deduct the qualifying adoption expenses on the disrupted adoption. Nonetheless, these families have to wait for a whole year to go by even before they can file for the credit. The maximum credit also applies no matter how many adoptions, whether these pushed through or were disrupted, that the family has experienced for that income tax year.

Dependency Tax Exemption

Adoptive parents can also take the similar dependency exemption that is stated on their income taxes that can greatly benefit the adopted children, including children who are placed under their care, even if the adoption is not yet finalized. The exemption also deducts the taxable income. Families must then provide half of the child’s support to make the exemption costs.

Adoption Tax Credit Before Finalized

Each year, adoptive families inquire whether they can still file their taxes and not have their child’s SSN. This is not possible because the SSN is received once the child has been successfully adopted. The adoption attorney of the taxpayer should then apply for the child’s SSN along with the birth certificate that has been amended. This is very crucial for the court hearing especially when it is being finalized. Taxpayers who do not have these just yet must turn to their accountant, tax representatives, or tax experts so that they can apply for a TIN that is temporary which the child needs. Taxpayers can also file for the taxes using that number.

Filing Tax Returns with Adoption Tax Credit

Due to documentation and the increase in requirements, the Affordable Care Act is introduced, and it helps taxpayers claim the necessary Adoption Tax Credit that can be filed under the income tax year and with the help of a professional accountant.

Meal Expenses: How Much Can You Deduct?

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.

Incidental-Expenses-Only

 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.

Where is Your Tax Home?

If your job requires you to travel from time to time, some of the expenses that you incur while traveling away from home may be entitled to tax deductions. In this sense, however, home does not necessarily refer to the place where you live but the place where you work. This is what the Internal Revenue Service (IRS) refers to as your tax home.

Determining where your tax home is is the first and most fundamental thing that you need to do if you want to determine if you are really traveling away from home.

Basically, your tax home refers to the general area of your workplace, regardless of where you actually live. So, if you work in New York, your tax home is New York.

Do not be confused if the place where you work is different from the place where you lay your head at night, because your tax home designation has nothing to do with where you live. In fact, you may travel miles from your permanent residence to your workplace every day, but your workplace will still and always be your tax home.

 Why You Need to Determine Your Tax Home

Often, when you attend a cocktail party and are asked where your home is, your answer is your current place of residence. However, that is not necessarily the case if the one asking you is from the IRS.  While their tax home is the same as their personal home for some taxpayers, the story is different for those who frequently travel for work or business. Don’t think that your tax home doesn’t deserve a thought, because it does matter especially for taxpayers like you.

According to the IRS, your travel can be considered deductible if your work or business requires you to be away from home longer than your normal work hours. Given that, it is clear that the key criterion in determining if your travel expenses are deductible is if your travel takes you away from your tax home.

Differentiating your tax home from your personal home is crucial because only those expenses incur while you are away from your tax home are considered by the law as deductible.

Your Tax Home, As Per the IRS

 IRS’ definition of tax home is plain and simple—Your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.

Basically, your tax home covers the general area or the entire city where your business or workplace is located. If your office is somewhere in Cortlandt Street in New York, then your tax home is New York. If you travel to Louisville every week for your business but return to your permanent residence in Nashville on weekends, your tax home is still Louisville even if you call Nashville home.

 Why Your Workplace Must Be Your Tax Home

There is a reason the IRS requires every taxpayer to know their tax home, and there is a reason the tax home designation exists in the IRS law. The purpose of the tax home designation is for the deduction of travel expenses associated with work or business. This explains why in the eyes of the tax-collecting agency, your workplace is your home and not your apartment.

Imagine living miles outside Louisville but working in the city. If there is no tax home designation, then you must also be counting your house in Nashville out as your tax home. If that is the case, then theoretically, you can declare each and every expense you spend in Nashville as a business or work-related expense. The IRS is wise enough not to fall for such tricks.

When You Have More Than One Regular Place of Business

 Some taxpayers find it hard to determine their tax home because they have multiple places of business. Should that be your case, then your tax home must be your main place of business or the place where you conduct majority of your business. So, if you have offices in Nashville, Louisville and Franklin, then you must declare the place where you do most of your work as your tax home. In this case, the IRS expects you to consider the following in determining your tax home:

  • How much is the total time that you normally spend in each workplace?
  • How much work do you usually accomplish in each workplace?
  • How much money do you make in each workplace? Is the income you earn from conducting business there significant or insignificant?

