October 2023

Family Loans: Does the IRS Care If I Lend My Kids Money?

Updated for tax year 2023.

As a parent, there’s a chance you may lend your kids money throughout life. Maybe it’s to buy a bicycle, to get their first car, or even to purchase their very own home. But, when you fork over cash to your family, does the Internal Revenue Service (IRS) care about those loans?

At a glance:

Small loans to your children are not a concern for the IRS.
Charge interest on significant loans to avoid gift tax implications.
If your child doesn’t pay back the loan, you can take a bad debt deduction.

Does the IRS care if I loan money to my kids?

For small loans under $10,000, the answer is simple — no. The IRS isn’t concerned with most personal loans to your son, daughter, stepchild, or other immediate family member. They also don’t care how often loans are handed out, whether interest is charged, or if you get paid back.

But, as with most things, there are exceptions.

Interest-free loans

If you loan a significant amount of money to your kids — over $10,000 — you should consider charging interest.

If you don’t, the IRS can say the interest you should have charged was a gift. In that case, the interest money goes toward your annual gift-giving limit of $17,000 per individual (as of tax year 2023). If you give more than $17,000 to one individual, even if the individual is your child, you are required to file a gift tax form.

The rate of interest on the loan must be based on the lesser of applicable federal rates (AFRs) set by the IRS or the borrower’s net investment income for the year. You don’t need to charge interest if the borrower’s investment income is $1,000 or less. If you choose to charge interest lower than the AFR, it’s called a below-market loan, and there are tax implications. See the last section in this article for more information about this topic and some exceptions.

Family loans that are really gifts

Some people may think they can give large amounts of money to their children and call it a loan to avoid the hassle of filing a gift tax return, but the IRS is wise to that. The loan must be legal and enforceable. Otherwise, it may be deemed a gift.

When loaning money to a family member, it’s good practice to seek legal counsel and have a professional help you draw up an official loan agreement for both parties to sign.

Student loans for tuition

You can give “student loans” to help fund your kid’s higher education by drawing up a contract like any other loan.

When they graduate and start making payments, your children can take the student loan interest deduction on any interest paid to you. Remember that you will have to pay taxes to the IRS on that interest income.

Take a bad debt deduction if your child doesn’t pay you back

One of the advantages of a loan contract is that if your child doesn’t pay, you can take a deduction for a non-business bad debt. Additionally, you don’t have to pay gift tax to the IRS on the amount you would have if you had gifted the money.

To take a bad debt deduction, you must prove that the debt is truly worthless and there is no chance you will be paid back. Have your child make a written statement that they cannot pay, and gather as much evidence that you tried to collect the debt as possible. Letters, invoices, and phone calls can all be used as proof in this instance.

Filing a gift tax return for a loan

But what if you fail to document the loan properly and legally, and the IRS decides your loan is actually a gift?

In most cases, you won’t have to pay taxes for a “loan” the IRS deemed a gift. Even if you exceed the $17,000 annual gift exclusion we mentioned before, you only owe gift tax when your lifetime gifts to all individuals exceed the lifetime gift tax exclusion. For tax year 2023, that limit is $12.92 million (up from $12.06 million in 2022).

If you’re like most people, that means you’re probably safe, but you still need to keep track of and report any gifts that exceed the annual exclusion ($17,000 in 2023).

Other family loans that are safe from tax consequences

You don’t have to worry about family loans being subject to tax consequences if:

You lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds.
You lend a child $100,000 or less, and the child’s net investment income is not more than $1,000 for the year.

If you don’t fall within the above exceptions, it might be a good idea to read up on below-market loans in IRS Publication 550 to determine the tax implication.

This article is for informational purposes only and not legal or financial advice.

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Form 2441 FAQs: The Child and Dependent Care Credit

Do you pay someone to care for your child or another dependent while you work or look for work? If so, you could qualify for the Child and Dependent Care Credit (CDCC), a tax break that can help you offset the cost of daycare, preschool, and more.

At a glance:

The CDCC helps cover childcare expenses while you work or look for work.
It’s worth 20-35% of eligible expenses, up to $3,000 for one dependent ($6,000 for two or more).
Eligible expenses can include daycare, preschool, and day camp costs.

What is the Child and Dependent Care Credit?

The Child and Dependent Care Credit is a federal tax credit designed to help families with the cost of care for their dependents, whether that be children in daycare, a caretaker for a disabled parent, or another eligible dependent.

