- 1 Who Can Be Claimed As A Tax Dependent?
- 2 5 tax strategies for digital nomads and location independent entrepreneurs
- 3 Filing taxes: Independent or Dependent? I'm confused.
- 4 tax dependant
- 5 What is a dependent tax deduction?
Who Can Be Claimed As A Tax Dependent?
One of the questions facing federal employees, retirees and annuitants as they prepare their 2016 income tax returns is which of their children or other relatives they can claim on their tax returns as tax dependents. This column gives guidance and the rules for whom can be claimed as a tax dependent. It is important to note that for each personal and dependency exemption claimed on an individual's 2016 Federal income tax return, the individual's gross income is reduced by $4,050, resulting in less taxable income and tax liability.
General Rules for Claiming a Dependent
There are two rules for an individual claiming a tax dependent, namely: (1) An individual cannot claim any dependents if he, or his spouse if filing married filing jointly, can be claimed as a dependent by another individual; and (2) the person claimed as a tax dependent is: (a) unmarried; (b) a US citizen, resident alien or national, or a resident of Canada or Mexico; and (c) either a qualifying child or a qualifying relative. Note the following chart:
Be the individual's child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or descendent of any of the above.
Not be the individual's or anyone else's qualifying child
Be younger than the individual and either under age 19 or a full-time student under age 24, or any age if totally and permanently disabled
Either: (a) live with the individual all year as a member of his or her household or (b) be related to the individual
Live with the individual more than half the year
Have a gross income of less than $4,050
Not provide more than half of his or her support
Not provide more than half of his or her support
Not file a joint return (unless filed only to claim a refund)
Not be a qualifying child of another individual with higher priority under the “tie-breaker9rdquo; rules
In short, the following “tests9rdquo; determine whether a child can be a qualifying child. Under the uniform definition in Internal Revenue Code (IRC) section 152(c), a child is a qualifying child of another individual if: (1) the child has a specified relationship with the individual; (2) the child has not yet attained a specified age; (3) the child has the same principal place of residence as the individual for more than one half of the calendar year; (4) the child did not provide more than one-half of his or her support during the year; (5) the child is a US citizen, national, or resident of the U.S., Canada or Mexico, or is adopted; and (6) the child cannot file a joint tax return (unless to seek a return of withholding taxes). These tests are further explained:
• Relationship test. In order to be a qualifying child of an individual, the child must be the individual's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister or a descendent of any such individual. An individual legally adopted by the individual or someone who is lawfully placed with the individual for adoption by the individual is treated as a child of such individual by blood. A foster child, who is placed with the individual by an authorized placement agency or by judgment decree or other order of any court of competent jurisdiction, is treated as the individual's child.
• Age test. In general, the age test depends upon the tax benefit involved. In particular, a child must be under age 19 (under age 24 if the child is a full-time student) in order to be a qualifying child. The child must be under age 13 for purposes of the child dependent care tax credit, and under age 17 for purposes of the child tax credit. There is no age limit with respect to children or other relatives who are totally and permanently disabled at any time during the calendar year.
With respect to the child being a “full-time9rdquo; student, note the following:
The child must be: (a) enrolled for the number of hours or courses the school considers to be full-time attendance during some part of each of any five calendar months of the year. The months do not have to be consecutive; (b) a school can be an elementary, junior or senior high school, college, university, or technical, trade, or mechanical school. But an on-the-job training class, correspondence school or school offering courses through the internet, do not qualify as school; and (c) students who work in “co-op9rdquo; jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students. Finally, the qualifying child must be younger than the individual claiming the person as a qualifying child.
• Residency test. A child must have the same principal place of abode as the individual for more than half (6 months) of the calendar year. Temporary absences due to special circumstances including absences due to illness, education, business, vacation or military service are not treated as absences. Note that a child who was born during 2016 or who died during 2016 is treated as having lived with the individual throughout 2016. The child must have been born alive as shown on a birth certificate. A stillborn child does not qualify for the dependency exemption while a kidnapped child does qualify for the exemption in most cases, if law enforcement officials presume the child to be kidnapped.
In most cases the residency test of a child of divorce or separated parents is the qualifying child of the custodial parent. There are some exceptions and affected individuals should check with their tax advisors.
• Support test. To meet this test, an individual must provide more than half of a person's total support during the calendar year. A child who provides over one-half of his or her own support is generally not considered a qualifying child of another individual. See below for a “support worksheet”.