Of the above mentioned criteria, the first one is the most important since the IRS states that the place where you conduct most of your business should be your tax home. Logically, the workplace where you spend most of your time is the same place where you conduct majority of your business.

Take this as an example. You reside in Birmingham since you have a seasonal job there for nine months each year. Annually, you earn around $50,000 from your seasonal job there. For the rest of the year which is equivalent to three months, you work in Atlanta where you earn $20,000. In that case, you may consider Birmingham as your main place of business since you spend most of your time there and you earn most of your significant income there.

When You Do Not Have a Regular or Main Place of Business

 Taxpayers who have more than one regular place of business and those who do not have a regular or main place of business usually have the same dilemma in determining their tax home. According to the IRS, for taxpayers whose nature of work causes them to not have a regular or main place of business, their tax home must be the location of their residence or where they regularly live.

Say you are a freelance web designer and do not have a regular office where you conduct business. Since your job requires you to visit offices of your clients to discuss business with them, and since you do not really have a workplace of your own, then your tax home is your house.

Freelance workers and travel bloggers are perfect examples of taxpayers who do not have a regular workplace, since they do not have a fixed place where they conduct business. In this case, you do most of the work at home so your tax home may be your actual home or your personal residence.

Take a look at these factors which the IRS considers in determining your tax home if you do not have a regular place of business:

  • You at least perform part of your business in the area of your personal residence and use it for lodging while conducting business.
  • There are living expenses in your personal residence that you are compelled to duplicate because your job or business needs you to travel away from home.
  • You do not abandon the area of both your place of lodging and personal residence are located, members of your family live with you in that residence, and you use that home for lodging most of the time.

Remember that you need to meet all the three criteria so you can consider your personal residence as your tax home. If you meet all the three factors, then any travel expense that you may incur away from your personal home can be considered deductible since they meet the “away from home” requirement for business travel deductions.

Unfortunately though, if you only meet one of the three factors, then the IRS can consider you as not having a true tax home so you can write off none of your travel expenses.

For example, your family residence is located in Indianapolis. In that city, you work 15 weeks a year. For the rest of the year, you work for the same employer in Cincinnati, where you dine in expensive restaurants and sleep in a rented apartment. For you, it doesn’t really matter whether you are in Indianapolis or in Cincinnati because your salary is the same whether you are in one city or the other. However, since you conduct most of your business in Cincinnati, that city is considered your tax home. That means that even if your expenses there are bigger than when you are in Indianapolis, you cannot deduct any of your expenses for meals and lodging while you are there. When you return to your family home in Indianapolis, you are away from your tax home so you can deduct the cost of your round trip between Indianapolis and Cincinnati, as well as part of your family’s living expenses for meals and lodging while working in your personal home.

When You Do Not Have a Fixed Workplace and a Fixed Home Address

 In determining your tax home, there is something much worse than having more than one regular workplace or not having a regular workplace at all– Not having a regular place of business or post of duty and no personal residence at the same time.

While determining your tax home is not that easy if you have more than one regular workplace, it becomes easy when you finally determine which among your workplaces is your tax home. And while determining your tax home is not that easy when you do not have a regular workplace, it becomes easy when you have a personal residence which you can call your tax home.

However, things become a bit complicated when you do not have a regular place of business and you do not have a place where you regularly live at the same time. In that case, the IRS considers you as an itinerant.

The IRS law states that the tax home of an itinerant or a transient is wherever he works. If you belong to this category, then you are not entitled to travel expense deductions because no matter where you work, you are never considered to be traveling away from home.

Since as an itinerant, everywhere you work is your tax home, you are never really away from home, which means that you cannot write off any of your travel expenses.

An outside salesman is an example of an itinerant. Say you are an outside salesman whose sales territory covers different states. The main office of your employee is in Memphis but you do not work or conduct any business there. Your work assignments are relatively temporary and you have no idea about the locations of your future assignments. Your sister is renting out a room somewhere in Saint Louis so you stay there for a couple of weekends each year, but you do not conduct any business in that area. You do not pay for your accommodation there either. Since you do not satisfy any of the previously mentioned factors that will make your regular home your tax home, then you are considered an itinerant and therefore have no deductible travel expenses.

