5 Good Questions About Income Tax

Finance, Home & Family
on March 3, 2014
Tax Time

As the April 15 deadline for filing federal income tax returns approaches, Stephen W. DeFilippis, a tax preparer at DeFilippis Financial Group in Wheaton, Illinois, answers some common tax questions.

1. Do my retired parents have to file a tax return?

“You must file a federal income tax return if your income is above a certain level, and the level varies depending on your filing status, age and the type of income you receive. For the 2013 tax year, for example, if you are at least 65 and single, your filing threshold is $11,500. For a married couple filing jointly, if they’re both 65 or older, the threshold is $22,400; if one of them is under 65, it’s $21,200. You first have to determine if any of your Social Security benefits are taxable. In some cases, Social Security benefits must be included in gross income. But if your only income is Social Security benefits, then you don’t have to file.”

2. Will applying for an extension of time to file my tax return allow me to postpone paying any taxes I owe?

“No. When you file an extension, all it does is extend the time frame for filing the return. If you owe any money, and you don’t pay it by the April 15 deadline, you will have a failure-to-pay penalty. It’s important when you file the extension to try to have as much information as possible so you can make an accurate guess as to what your liability will be—so that if you do owe money, you can pay it, aiming to break even when you actually file your return. Anything you owe after the extension would be subject to the failure-to-pay penalty.”

3. Do I have to pay taxes on the profit from the sale of my home?

“It depends on the amount of profit you made and how long you lived in the home before you sold it. If you are single, you can exclude up to $250,000 of gain on the sale. If you’re married and file a joint return, you can exclude up to $500,000 of gain. You have to have owned and lived in the home as your primary residence for at least two of the five years immediately preceding the sale, and not excluded the gain from another home within the past two years. Any profit exceeding the $250,000/$500,000 limits—and those situations are going to be very rare—is reported as a capital gain and may be subject to the net investment income tax.”

4. What’s the difference in a deduction and a credit on my income tax return?

“For every dollar of deduction, you will save tax at your marginal tax rate. So, for instance, if you’re in the 25 percent marginal tax bracket, and you have an additional $1 of deduction, you will save 25 cents in actual tax savings. It will reduce your taxes by 25 cents. A credit is a dollar-for-dollar reduction in your tax liability, and certain credits are even refundable if you’ve brought your tax liability to zero. In other words, if you don’t owe any taxes, you can claim the credit and get money back. Common credits include the child tax credit for dependent children and the education credits for children that are in post-secondary education.”

5. What is the age limit on claiming my child as a dependent?

“The child must be either under age 19 or be a full-time student under 24. There is no age limit if the child is totally and permanently disabled. There are other rules about claiming a child as a dependent, including tests regarding residency, support and their tax return filing status. Other relatives, including brothers, sisters, stepbrothers, stepsisters or descendants of any of them, may be claimed as a dependent child if they meet these tests. If a child or another relative does not meet these tests, they still may be considered as dependents—regardless of age—if they meet certain ‘qualifying relative’ tests.”

%d bloggers like this: