Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member of FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning, and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink. Third Wednesday of each month we talk taxes. I was able to pry away Andy Ferguson, NelsonCorp Tax Solutions. It’s getting to be kind of a, I wouldn’t say hectic is the word quite yet, but it’s …
Andy Fergurson:
It’s busy. I appreciate the break.
Nate Kreinbrink:
… a busy year, and it’s getting busier. No, it is hard to believe we are over past midway point of February. Obviously, you wouldn’t feel it by the weather outside touching upper 50s. I seen next week we are hitting mid-60s, I think for a couple of days, I think.
Andy Fergurson:
Yeah. Fun fact, when you come in to see your tax preparer, you don’t have to tell them how great the weather is outside.
Nate Kreinbrink:
You want it to be snowy, crappy, rainy …
Andy Fergurson:
Rainy, snowy, cold.
Nate Kreinbrink:
… icy, because you’re inside, anyways.
Andy Fergurson:
Yeah, everybody else should be inside with me.
Nate Kreinbrink:
Yeah, you don’t want to hear everybody say, oh, it’s a beautiful day out there.
Andy Fergurson:
Oh, you should be outside. It’s so nice. No, no, that’s not how that works.
Nate Kreinbrink:
But it is, it’s moving right along. Spring training coming up. I know we haven’t got into our NL central battles yet, but we will see how they …
Andy Fergurson:
What’s going to happen.
Nate Kreinbrink:
It’s exciting how they kind of play out this year, but obviously getting a little bit more in-depth into tax season this year. We’re starting to see foot traffic more and more, obviously with drop-offs, but getting those people in for their meetings and getting them in, getting them out, and people coming in to pick up, which is, it’s always good to see. From my end, I like seeing people coming in and out the doors on that busy, getting to see people.
Andy Fergurson:
Yeah, it’s nice to feel needed and loved and it feels like Grand Central Station down there right now. I mean, you walk out …
Nate Kreinbrink:
You guys have that machine going well though. It’s impressive to see that in progress, I guess.
Andy Fergurson:
It’s nice. It’s nice to know, like you said, it’s a good problem to have so many people around. It’s good to see people coming in early. We are really early in the season yet. We got probably 10 weeks left, so lots of good stuff going on. We are starting to see some things repeat, some issues or concern, not issues, but questions are starting to repeat for people. Yeah, it’s nice to have a little break from that and to come up and talk to the people, give the people what they want and …
Nate Kreinbrink:
That’s right.
Andy Fergurson:
… be on the radio.
Nate Kreinbrink:
So as we get into the season this year, obviously every year there’s a little bit of changes and some maybe tweaks to the filing or just seem to be a common misunderstanding that people have when they come in and file their returns. One of them that you mentioned as far as is the claiming of kids, and I think people have a misconception that it’s age 18 and then they can’t claim them anymore. But that’s not exactly how that reads and how that relates to that.
Andy Fergurson:
Right. Turning 18, being able to vote does not mean that you cannot claim your kids anymore. There’s a lot of circumstance that surrounds whether or not you’re able to claim those kids, but I hear it all the time. People come in and they’re like, oh yeah, my kid’s 18 so I can’t claim them anymore. Well, that’s not the case. You can claim your kids after age 18 up to the age of 24 if they’re in school. If they’re in school and you provide more than half of their support, they can make a lot of money and you can still claim them. If they’re over 18 and they don’t make any money and they’re not in school, you can claim them. If they’re disabled, you may be able to claim them. There’s a lot of things that allow you to claim these kids.
One of the things that’s important too, a lot of parents, when their kids get a little bit older, they don’t want to claim them because they want their kid to start getting all those benefits that they’ve been getting. They say, well, I want my kid to get this benefit or that benefit. Maybe it’s an education credit, maybe it’s the other credits that the parent has been getting for the child. What’s important to understand is those credits, first of all, follow dependency and second of all, a lot of those credits are non-refundable, which means if you don’t have tax, you can’t get the credit. If a kid is 18 or 19 and in school and has tuition that would qualify them for an education credit, but they don’t have enough income, maybe they only made $5,000 because they worked through the summer or something like that, if they don’t have enough income, they’re not going to get the benefit of the refundable portion of that credit. They’re not going to get the other dependent credit that the parent will get because they don’t have any tax.
Those credits require tax in order to be given. Since the parent is providing more than half of that child support, they should claim that credit. Even if they turn around and give the money to the kid …
Nate Kreinbrink:
They need the credit to make the money.
Andy Fergurson:
The money doesn’t come, the credit doesn’t come unless there’s tax for it to work against. It’s important to, I think, I tell people all the time, I’m like, if you are in that situation, if it’s close, have the adult taxes prepared first and then do the kid taxes because a lot of kids are chomping at the bit. They’ll go out onto Turbo Tax or one of the other free file options, and they’ll just charge through and try and get the $78 that they’re due back from their summer job at the ice cream parlor because that $78 is a lot of money. But if that child claims themselves when they do that, then the parent can’t claim them because that social security number has been used. I always tell parents, just have your kid wait until your return is filed.