 When Traveling is Considered Traveling Away from Your Tax Home

 Regardless of which of the abovementioned categories you fall under, all the said criteria boil down to the fact that determining your tax home is critical in determining your tax liability when traveling. Once you have already identified your tax home, it will become easier for you to know which of your travel expenses you should write off and which you should not.

It is also worth mentioning that these tax home rules are the same whether you are an employee or a self-employed individual, although there are certain instances when the degree to which you can write off your business travel expenses may differ.

For instance, employees can only deduct work-related expenses that they have not reimbursed from their employers, while self-employed individuals can deduct the full amount of their travel expenses as long as they are incurred away from their tax homes. In any case, remember to keep well-organized records like receipts, checks and other documents to support your deduction claims.

Visiting Your Dream Destination While Winning the Audit: Here’s How You Do It

Taking a trip to the destination of your dreams sounds fun, but nothing is more fun that taking a trip while winning the resulting audit at the same time.

Yes, you read it right. Turning your vacation into an honest-to-goodness tax deduction is possible. In fact, you can travel throughout the Mediterranean with no or very little travel costs. The key is by making your trip either a passive or an active business trip. Remember that the only way you can reduce your transportation expenses is by making business the primary purpose of your trip.

As a business owner, you know that taking a vacation doesn’t come easy. Aside from the fact that you don’t have paid vacation leaves, you can’t just entrust your business to someone else while you’re away. However, your advantage is that when it comes to business, you are free to mix pleasure with business. If you do it right, you make it possible for you to enjoy a vacation while reducing your tax bill.

 Why Need to Make Your Trip a Business Trip

 If your purpose is to lower your travel expenses, making your vacation a business trip is a must. This is because it becomes a lot easier to deduct transportation expenses if the purpose of your trip is business.

You should also not forget to count up the number of days allotted for business and for personal activities in your planned trip. As a rule of thumb, make sure that majority of your travel days is spent on business activities. A weekend that is squeezed in between workdays can also be counted as business days. Hence, you can fly to Hawaii on a Thursday and meet a client the following day, stay there for the entire weekend, have meetings again on Monday and Tuesday, and fly back home the following day. That way, you’ve already had seven business days and you can enjoy Hawaii and still expense your transportation costs.

 How to Make Your Vacation Look like a Business Trip

 Now that you know that the key to reducing your travel tax is by writing it off as a business trip, the next thing you have to figure out is how to actually do that. Well, of course you cannot just take off for your dream destination with your business cards and pretend that you are going there for pure business.

Today, for your trip to be considered a business trip, you have to have a prior set business purpose. That is as per the requirements set by the IRS. Simply put, you need to schedule at least one business appointment before leaving for your trip. If you fail to do it, then you will never be able to expense your transportation costs.

There is nothing wrong with deducting part or your entire trip by deducting your travel costs as business expenses. In fact, this is the reason many professional groups host their annual conventions in popular tourist spots. Combining your vacation with business travel is not a bad idea at all, as long as you do it right.

 The IRS Rule on Travel Expenses and Deductions

 If you love the idea of traveling with minimal travel costs, it is necessary that you identify which among your travel expenses are tax-deductible and which are not. Once you have identified that, then you can finally let your tax savings pay for the deductible part of your trip.

Writing off some of your travel expenses may invite scrutiny, but don’t hesitate taking deductions if you think you are entitled to them. However, you have to be careful when it comes to this part and remember the IRS rule. You cannot simply claim that your trip is a business trip just because you have to visit an office somewhere. The IRS made it clear: “The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.”

Expenses that are Considered Deductible

 You know that in every trip, your transportation costs–taxi fare, airfare, airport parking, etc.)–make up a huge part of your travel expenses. If you are good and careful enough, you can fully offset such costs so long as you meet the criteria set by the IRS. Aside from your transportation costs though, there are other expenses that can be added up, too.

The IRS Pub 463 has laid out the details when it comes to these expenses, but just to give you an idea, here are some of the basic things that you should take note of:

  • For each day that is considered business day, you are allowed to deduct the entire cost for your lodging, car rentals and tips. That means that if your weeklong trip to Hawaii includes five days of business and two days for your personal getaway, then you can legally deduct your hotel bill for all those five business days.
  • For each day that is considered business day, you can deduct 50 percent of the total amount you spent for food.
  • You can also deduct other miscellaneous expenses that are “ordinary and necessary” to your travel, like dry cleaning and baggage fees.
  • The catch is, you cannot deduct the amount spend for your family, in case they joined you in your trip.

