Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • May 30

    Too often natural disasters strike and serve as reminders that it’s important for both individuals and businesses to protect themselves against the potential financial consequences of such events. A few smart steps we recommend include making electronic backups of important records, including your insurance policies, tax returns, bank and credit card account information, and vital records. It is critical that you store this backup at a separate location that will be easy to access if your area suffers damage. You should also take the time to take pictures or videos of your home or business and store them separately, in case you need to make an insurance claim.

    If you run a business, you must consider how you will get up and running again after a disaster. It’s a good idea to develop contingency plans that will enable employees to work from home or elsewhere if your location is damaged or inaccessible. Both businesses and families should consider using phone trees, or other methods, to maintain contact in an emergency. Review your contact and contingency plans every year to be sure they are up to date.

  • May 16

    Radio Shack announced last month that it would be closing 1100 of their stores nationwide. That amounts to 20% of all their stores in the nation. Believe it or not, it’s because they made a common mistake. They abandoned the niche that made them a success in the first place. Instead of embracing who they were, they tried to become “Best Buy, Jr.” and what a costly error it was.

    All too often business owners are blinded by the segments of their business that aren’t performing as well as they’d like. Tunnel vision ensues and before you know it, while chasing a marginal increase in a marginal segment, they’ve totally neglected the customer base that was succeeding. This is such a silly mistake.

    I’m not speaking out against expanding your business, in fact quite the opposite. I think you should constantly expand your business, but in a way that makes sense. Instead of focusing on making your weak areas strengths, you should spend more time and resources on growing the area of your business that is already kicking tail.

  • May 2

    Today’s sandwich generation is squeezed between the obligation to care for their aging parents and their grown children.

    It’s hard enough to pay your bills and save for retirement, but it’s even tougher when you have to juggle responsibilities, providing for your own financial needs while lending a helping hand to your elderly parents or grown children — or both.

    A recent study estimated that one in eight Americans between the ages of 40 and 60 are simultaneously providing some financial assistance to both a child and a parent. Other studies have shown that more than 50% of Americans expect to provide assistance to both. The obligations of taking care of aging parents demand considerable time and money, sometimes as much as your children. But, are they your dependents?

    From a tax standpoint, a dependency exemption deduction is available for each person who is a dependent of the taxpayer for the year. A dependent is defined as either a qualifying child or a qualifying relative.

    To be a qualifying child of a taxpayer, an individual must satisfy five tests:

    1. Relationship. A qualifying child must be the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.
    2. Residency. Have the same principal residence as the taxpayer for more than half the tax year.
    3. Age. Be under age 19 at the end of the tax year, a student under age 24 at the end of the tax year, or permanently and totally disabled at any time during the tax year,
    4. Support. Did not provide more than half of such individual’s own support for the tax year.
    5. Married child. The individual, if married, cannot file a joint return with his or her spouse except as a claim for refund.

    Individuals who do not meet the test for being a qualifying child of the taxpayer may still qualify as a dependent of the taxpayer as a qualifying relative. A qualifying relative is an individual who passes the following three tests:

    1. Is a specified relative of the taxpayer, or if unrelated, has as his or her principal residence the taxpayer’s home and is a member of the taxpayer’s household. Under this rule, a dependency exemption may be allowed for a domestic partner and a domestic partner’s children, provided all the other tests for a qualifying relative are met.
    2. His or her gross income for the year is less than the exemption amount. This test disregards tax-exempt income such as certain scholarships and the nontaxable portion of social security payments.
    3. The taxpayer provides more than one half of the individual’s support for the tax year. While a supported person’s nontaxable income (e. g., nontaxable social security benefits) is not considered when computing that person’s income for the gross income test (see number 2 above) it is considered when determining the amount of support the person provides under the support test, to the extent such income is actually used for support.

     

    Therefore, a qualifying relative can be a:

     

    Child

    Brother

    Father-in-Law

    Grandchild

    Sister

    Brother-in-Law

    Uncle

    Great Grandchild

    Stepbrother

    Sister-in-Law

    Aunt

    Stepchild

    Stepsister

    Son-in-Law

    Nephew

    Parent

    Stepparent

    Daughter-in-Law

    Niece

    Grandparent

    Mother-in-Law

     

    Even if a child of the taxpayer does not meet the definition of a qualifying child, the child may still qualify as a dependent of the taxpayer as a qualifying relative.

    Example: Paul’s son, Samuel, is 22 years old and is not a full-time student or disabled. Samuel’s gross income is $2,500 and Paul provides 75% of his support; Samuel’s grandmother also contributes to his support. Samuel is not a qualifying child of Paul or his grandmother because he fails the age test. However, Samuel is Paul’s dependent because he meets the definition of a qualifying relative (i.e., he meets the relationship test because he is Paul’s son, he meets the gross income test because his income is under the exemption amount, and he meets the support test because Paul provides more than half of his support).

    If the dependent is related to the taxpayer, it does not matter where he or she resides for the year, as long as the gross income and support test are both met.

    Example: Cindy is 20 years old and not a full-time student or disabled. She lives with her friend for the entire year, and her grandmother Gigi provides more than 50% of her support (she has no gross income). Gigi can claim Cindy as her dependent because Cindy is a qualifying relative. Cindy does not have to live with Gigi during the year.

    In determining the amount of support provided to an individual, the value of lodging is included in the support test.

    Example: David and Michelle Butler help support Michelle’s widowed mother, Mona, who is 72 years old. Mona lives rent-free in one side of a duplex the Butlers own. The fair rental value of the dwelling is $8,400 a year. Mona provides her own furniture, but the Butlers paid utilities, which were $1,200 in the current year. Mona’s income consists of $8,000 of social security benefits and $300 of interest income, all of which she spends for her own support. The annual fair rental value of Mona’s household furnishings is $1,200.

    The Butlers provide more than half of Mona’s support for the current year. Their support is $9,600 ($8,400 value of dwelling plus $1,200 utilities), while the support Mona provides for herself is $9,500 (income of $8,300 plus $1,200 value or furnishings). Mona also meets the other test for dependency as a qualifying relative (i.e., relationship and gross income). Thus, the Butlers can claim Mona as a dependent on their form 1040 and take an exemption deduction for her.

    Note: Mona’s social security benefits are included in determining the amount of support she provides for herself, but are excluded for the gross income test since they are not taxable income to her.