Tax

Cigarrettes, Pot, Hookers and Other Sin Taxes

Taxes are never going to be popular and when governments implement new taxes it is always controversial. However, when taxes target certain products or services — especially when it involves things people are passionate about — things get really interesting. This is the situation with the so-called sin taxes: taxes on products and services which are considered dangerous or detrimental, such as alcohol, tobacco, pot, and prostitution.

Effect of Taxes

Usually, the undesired effect of taxing a product or service is that demand for it drops, which obviously hurts businesses and their ability to pay more taxes. That is why tax policymakers try to find the sweet spot that maximizes revenue without hurting production excessively.

Take for example income tax brackets. In 2013, any income between $36,250 and $87,850 was taxed at 25%, but anything between $87,850 and $184,250 was taxed at 28%. Having to pay 28% taxes on your income is not fun, but it probably won’t stop you from working harder or accepting a job with more responsibility and a larger salary. But what if you earned $87,000 and the tax on income over $87,850 were 90%, would it be worth your time to work harder?

Sin Taxes Rationale

When it comes to sin taxes, the rules change completely. Policymakers generally want to either curb demand for the product or service taxed, or their priority is to maximize revenue from the sin tax, which is then put toward alleviating the negative side effects it generates.

Consider the tobacco tax. In New York City, which has the highest cigarette tax in the United States, smokers pay $5.85 a pack in state and local taxes. Some feel this tax is unfair because smokers are mostly low-income taxpayers who generally don’t reduce their tobacco consumption and higher taxes simply leave them with less income for life essentials. However, supporters of the tobacco tax argue that these taxes do discourage consumption and simply reflect the true cost of smoking. There is no arguing against the fact that smoking is expensive. Every year, $96 billion are spent on the treatment of tobacco-related illnesses according to a 2012 report by the American Cancer Society. 

The rationale for taxing wine, beer and hard liquor is similar. According to a 2013 report by the Centers of Disease Control, over drinking cost each state a median of $2.9 billion in 2006. California had the largest economic burden due to excessive drinking: $32 billion. When you calculate the cost of these additional expenses per drink – what an economist would call calculating the consumption externalities of a product — the CDC estimates the median cost per state for each alcoholic consumed at $1.91.

Tobacco and Booze Are Just the Beginning

Governments are not stopping at alcohol and cigarettes. Last week, Mexico, which recently took the United States’ place as the most obese country in the world, passed an 8% tax on candy, chips and other high-calorie foods.

Last Tuesday Colorado passed proposition AA, a 15% excise tax – which is measured by the amount of business done – and a 10% sales tax on all recreational marijuana sales in the state. The revenue from the new pot tax is estimated at $70 million and will be used to regulate the marijuana industry and educate people about the harmful effects of consuming the ganja. 

In Holland, prostitutes are required to charge a 19% sales tax for each transaction. In the United States, Nevada is the only state where prostitution is legalized – albeit only in certain counties. Although legal brothels and prostitutes must pay federal income tax, there isn’t a specific tax on prostitution. According to Dennis Hof, owner of the Nevada Moonlight Bunny Ranch brothel, the federal government is missing out on an $18 billion business, which could generate $6 billion in income tax and $2 billion in licensing fees.

Controversial and Discriminatory

Alcohol, tobacco, high-calorie foods and prostitution can have very real and harmful health effects on the health of consumers. There is an argument for saying that production costs don’t take into consideration the cost of treating their side effects and taxes are simply accounting for these negative externalities and giving a more accurate reflection of their true cost to society.

Sin taxes are controversial because they discriminate certain habits and lifestyles over others. Some consider them an unwarranted encroachment of the government into our personal lives. Others argue they are inefficient and simply add to the woes of the poorest sectors of society.

Photo: PabloEvans

Tax Deductions for Professional Gamblers

What could be better than winning $8.3 million at the World Series of Poker next week?

Not paying taxes on all $8.3 million.

Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self-employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.

This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.

Are You a Professional Gambler?

So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.

The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.

Gambling Guidelines

  • Make a profit. Everyone loses money sometimes. But if you never win or profit, it’s hard to suggest that you make a living by gambling. This is the same way the IRS distinguishes between a small business and a hobby.