 Simple Steps to Follow When Writing Off a Trip

  1.  Choose any place in the U.S. where you want to go.
  2. Decide how you want to write off your trip–as an active or a passive trip.
  3. Find a conference, convention or any event in that destination that is related to your business or profession.
  4. Book the trip.

 Things to Remember if You Want to Write Off Your Trip

 You have to go a long way to be able to write off your trip. The IRS has existing rules stipulating which particular expenses can be written off and which cannot, so it takes a dose of wisdom to avail of tax deductions without a hitch.

  1.  S. Trip vs International Trip. Deductions for business trips within the U.S. differ from deductions for international trips. If your trip is pure business and is just within the U.S., then you can expect your transportation to be fully deducted both ways. However, if your business trip is out of the country, then it has to be at least 75 percent business to be written off your plane ticket. If you go less than 75 percent, then the amount to be deducted will be just the percentage related to business.
  1. The Importance of Traveling via a U.S.-registered cruise. In the event that you are in a business-related cruise, make sure that you are aboard a ship that is registered in the U.S. and not in any other country. However, the rule is that a business-related cruise in a U.S. ship entitles you to only a deduction of up to $2,000 a year, regardless of how long or how frequent your trip is. Also, this has to come with a detailed written statement with tax return.
  1. On Overstaying. If you stay in Hawaii for a full week but the days dedicated for business is just five days, that’s fine. You do not need to work all day and end your staycation as soon as your business is done. Remember that spending a few more days in your destination will not disqualify you for deductions, but you have to ensure that your primary purpose for that trip is business and everything is well-documented.
  1. Family’s Expenses. When it comes to the expenses incurred by your family throughout the trip, the story is different. Unless they are employees in your company too, any of your family members is not entitled to a deduction because you cannot deduct expenses for anyone who is not really part of the business trip.

If you want a way out of this rule, the trick you can do is to find a means through which you can overlap what you have to pay for yourself with what a family member can pay for himself. For example, when you drive him in your car, your deductible transportation also gets him to the destination since both of you are riding the same car. Same trick applies if you share a single hotel room. It is important to note, however, that the costs incurred for the added occupants, the need for a larger room, for instance, are not covered by the deductions.

 

  1.  Miscellaneous Fees. We’ve been talking here of transportation costs like airfare, hotel expenses and food. But how about other fees that you may incur in the course of your travel? Well, it is normal for any trip to rack up some incidental costs, including laundry charges, tips, taxi fares, internet access fees and phone calls. The rule for such fees is simple. If these expenses are related to your business trip in any way, then you are free to write them off. Otherwise, you pay for them.
  2. Meal Deductions. When you go on a business trip with your associates, you are entitled to a deduction of 50 cents per dollar, which means you get to eat out at only half of your total meal cost.
  3. Record-keeping. As previously mentioned, the key to getting as much deductions as possible for your trip is to be careful. Since many business organizations abuse this area of the law, it is highly likely for the IRS to interrogate you when it comes to your deductions. When that time comes, you have to be ready to justify everything. Make sure that you keep all the necessary records, which do not only include the receipts but everything that will prove that you were actually out there for a business trip. Hence, you have to be meticulous in keeping even your itineraries and agendas.
  4.  Extravagant Expenses. You don’t want to be called an abuser of the law, so be reasonable. While you are free to write off some of your expenses since it’s a business trip, the IRS has the power to foul on whatever expenses it may find too extravagant. As the law stipulates, your expenses must be reasonable based on facts and circumstances.

On Documenting Your Trip

 As previously mentioned, you have to document everything so you will have something to present in case the IRS asks you to prove that your trip was actually a business trip. This may sound a bit demanding, but if that’s too big a deal to you, here’s the deal: You don’t really need to keep a pocketful of receipts for expenses smaller than $75.

While the IRS does not require you to keep receipts for a travel expense that’s worth under that amount, that doesn’t necessarily mean that you are already off the hook when it comes to record-keeping. Remember, your goal is to make as much expenses deductible as possible, so be responsible enough to document all your deductible expenses. That means if you stayed at a hotel that’s worth $75, you still ought to have a copy of its receipt so you can expense it.

Tax Strategy

 The only best way for you to avoid trouble when it comes to tax strategy is to be honest. Do not deduct expenses that you are not entitled to and keep all the necessary documents that you will eventually need to back up your claim for deductions. Remember that substantiating your claim is important because if you fail to document your expenses, you are entitled to serious penalties such as losing all the deductions altogether and having to pay additional tax on top of penalties and interest.