Currently, the credit is worth anywhere from 20-35% of qualified care expenses — up to $3,000 for one qualifying dependent and up to $6,000 for two or more qualifying dependents.

For example, if you claimed the maximum amount of $3,000 in expenses for one dependent in 2023 and qualified to deduct 35% of care expenses, your credit amount would be $1,050 (or 35% of $3,000). The max credit for two or more dependents would be $2,100.

Who is eligible for the Child and Dependent Care Credit?

To claim the CDCC, you must have earned income during the tax year and must have paid for the care expenses so you could either work or look for work.

In other words, costs paid to a babysitter to watch your child while you go out for the evening aren’t an eligible expense. But if you pay daycare fees for someone to watch your toddler while you’re at work, that would be a qualified expense.

The amount you can claim depends on your adjusted gross income (AGI). You can claim the maximum credit percentage of 35% if your AGI is less than $15,000. If your AGI is $43,000 or above, you can claim 20%. The IRS lists the complete child and dependent care income limits on page 13 in Publication 503.

What dependents qualify for this tax credit?

In most cases, the care expenses should be for someone you’re claiming as a dependent on your income tax return. Qualifying individuals must also fit into one of the following categories:

A child under 13 who lived with you for more than half the year
A disabled spouse who has lived with you for half the year and is mentally or physically unable to care for themselves
Another person (like a parent) who has lived with you for half the year and is mentally or physically unable to care for themselves. This person must be your dependent OR would have been your dependent except for one of the following reasons:

They earned more than $4,700 of gross income during the year.
They filed a joint return.
You or your spouse could be claimed as a dependent on someone else’s tax return.

The IRS covers some nuances for children of divorced parents in more detail in Publication 503 as well.

What is Form 2441?

To claim the Child and Dependent Care tax credit, you’ll need IRS Form 2441 and Schedule C.

On Form 2441, you’ll list the names and info of any care providers (including address and Social Security number for tax purposes), the qualifying person(s) receiving care, and the care expenses you paid during the tax year. The form has a worksheet to help you determine your credit amount based on your provided information. Once you get that number, you’ll list your credit amount on Schedule 3, line 2.

If you use TaxAct® as your tax preparation service, we can assist you in making these calculations and filling out all the necessary tax forms on your behalf.

For more details, you can also check out the Form 2441 instructions provided by the IRS.

What are qualifying child and dependent care expenses for Form 2441?

Some common qualifying care expenses for this tax credit include:

Costs of childcare provided by daycare centers or babysitters
Fees for preschool (and comparable programs) for children not yet in kindergarten
Day camp costs (overnight camps don’t qualify)
Payments made to a cook or house cleaner who also provided care for your dependent
Before- and after-school care for children under 13 years old

The following costs do NOT count as qualified care expenses for the CDCC:

Costs for children to attend kindergarten and above
Summer school programs
Tutoring fees
Overnight camp costs
Child support payments

Is the Child and Dependent Care Credit refundable?

The Child and Dependent Care Credit is nonrefundable. This means if the tax credit amount exceeds your tax liability, you won’t be able to claim the excess back as a tax refund.

Can I claim both the Child Tax Credit and the Child and Dependent Care Credit?

Yes, you can claim the Child Tax Credit (CTC) and Child and Dependent Care Credit on the same tax return. Though they share similar names, these are two separate tax credits with different rules and eligibility requirements for tax filers.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Form 2441 FAQs: The Child and Dependent Care Credit appeared first on TaxAct Blog.

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How Tax Brackets Work: 2023 Examples and Myth Busting

Updated tax brackets for the year 2023.

Your tax bracket shows you the tax rate that you will pay for each portion of your income. Below, we go over some helpful examples and address myths about how tax brackets work.

At a glance:

Tax brackets determine the tax rate you pay on each portion of your income.
The U.S. has a progressive income tax system, meaning higher incomes are taxed at higher rates.
Your tax rate only applies to the income within that bracket, not your entire income.
Your effective tax rate is the total tax liability divided by your taxable income.

What tax bracket are you in, and what does that really mean?

Your tax bracket, roughly speaking, is the tax rate you pay on your highest dollar of taxable income. It is not the tax rate you pay on all your income after adjustments, deductions, and exemptions. Your bracket only determines your individual income tax rates for each additional dollar of income (ignoring the effects of rounding).