  • Keep records of the time you spend practicing and competing. Maintaining books and records show that you’re not just a casual gambler, you can prove that you’re a professional.

  • Study hard. Prepare for each tournament with a poker expert. This will show you consider gambling your job, and that improving your game is part of professional development.

  • Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.

“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket.  Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.

How to Report Gambling Winnings?

Gambling winnings are reported through IRS Form W-2G. Depending on how much you win and the type of gambling you undertake, you may receive this form directly from the “payer” or organization from which you won the money. If the payer withholds federal income tax from your winnings, you will receive a Form W-2G. This form, according to Robert W. Wood of Forbes.com, works just like a 1099 Interest Form that you receive as part of tax time preparation forms. He reminds everyone the IRS also receives a copy of the Form W-2G and reminds winners to keep it handy for tax time to ensure full compliance!

If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.”

Bingo or slot machines:  $1,200
Keno:  $1,500
Poker Tournament:  $5,000 (excluding wager or buy-in amounts)
“Other” gambling winnings:  $600

“Other” gambling winnings are those that do not include poker tournaments, slot machines, bingo, and keno – and the payout is at least 300 times the wager amount).

What if My Winnings don’t Meet the Above Thresholds?

No matter how much income is generated from gambling, it must be reported if you receive a Form W-2G or not. If your winnings do not meet the threshold, you must report your income under the “Other Income” line on the Form 1040 U.S. Individual Income Tax Return.

What do I Do if I Lose Money From Gambling?

Gambling losses may be deducted. Deductions are permitted up to the winning amount. Losses must be reported, as an Itemized Deduction, on Schedule A, separately from any winnings.

How are Winnings and Losses Substantiated?

The IRS requires proof of losses and winnings. In case of an audit and to maintain the integrity of your income tax return, the IRS recommends keeping all records related to winnings and losses. Items to substantiate gambling transactions include tickets, receipts, checks, and IRS Form W-2G (if given). Maintaining a notebook or other written documentation is highly suggested to keep winnings and losses separate and organized.

What Expenses Can Be Deducted?

Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.

List of Possible Deductions

  • Internet Costs, if you regularly play online
  • Home office expenses
  • Tax advice
  • Subscriptions to gambling magazines and newspapers
  • Gaming fees, chat room fees
  • Club membership fees and dues
  • Clerical and record-keeping expenses
  • Travel and meal costs during tournaments
  • Wages paid to relatives or employees for their assistance

You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.

To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets, and rides by casinos. Don’t try to pass those off freebies as expenses.

So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.

Photo: Play Among Friends

IRS Form 1040-ES & Estimated Tax for Individuals

You’re self-employed, which means that you no longer have to punch a clock or make that daily commute to spend the day in a cubicle. However, along with the freedom to set your own schedule comes the responsibility to make sure Uncle Sam gets his cut – and receives what you owe in a timely fashion.

That means either setting aside funds from your earnings to cover your tax obligation next April, or paying quarterly estimated taxes. Regardless of which strategy you take, the IRS has developed a worksheet to use to calculate how much you should set aside – IRS Form 1040-ES: Estimated Tax for Individuals.

Using IRS Form 1040-ES: Estimated Tax for Individuals

The IRS makes it easy (or at least as easy as paying taxes can be) to satisfy your federal income tax obligations by making quarterly estimated income tax payments. To begin making estimated payments, first download IRS Form 1040-ES, Estimated Tax for Individuals from the IRS website. For more details on how to complete the form, download Publication 505, Tax Withholding and Estimated Tax. The form is a PDF document that you can fill in and save with your information at any point.

Expected Wages

To calculate your expected wages for the coming year, obtain a copy of your prior year’s tax returns and locate the figure for your adjusted gross income to use as a starting point to estimate your income for the coming year. Subtract either your itemized deductions from your return or the standard deduction (whichever is larger) from your adjusted gross income. If the resulting amount is negative, adjust the total to zero. The result is an estimate of your wages for the coming year.