The bottom line here is that there are existing rules on travel deductions and you’re not supposed to push these rules. However, there is no reason that you cannot tack on some days of fun when you are out there for business.

Employment Matters: The Difference Between Contractors and Employees

When there’s extra work that needs to get done and there are no sufficient employees to do the job, companies usually hire more workers to keep up with the customer rush. If you happen to find a job in a company, make it a point that you understand your status in that company. That way, you will know how you are supposed to be treated by your new employer.

More often than not, problems arise because independent contractors think of themselves as employees, and vice-versa. For some, knowing whether they are contractors or employees doesn’t matter because all that matters to them is that they got a job and an income. However, they don’t realize that not knowing which classification they belong to—independent contractor or employee—will put them at the risk of tax troubles in the future.

But how does the law classify contractors vs. employees?

Telling Between Contractors and Employees

On the surface, you probably cannot tell what sets contractors apart from employees because most of the time, they do the same work. However, the law views them differently. The law also views the companies that hire them just as differently.

Basically, the thing that makes contractors different from employees is their degree of independence and control over the work that’s assigned to them. Usually, while an employee performs tasks that are dictated by others and are provided trainings to effectively do the job, an independent contractor has more than one client and sets his own hours at work. A contractor typically does not have a boss and he uses his own tools in performing his job. Also, his salary doesn’t automatically come at a definite date because he invoices for each of his completed assignments.

While that seems pretty much understandable, there can sometimes be gray areas, too.

In many cases, companies prefer hiring contractors instead of employees so they can save on labor costs. Financial-wise, hiring contractors makes more sense because contractors are not entitled to benefits. Also, companies save considerably on taxes since in hiring contractors, it no longer becomes necessary for the employer to pay portion of the state unemployment taxes.

Companies that follow the law and take the employee route usually regret their decisions at some point in the future because of the cost that making someone an employee entails. That explains why small businesses that operate on tighter margins are often tempted to hire contractors instead of employees, even when the job that needs to get done calls for an employee.

To minimize their costs, business owners make people believe that it is more advantageous to be a contractor than an employee since contractors’ take-home pays are bigger. While that may be true on the surface, that is not as simple as it seems.

The Tax Implications of Contractual Work 

If you are an employee, your employer is the one that pays half of your Social Security and Medicare taxes and withholds half of these taxes from your salary. That and the withholding of your federal and state income taxes are the reasons why those employees who work at $9 per hour at fast-food restaurants take home less every payday.

So, does that prove that being a contractor is better than being an employee?

The answer is not necessarily. Why? Because independent contractors pay 100% of all their Social Security and Medicare taxes when they file their tax returns, and pay all the income taxes that were not withheld. And if you are a contractor and you failed to make estimated tax payments every quarter to cover your taxes, prepare yourself for an unfortunate surprise come April. This only goes to show how tax responsibilities affect the amount that employees take home during payday versus the amount taken home by contractors.

Contractors Escaping Taxes

 Sounds common, doesn’t it? Many contractors believe that one of the advantages of being an independent contractor is that they get to escape taxes. Actually, they don’t. Well, that’s always possible. But that is not legal.

If you are a contractor and are paid in cash, don’t think that that already lets you get out of paying taxes and not report it. Whether your pay comes in the form of a check, cash, digital transfer or barter, and regardless of its amount, remember that every pay you get for each work that you do is taxable income.

Many contractors get all the more confused about taxable contract income because of the amounts that the IRS uses to require reporting of earnings. Remember that when you are a contractor, you get Form 1099-MISC to lay down the details of how much you have made for each job. Form 1099-MISC is what you need, not a W-2. However, as a contractor, an employer does not need to send you a form 1099 if your earnings during the tax year in question is less than $600.

The law can’t stress enough that the abovementioned rule is just a reporting requirement and has nothing to do with your taxable income. However much you earn, your earnings are always legally taxable and should be reported either on Schedule C or as other income on Form 1040.

For your FICA taxes, which refer to your Social Security and Medicare taxes, these taxes are self-employment taxes which you are responsible for in full. If you are an independent contractor, you should report the amount of your FICA taxes and pay them via Schedule SE.

