Hopefully a simple question:
In calculating future fed and state taxes, does the program look at the ages of children and reduce the number of dependent exemptions in the appropriate future year? What age would that be? What if they are over 18 (in college) and still a dependent?
Will the over-65 additional exemptions automatically be added?
Exemptions reduced upon death of spouse in contingency planning?
Thanks.
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Dick can confirm, but I think the current version of the compuation engine (CE) drops kids after age 18. It's on the list to be able to add them as dependants after that age, although the tax implications will change.
bill_sloat at hotmail.com wrote:Hopefully a simple question:
In calculating future fed and state taxes, does the program look at the ages of children and reduce the number of dependent exemptions in the appropriate future year? What age would that be? What if they are over 18 (in college) and still a dependent?
Will the over-65 additional exemptions automatically be added?
Exemptions reduced upon death of spouse in contingency planning?
Thanks.
Bill,
We consider 18 to be the end of the era of dependency for children. Currently there is no mechanism for adjusting this. We have this on our wish list for other reasons (medical dependents, e.g., Down's Syndrome children or elderly parents) but haven't got any implementation plans for it at this time.
We adjust the exemptions based on age for both state and federal taxes. When you turn 65 (younger or older, depending on the state) we do the right thing.
Contingency planning knows about the number of exemptions as well.
We also calculate the necessary life insurance to support dependent children through the age of 18 in the event of your early death.
Best,
Dick Munroe
Tell me if this is a reasonable way to deal with a child going away to college that addresses the tax dependent issue:
1. Tell ESPlanner that the child is born four years later so that it sees (him) as 14 instead of 18. This keeps him on the tax dependent status.
2. Adjust the "cost of children" for those last four years down to 0% (or perhaps 5 or 10 percent if you feel you will still have some "phase out" child expenses not covered under your college expenditures.
3. Leave college special expenditures set for the years he's actually in college (14-18 so to speak)
This will deal with the household economy and scale it back to 2 persons instead of three (in the case of a one-child family).
Do you see any problem with that?
Dan
Dan,
Larry will have to take a look. I would have taken a much more complicated approach, basically using the special expenditures mechanism to model the still dependent kid's economic effects. I don't think this handles the tax implications all that well but it would probably come close.
Best,
Dick
The approach Dan gives in his Post of 03 Jan 2008 12:30 seems perfectly reasonable to cause the ESPlanner to correctly calculate the number of dependent exemptions.
Quote:1. Tell ESPlanner that the child is born four years later so that it sees (him) as 14 instead of 18. This keeps him on the tax dependent status.
2. Adjust the "cost of children" for those last four years down to 0% (or perhaps 5 or 10 percent if you feel you will still have some "phase out" child expenses not covered under your college expenditures.
3. Leave college special expenditures set for the years he's actually in college (14-18 so to speak)
However, lowering the age will result in a calculation of the non-refundable child credit (Form 1040) and of the refundable additional child credit (Form 8812) even though you would not actually receive them. The child must actually be under age 17 on December 31.
The Tax Year Maximum Credit Per Child is $1,000. Additional rules apply.
http://www.irs.gov/newsroom/article/0,,id=106182,00.html
So it seems that an improved estimate is to:
a. change the input age for each child (note that latest version of ESPlanner removes kids at age 19, not 18 ) so that each child reaches age 19 in ESPlanner in the same calendar year that dependency ends.
b. make adjustments for any non-college expenses you will absorb, as Dan recommends, for those same years
c. Add a non-tax-related Special Expenditure for each year that ESPlanner gives you a child credit or additional child credit when that child's real age would not allow such credit (child must be under age 17 on December 31)
If child is going to college, you could also put in Special non-taxable Receipts for Hope Credit (first two tax years only) and Lifetime Credit (one per family per year).
Cavers:
Note that there is a program update that has the feature where you can keep the child at home for X number of years and the tax deduction you refer to is dealt with properly.
Dan