What tax bracket you fall in also depends on your filing status: single, married filing jointly, married filing separately, or head of household.

We have federal tax brackets in the U.S. because we have a progressive income tax system. The progressive tax system ensures that all taxpayers pay the same rates on the same levels of taxable income. That means the higher your income level, the higher the tax rate you pay. Your tax bracket (and taxes you are responsible for) becomes progressively higher the more income you make.

In a progressive tax system, tax rates are based on the concept that high-income taxpayers can afford to pay a higher tax rate. Low-income taxpayers pay fewer taxes overall and are taxed on a lower percentage of their income.

Federal income tax brackets

Find your bracket in the following chart based on your filing status and 2023 income.

2023 tax brackets 

Want to find out which IRS tax bracket you are in? Estimate your tax rate with our tax bracket calculator.

How tax brackets work

Say you’re single with no dependents, and your taxable income is $9,000. Your marginal tax rate, according to the Federal Income Brackets chart above, is 10%. You pay $900 in income tax. That’s simple.

What if your taxable income is $19,000?

As a single filer, you’re now in the 12% tax bracket. However, that doesn’t mean you pay 12% on all your income.

Instead, you pay 10% on the first $11,000, plus 12% of the amount over $11,000.

Here’s the math:

What if your taxable income is $115,000?

As a single filer, you moved up to the 24% bracket, so things get a bit more complicated. In this case:

You pay 10% on the first $11,000

+ 12% of the amount between $11,001 and $44,725

+ 22% of the amount between $44,726 and $95,375

+ 24% of the amount over $95,375.

Here’s the math (we’ll round to the nearest dollar):

What is my effective tax rate?

Your effective tax rate (ETR) is your total federal income tax liability divided by your taxable income (earned income and unearned income) — AKA the percent of your income that you pay in taxes.

In the $115,000 example above, your effective tax rate would be:

$21,000 (amount of tax owed) ÷ $115,000 (total income) = 18.26% ETR

So, while your highest tax bracket would be 24% in this example, your income would be taxed at an average rate of 18.26%.

Keep in mind, your ETR does not generally take into account any state income tax or local taxes you may owe.

Busting a tax bracket myth

Some people think that if their income increases and they are bumped into a higher tax bracket, they will pay taxes at a higher rate on all their income. With this reasoning, some tax filers believe they may have less money left over than they would if they had earned less.

Using the examples above, you can see that’s not true.

Each dollar you earn only affects the federal income tax rate and taxes owed on additional income. It does not change the rate applied to dollars in lower tax brackets.

Unless you are in the lowest bracket, you are actually in two or more brackets. If you are in the 24% tax bracket, for example, you pay taxes at four different rates – 10%, 12%, 22%, and 24%.

Based on the tax brackets, you always have more money after taxes when you earn more income. But, of course, rates are not the only factor in your final tax bill. You can lose tax benefits that phase out at higher income levels, such as tax credits for higher education. In some tax scenarios, it might make sense to avoid higher tax brackets if possible.

It pays to use tax software like TaxAct® as a planning tool to see how different levels of income affect your tax benefits and final tax bill.

Use the tax code to make better decisions

Let’s say you’re considering working overtime and making an additional $1,000 in a year.

If you know you’re in the 24% tax bracket, you’ll pay $240 in income tax on that extra money. You’ll also pay 7.65% in Social Security and Medicare taxes, plus any state tax and other mandatory tax withholding.

Earning an additional $1,000 is a great idea, but don’t be surprised when you discover that one-third or more of your overtime pay goes to taxes.

There are ways to lessen your tax burden on that extra income. For example, if you’re an itemizer contemplating making a charitable contribution before the end of the year, knowing your income tax bracket and filing status can help determine how much your contribution will save you in taxes. Say you’re in the 22% tax bracket — that means every $100 you contribute to charity saves you $22 in federal income taxes. (Note that you cannot take this tax deduction if you take the standard deduction; you have to itemize.)

Knowing your tax rate also helps when you’re thinking about making retirement plan contributions. If you contribute to a traditional 401(k) plan or traditional IRA, you’ll reduce your state and federal income tax. In turn, that makes your contribution more affordable.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

5 Ways to Avoid Bumping Your Income into a Higher Tax Bracket
How Retirement Contributions Impact Your Tax Bill
Reduce Your Taxable Income With a 401(k)

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Writing Off Gambling Losses on Your 2023 Taxes

Updated for tax year 2023.