Calculate Estimated Tax

Once you’ve finished this calculation, use the included Tax Rate Schedule to calculate your estimated tax and enter the figure on the appropriate line of IRS Form 1040-ES. If you are subject to Alternative Minimum Tax (AMT), include the amount generated from IRS Form 6251 on IRS Form 1040-ES as additional tax. Subtract any credits you’re entitled to, such as the Earned Income Credit or deductions for use of your vehicle for business, medical or charitable purposes.  The result is your estimated tax.

Self-Employment Taxes

Use the resulting figure as the starting point to estimate your self-employment taxes. First, multiply your expected wages for the coming year by 92.35%, or .9235, and enter the result on line 3 of IRS Form 1040-ES. Multiply the figure on line 3 by 2.9% or .029 and enter the result on line 4 of IRS Form 1040-ES. Subtract your expected wages for the coming year from $113.700 (the maximum income subject to Social Security taxes).  If the result is zero or less, enter 0 on line 9 of IRS Form 1040-ES, and skip to line 10 on the form. If the result is zero or greater, compare this figure to the figure on line 3, and multiply the smaller result by 12.4% or .124 and enter the result on line 9 of Form 1040-ES. Add the figures from line 4 and line 9 together and enter the result on line 10. Multiply the figure on line 10 by 50% or .50 to obtain your estimated self-employment tax.

After you’ve completed all these calculations, add the estimated tax to the estimated self-employment tax. If the result is $1,000 or more, divide the total by four to determine your quarterly estimated payments. If the figure is less than $1,000, the IRS does not require you to make quarterly estimated payments. But before you throw your calculator across the room in frustration for having wasted so much time, consider this: you’ve generated a good estimate of how much you should set aside to cover your tax obligations.

Set Aside Funds

Whether or not you are obliged to make quarterly tax payments, you will still need to set aside funds to cover your income tax obligations. If you have a paid-wage job in addition to self-employment, you can ask your employer to deduct more from each paycheck to make the process automatic. If not, set up a “pay yourself first” account with your financial institutions, and commit to making regular deposits into the account until you collect the funds you need for each quarter.

By following this strategy, you’ll be far less stressed when you file next year’s federal income tax returns. If you still need assistance, feel free to give us a call.

Photo: Philip Taylor PT

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Not Food? Pumpkins Are Taxable

Every now and then you hear about state and local governments wanting to tax certain items which weren’t previously taxed, based on use. For example, some areas tax a five pound block of ice sold at a grocery store, but they don’t tax a five pound bag of ice cubes. The reasoning is, the block is refrigeration, but the cubes become part of a drink.

Other tax agencies see an individual snack (such as a cupcake) as taxable, the same item in a multi-pack is not. Sure, government at all levels seems to be cash-strapped. But sometimes these proposed rules make you wonder if government officials just have too much time on their hands. Take Iowa’s attempt to pass a pumpkin tax, a few years back.

A few years back, someone in the Iowa Department of Revenue (DOR) figured out that about 750 million pumpkins are carved into jack-o-lanterns each year for Halloween. Just like a jack-o-lantern lit from within by a candle, the eyes of Iowa taxing authorities lit up with possibilities. A new source of tax revenue!

That’s why someone at the DOR drew up a notice to send to retailers across the state, instructing them thusly: You cannot simply sell a pumpkin. You must first put on your Sherlock Holmes cap and dig till you find out the true intent of the purchaser. Will this pumpkin be food? If so, no problem. But if the orange ball with a green stem will become a decoration… cha-ching! Tax that bad boy!

According to the DOR notice, pumpkins are taxable if:

  • They are advertised as decorations or jack-o-lanterns.
  • If it is understood they will be used as decorations or jack- o-lanterns.

They are exempt if a buyer completes a sales tax exemption statement, claiming the pumpkin will be used as food. They will also be exempt if:

  • The pumpkin is a specific variety used to make pumpkin pies and is advertised for that purpose.
  • It is purchased with food stamps.

When one tax expert highlighted the silliness of tax based on intent, the blogosphere picked up on the idea, and soon the Iowa DOR dropped their efforts and rescinded the taxes, and maybe found better uses for their time.