While being an independent contractor has its share of advantages when it comes to taxes, there are instances when a business hires a contractor who is eventually deemed as an employee. In such cases, both parties lose significant amount of taxes, interests, penalties and premiums.

Since the relationship between a company and a worker sometimes tends to be a gray area, it is imperative that you protect your status as an independent contractor. Well, that is if you are really an independent contractor. To make sure that your work as a contractor remains independent of your employer, it should be able to pass the Four Point Test.

Determining Your Status

 If one asks you now whether you are a contractor or an employee and what makes you think so, do you know how to answer?

In Canada, a four-point test helps workers to determine their relationship with the business that you are working for. The agency clearly sets out a method that lets tax payers and workers identify the nature of their relationship with their companies.

The four-point test makes clear-cut distinctions between contractors and employees based on their control, tool ownership, risk of loss and integration.

  • Here, the issue is who controls the worker. If the employer has all the right to hire or fire you, determine your salary, decide on the time and place of your work as well as the manner in which you should perform your work, then you are an employee. Even if the employer does not directly control how you do your job, if he still has the right to do so, then an employer-employee relationship exists between the two of you.

 On the other hand, if you are a contractor, it is not necessarily the employer that runs the ship. As a contractor, you decide how you are going to perform your job and you maintain your right to decide where and when you are going to get the work done. In short, you are the only person responsible for planning the job that you need to get done.

  • Ownership of Tools. When it comes to tool ownership, the common notion is that what sets contractors apart from employees is that contractors supply their own tools. While that may be true, the problem is that it is also customary for other employees to provide tools for themselves so they can perform their jobs, such as in the case of garage mechanics and painters.

If that is the case, then how does tool ownership differentiate a contractor from an employee? According to CRA, the cost of using the tools is a better indication of whether you are a contractor or an employee. As per the CRA rule, you are considered an independent contractor if you purchase or rent large tools that call for major investment and expensive maintenance. Otherwise, you are an employee. Another good example of a self-employed, independent contractor is a home-based IT worker who uses his own computer to perform his job.

  • Chance of Profit/Risk of Loss. Here, determining which type of relationship exists between the business and the worker heavily depends on the financial involvement of the latter. Take a look at these questions:
  •  Do you have a chance of gaining profit?
  • Are you at risk of incurring losses due to damage to materials, delays or bad debts?
  • Do you cover the operating costs?

If your answer to all of these three questions is a Yes, then you are considered an independent contractor.

  • This criterion seems to be an attempt to presume the intention of the involved parties. According to CRA, a business relationship exists if the worker integrates the payer’s activities to his own commercial activities. On the other hand, an employer-employee relationship exists if the worker integrates his activities to the commercial activities of the payer.

The CRA does not lay out how to determine such integrations. However, an obvious way of proving that you integrate your own commercial activities is by having multiple clients. If you have only one client, it becomes easy for others to presume that you share an employer-employee relationship with that client. But be careful when having a single client, because that puts you at risk of being declared as a personal services corporation by the CRA.

Deciding Whether to Become an Employee or a Contractor

 Based on the facts discussed, it looks like being a contractor can be beneficial for you in terms of earnings and taxes, so long as you are prepared. However, remember that being an employee or a contractor is not really one of those decisions that you make when you look for a job. In reality, it is the business or company that decides whether you are a contractor or an employee.

Most of the time, employees are carried on the books, unlike contractors. So as a contractor, it is your responsibility to enshrine your relationship with the company you are working for through a contract. This contract should focus on the first three points of the four-point test and set out the intentions of both parties. Since you are an independent contractor, you have to make sure that such a written agreement is carefully crafted so your status is protected in case the other party subsequently changes his mind and argues that your relationship is not what you think it is.

At the end of the day, it is the business’ responsibility to weigh certain factors to determine whether a worker is an independent contractor or an employee. While other factors may indicate that one is an employee, other factors may indicate that he is an independent contractor. Apparently, there is no magic that stands alone in determining one’s status, but the key to making the right determination is by looking at the entire relationship that the person has with the company he is working for.

In a nutshell, what makes a worker an independent contractor is his being his own boss, although his work should still stay within the definitions of a contract with the party he is working for. Also, he is not eligible for benefits provided by the employer and retains a certain degree of independence and control. On the other hand, a worker is an employee if he treats the business as his stable source of income, is eligible to benefits and pensions, and gives up elements of control to his employer. He should also be working within the time and place specified by the employer.