Betters understand the concept of win some, lose some. But the IRS? They’re going to want exact numbers.

At a glance:

Report all gambling winnings as taxable income on your tax return.
If you itemize deductions, you can offset your winnings by deducting gambling losses.
Casinos send a W-2G form to the IRS for winnings above specific thresholds ($600 or more for most games).

Specifically, your income tax return should reflect your total year’s gambling winnings, from the big blackjack score to the smaller fantasy football payout. That’s because you must report each stroke of luck as taxable income — big or small, buddy or casino. Thankfully, if you itemize your deductions, you can offset your winnings by writing off your gambling losses. 

It may sound complicated, but TaxAct® will walk you through the entire process of filing taxes on gambling winnings and losses from start to finish. That way, you leave nothing on the table. 

What is a W-2G form? Should I have one?

A W-2G is an official withholding document. A casino or other professional gambling establishment typically issues it. You may receive a W-2G onsite when your payout is issued or one in the mail after the fact.

Gaming centers must issue W-2Gs by Jan. 31. When they send yours, they also shoot a copy to the IRS, so don’t roll the dice and make sure you report those winnings as taxable income.  

Don’t expect to get IRS Form W-2G for the $6 you won playing the Judge Judy slot machine. Withholding documents are triggered by the amount won and the type of game played.

How much can you win at a casino without paying taxes?

If you receive $600 or more in gambling winnings, the payer should issue you Form W-2G, but if you win more than $5,000, the payer could withhold 24% for federal income taxes (backup withholding).

Can I write off gambling losses?

You can deduct gambling losses if you itemize your deductions on your tax return, but you cannot deduct more than the gambling income you received. You’ll need a record of your winnings and losses to do this.

How much can I deduct in gambling losses?  

You can report as much as you lost in 2023, but you cannot deduct more than you won.

Remember, you can only do this if you’re itemizing your deductions. If you’re taking the standard deduction, you aren’t eligible to deduct your gambling losses on your tax return, but you are still required to report all your winnings. Cash and noncash winnings are both taxable. 

Where do I file this on my tax forms?

Let’s say you took two trips to Vegas this year. During Trip A, you won $6,000 in poker. During Trip B, you lost $8,000. You must list each individually, with the winnings noted on your return as taxable income and the loss as an itemized deduction in Schedule A. In this instance, you won’t owe tax on your winnings because your total loss is greater than your total win by $2,000. However, you do not get to deduct that net $2,000 loss, only the first $6,000.

Now, let’s flip those numbers. Say in Trip A, you won $8,000 in poker. In Trip B, you lost $6,000. You’ll report the $8,000 win on your return, the $6,000 loss deduction on Schedule A, and still owe taxes on the remaining $2,000 of your winnings.   

Are bank statements proof of gambling losses?

You can use your bank statements as proof of gambling losses if they are listed separately and not a combined number.

When will I get a W-2G form? 

You can expect a form W-2G if you win:

$1,200 or more on slots or bingo
$1,500 or more on keno
$5,000 or more in poker tournaments
$600 or more on other games, such as horse racing, but only if the payout is at least 300 times your wager

Federal taxes are withheld at a flat rate of 24% if your winnings are reported on a Form W-2G. If you didn’t give the payer your tax ID number (Social Security Number), the withholding rate is also 24%. 

Tip: Withholding only applies to your net winnings, which is your payout minus your initial wager. 

What kinds of records should I keep?

Keep a journal with lists, including each place you’ve gambled, the day and time, who was with you, and how much you bet, won, and lost. You should also keep receipts, payout slips, wagering tickets, bank withdrawal records, and statements of actual winnings. You may also write off travel expenses associated with loss, so hang on to airfare receipts.

You can use TaxAct to file your gambling wins and losses. We’ll walk you through the process and help you report any winnings and deduct losses, if applicable.

This article is for informational purposes only and not legal or financial advice.

All TaxAct® offers, products and services are subject to applicable terms and conditions.

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IRS Gives Tax Extension For Israel Terrorist Attack Impact To 10/7/24

IRS: Taxpayers impacted by the terrorist attacks in Israel qualify for tax relief; Oct. 16 filing deadline, other dates postponed to Oct. 7, 2024. – ​Forbes – Taxes

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