Once your return is filed and you’ve made the decision whether or not you’re going to claim that child, then they can file because then on that free file software, it’s going to be really hard for them to mess it up. If they try to claim themselves and they’ve already been claimed on your return, their return will get rejected and they’re going to have to go back and mark that box that says they’re dependent of another person. Otherwise, if they don’t understand that question or if they mark the box wrong, or maybe they just think they’re independent. I mean, there are a lot of eighteen-year-olds, I have some that live in my house that believe they’re independent.
Nate Kreinbrink:
Even younger that believe that.
Andy Fergurson:
Oh yeah, I have nine-year-olds that believe they’re independent. Independence in tax terms is not necessarily what a kid thinks it is, and so the parent should make that decision whether or not they’re going to claim, file their return, and then the kids can go file their returns. Otherwise it gets real messy and correcting that situation takes a lot longer than the e-file process.
Nate Kreinbrink:
As people transition to different periods, different stages of their life and maybe some dependent’s life, obviously these credits change which ultimately then impact their refunds. That’s where you want to look ahead a little bit and start taking a little proactive approach to say, hey, when are these credits maybe going to expire? When am I not going to be able to use them? Because again, that will impact your refund or having to pay in even more if that’s the case.
Andy Fergurson:
Sure. Yeah. It’s important to know what that child on your return is really worth, what they’re contributing. If you’re a single parent and you’re getting a head of household and you have a child that’s phasing out, what is that really worth on your return and what is it going to look like when that child comes off? If your refund from the government is less than what that child is contributing to your refund, you may want to check your withholding status and start to inch that up before the child leaves because children can come off your return pretty abruptly if they get married or if they get a job and start to make a ton of money. All of a sudden now they’re off your return and you’ve been under withholding for the last 20 years because you had to buy tennis shoes and groceries.
Now you’re underwater and you file your tax return for the first time when you’re not a head of household or you don’t have that education credit and now you’ve been counting on a $1,500 refund every year and now you’re paying $1,500 in because you didn’t realize that child was worth $3,000. Definitely important to ask that question, and your tax provider can probably look at your return pretty easily and say, well, they’re worth at least X dollars on this return. If that X dollars is bigger than the number you’re getting back …
Nate Kreinbrink:
You need to make a change.
Andy Fergurson:
… it’s time to make an adjustment.
Nate Kreinbrink:
When you go with that too, I know we’ve mentioned it briefly, but on the W-4, checking the marital status. This is a misconception that I think a lot of times people have when they fill out that W-4 is that they’re assuming that that means their actual marital status. Whereas on the W-4 for your tax form, it’s how you want your taxes to be withheld. If you are married, you are able to check single and it doesn’t change your marital status that you have in there. It’s just how they withhold the taxes for that.
Andy Fergurson:
Absolutely. Yeah, a lot of people don’t understand that the W-4 is not a document that is submitted to the IRS. W-4 is a form that is used by your company to determine how much money to withhold from your paycheck. The IRS never sees that status. They don’t know that you marked single on your W-4 and then filed as married filing joint. Even if they did, that’s okay because you’re only telling your company how to withhold the money. What you have to remember is on that W-4, when you are putting exemptions on or putting numbers in those boxes that say, I have this many kids, or I have other jobs, you are telling the algorithm that is figuring your withholding to exclude some of your income because that income is going to be deducted when you file your taxes.
When you mark married, your algorithm is figuring that you’re going to get the standard married deduction, right, $27,000. They take $27,000 out of your income. Then they calculate how much tax you’re going to have. Well, if both spouses do that, that’s $54,000. Well, it’s $55,000 worth of income that is excluded from the withholding calculation.
Nate Kreinbrink:
But you only get that once.
Andy Fergurson:
You only get twenty-seven on your tax return, and so consequently, you’re significantly under withholding because they’re excluding too much of your income. They’re excluding $27,000 too much. By marking single, you only get half of that married deduction. If there are multiple jobs, so if you’re a single person that has multiple jobs, obviously you mark single, you may even want to increase the withholding by taking additional withholding if you’re a single person. But if you’re married, marking both spouses W-4s as single will increase the amount of withholding, decrease the amount of income that is excluded, and that’s important to make sure that withholding stays up high enough so you’re not paying it on tax day.
Nate Kreinbrink:
All great stuff. We are getting close on time here, but I do appreciate you joining us today. I’m going to try as much as I can to get you out next month as well. It’s going to be tougher. I understand that. But again, appreciate you joining me.
Andy Fergurson:
You might have to do it at midnight next month.
Nate Kreinbrink:
We may have to do it at midnight, which is fine. I did want to mention quick before we run out of time that every Friday, NelsonCorp Wealth Management and NelsonCorp Tax Solutions are wearing jeans for charity. Money raised in the month of February will be donated to the Lions Club here in Clinton. Again, Andy Ferguson with NelsonCorp Tax Solutions, Nate Kreinbrink with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer member of FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.