• “Tie breaking” rules. If a child would be a qualifying child with respect to more than one individual, such as a child living with his or her mother and grandmother in the same residence and more than one person claims a benefit with respect to that child, then the following “tie-breaking9rdquo; rules apply:
IF more than one person files a return claiming the same qualifying child and.
THEN the child will be treated as the qualifying child of the.
5 tax strategies for digital nomads and location independent entrepreneurs
Being a digital nomad is all about the freedom to live and work anywhere on earth. Don’t let your passport imprison you to your home country’s tax system.
Last updated January 7, 2017
Dateline: Brasov, Romania
In British electronica trio Years and Years‘ newest single, King, vocalist Olly Alexander sings about the shackles of a bad relationship and how he wants out.
I’m certainly not a music scholar, but it seems the title “King” is a nod to the feeling of freedom he feels in said relationship. However, in reality, he knows he is anything but free and is asking to be let go from the sense of false freedom.
Sounds a lot like expats doing taxes.
I caught you watching me under the light
I was a king under your control
I wanna feel like you’ve let me go
The phenomenon of digital nomads spawned by books like The Four Hour Workweek is huge. Thousands of people have quit their jobs in the United States, Canada, Australia, and Europe to live overseas in Southeast Asia and other emerging countries. No doubt, many feel like kings.
Here’s the dirty little secret: many digital nomads and location independent entrepreneurs are not in tax compliance back home. I call this “The Nomad Trap”; the idea that simply leaving your country as a tourist is enough to keep you from paying tax. If you’re in this boat, the fines and penalties could be huge. Even I have trouble keeping up with the endless tax laws these governments put out.
On top of that, most digital nomads I’ve met in my travels haven’t properly structured their affairs to legally reduce or eliminate taxes. While some people unnecessarily set up offshore companies, others who need them totally ignore that.
Hopefully you know by now that simply leaving your home country for greener pastures doesn’t mean an end to your tax obligations… especially if you’re a US person.
Just as in the song, you may feel like a “king” or queen with the freedom that being a digital nomad provides. However, maintaining your home country’s passport means you are still a king under the control of that government.
If and until you give up your citizenship, you have to play by their rules or risk the penalties of non-compliance. As always, ignorance of the law is no defense to tax authorities. And as of 2017, countries like Australia have been issuing more and more strict tax rulings to non-residents.
If you want to truly be free and not under the thumb of your local tax authority, here are some important steps. It doesn’t cost a lot to get started, but doing this stuff right from the beginning can save you countless hours of time and great expense.
As they say, an ounce of prevention is worth a pound of cure. Which is why we’ve taken the time to tell you about these five important tax strategies for digital nomads.
1. Become tax non-resident in your home country
This was one of the big discussion points at my private club meeting in Monaco earlier this month. More countries are raising the stakes for their citizens to escape taxation at home, even when your primary home is overseas.
For digital nomads, this can be especially challenging. Countries like the UK, Australia, and others limit the amount of time you can spend there once you’ve ticked the box to have your tax domicile located elsewhere.
That’s why obtaining a second residency can be an important step for digital nomads. Historically, many people obtained permanent residence in countries like Panama, but in my opinion Latin America can be needlessly bureaucratic and surprisingly expensive. Options in eastern Europe and Asia are often more attractive, although the choice is yours.
Putting down roots in your country of residency can help your case even more. This includes renting an apartment, getting a drivers’ license, joining a country club, or docking your yacht at the local marina. Every little step helps.
For US citizens, being tax non-resident can be as simple as spending 330 days in foreign countries in any 365 calendar day period. However, you still have to structure your company properly to avoid paying a minimum 15.3% tax for Social Security and Medicare.
2. Earn your money in an offshore company
All too often, I see entrepreneurs, and especially consultants, living overseas earning money in their personal name or even using a corporation in their home country.
There’s a reason you left California, and you ought to ditch your California LLC, too. Around our office, we refer to California as a sort of plague. There are some circumstances where using a corporate entity in your country of citizenship can be useful; in some cases, you can even structure it to be tax-free. It’s better to have an offshore company, though.
However, doing business in your own name may qualify you for tax exemptions like the Foreign Earned Income Exclusion in the United States, but it may leave you open to other taxes as mentioned above. If you’re not a US citizen, you could still be on the hook for income tax on your entire business profits if you mess up on step #1, or if you spend too much time somewhere else.
Being a digital nomad or perpetual traveler is all about being able to call anywhere “home”. Just make sure your definition lines up with that of the tax authorities where you lay your head.
Here in Europe, most countries practice what is called “residential taxation”. Live there long enough — often 183 days or more per year — and you’ll be taxed on your worldwide income. Some countries aren’t as aggressive as the United States at taxing your foreign investment income, but you can’t be too careful.
Fortunately, many of the countries sought out by nomads practice “territorial taxation“, which means that only income you earn in that country is taxed. Malaysia, Singapore, and Panama are a few examples of this. In simple terms, that means that earning money in an offshore company and not remitting it to where you’re living can keep you tax-free.
Of course, the United States is the most aggressive of all with what is called “citizenship-based taxation”. If you follow these steps, though, you stand a good chance to eliminate most forms of tax… unless perhaps you’re the sole employee of a business doing $20 million in profit.
If you travel from place to place as a tourist, you’ll enjoy the best of both worlds. Just be careful; the US can tax you if you overstay your welcome as a tourist. I think it’s written on the Statue of Liberty under “your huddled masses yearning to breathe free”.
4. Bank overseas in a foreign currency
Your newly internationalized business should use foreign currencies as a diversification tool. If you’re from the United States, holding US dollars in your personal and business account can be a ticking time bomb.
It’s easy to hold foreign currencies in offshore banks, and currency exchange rates in some of the large wealth havens in Asia are often excellent.
Banking offshore helps bolster your case that you’re truly a global citizen, not just someone on vacation. Again, every step in that direction helps.
5. Have an accountant that specializes in expat tax law
When I operated and invested in businesses in the United States, I retained the top tax firm in town. My annual tax return looked like a small town phonebook. Paying that firm thousands of dollars a year was well worth it, despite some of my employee friends who thought paying more than $399 at H&R Block was insane.
That said, the minute I saw the light and started applying offshore strategies, I found tax counsel that understood what it’s like to be an expat. For as expensive as my US-based firm was, they didn’t understand stuff like the FEIE or what an FBAR was. It rarely came up among their clients. Hiring an expat-focused tax preparer doesn’t have to be expensive. In fact, my expat tax attorney costs about the same as my high-powered domestic firm when I lived in the United States.
If you need help applying these tax strategies, apply here to see if you qualify to work with me 1-on-1 and avoid the tax pitfalls location independent workers face.
Filing taxes: Independent or Dependent? I'm confused.
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I filed as independant last year believing that I was an independant student. This year I talked to my school financial aid director and they told me that under New Jersey State Law, I am still considered a dependant until I am over 24 because I am still a full time student. I don't live with my mother and she doesn't claim me on my tax return. I work and pay rent.
What do I do about applying independant last year and getting a return?
What do I do this year when I am applying?
There's a significant condition for your parents to be able to claim you as a dependent:
You must have paid one-half or more of the tuition and maintenance costs for the student. Financial aid received by the student is not calculated into your cost when totaling one-half of your dependent’s tuition and maintenance. However, the money earned by students in College Work Study Programs is income and is taken into account.
If you work and pay your own tuition or more than half of your total expenses - you're on your own and not anyone's dependent.
What is a dependent tax deduction?
A dependent tax deduction is an allowance for reduced tax payments on a preset basis for those who have people who rely on them for direct monetary support, according to the Internal Revenue Service. Children and other relatives that meet specific requirements can be claimed as dependents, as can some people with certain disabilities who rely on the taxpayer for support and care.
What is a standard meal allowance according to the IRS?
How does the standard deduction for single and married persons differ?
How do you determine the amount of your standard IRS deduction?
There are many instances in which a person cannot be claimed as a dependent regardless of their financial situation or of their particular needs. Married people filing jointly cannot be claimed as dependents and nor can people who do not meet citizenship requirements, as noted by the IRS.
A dependent tax deduction is also referred to as an exemption, and a separate exemption may be filed for each dependent a taxpayer claims. Social security numbers must be provided in order to claim the exemption, however, each exemption reduces the filing party's taxable income by a set amount, in effect sparing them tax payments.
Dependency is an important way for people to protect family members and loved ones who need care while still maintaining financial solvency and independence. Most parents claim their children as dependents until those children move out and begin independent careers of their own, acquiring their independence in the process.