Iowa is Not Alone

Iowa DOR may have needed a push from the blogosphere to come to common sense. But at least they did relent. Washington state, on the other hand, still taxes certain candy, while not taxing other very similar candy. The difference it seems boils down to whether or not the confection is made with flour “Candy does not include any preparation containing flour and does not require refrigeration.”

By this definition, Kit Kat, Twizzler Strawberry Twist, Milk Way Bars, and Hershey Powdered Cocoa for baking are all exempt from tax. But Brach’s Milk Chocolate Covered Raisins, Milky Way Midnight Bar, and Kraft Bakers Chocolate, unsweetened, all are taxable. Go figure!

Does it Matter?

Yes, most areas are cash strapped. But maybe they could save money by sending some tax authorities home, instead of having them waste time and taxpayer money working out the taxability of candy and pumpkins.

Photo: Wildcat Dunny

7 Most Outrageous Tax Deductions

Think only celebrities and big corporations get away with outrageous tax deductions? We’ve put together a few reasonable ones you can take advantage of next year, and a few of the more outrageous tax deductions for fun.

1. Put your pup to work! Employing man’s best friend to protect your company grounds can offer some leeway with the IRS. Since the animal is considered part of the “protection” or security system for your place of business, some of your pooch’s care costs may be written off come tax time.

2. Enlarging your deduction — taken to the next level. In 1988 a stripper wrote off her breast enlargement surgery as a business expense. At first the tax courts denied her the deduction. Immediately she appealed the decision and sure enough, her implants were considered a business expense allowing her the tax deduction.

3. Getting a prescription for cash. Does your doctor feel you need to drastically improve your health in order to stay alive? Well the IRS wants you alive and kicking in order to keep up with your tax payments. If your doctor signs off on the purchase of remedies in order to drop some weight, you may be able to write the concoctions off as an expense on next year’s tax return.

4. Stick ’em up! No one escapes the IRS when there’s cash involved. Even criminals in the pen must pay tax on their bounty; ironically, they may be able to write off lawyer expenses as a tax deduction. Who are the real criminals here?

5. Smoke and mirrors. Lately, everyone seems to be trying to live a healthier lifestyle. Many smokers have decided to quit, if not for health reasons, then for the steep increase on cigarette taxes. Smoking cessation devices, patches, or other quit-smoking aids can indeed be written off at tax time. Take advantage of this and you may see some payback for cigarette taxes you paid last year.

6. Music to your ears. Signing junior up for clarinet lessons may not be such a bad idea after all. If your child has an over-bite it is scientifically proven that playing certain wind instruments can correct the problem. Junior practicing clarinet may keep you up at night, but writing off that lesson can help you sleep like a baby during tax time.

7. Moving on up. You made it. You finally got that big promotion and are moving to the city to rake in the dough and live the high life. As many people already know, you can write off your moving expenses when relocating for a job. If you have pets, moving can become a bit more costly especially if there is a plane ride in your pup’s future. Since this is considered a moving expense, you pet’s airfare is a write off as well.

At Optima Tax Relief we can help you take advantage of some of these legal, but outrageous tax deductions. Contact us for more information on how to keep more cash in your pocket and out of the IRS’s hands.

Photo: tolworthy

Are Game Show Prizes Taxed?

Before you envy those game show contestants who win big, you need to hear the rest of the story. Some winners scoop up prizes worth tens of thousands of dollars, and maybe even a car. But often they don’t realize that those items are taxable. Depending on the details, they may not be able to leave the show with their prizes until part of those taxes are paid.

One contestant, Andrea Schwartz won $33,000 worth of prizes on The Price is Right (TPIR), including a pool table, a shuffleboard table, and a shiny new red Mazda 2. After the show she was whisked backstage to do the paperwork, and come up with the tax.

In an interview with Yahoo!Shine, she told reporters, “Yeah, you don’t just drive off the back lot with the car. After the show, you fill out some paperwork and basically sign your life away. You say that you’re going to pay the taxes on it. If you win in California, you have to actually pay the California state income tax ahead of time.”

Of course, winners will also have to file their regular tax returns during filing season, and the value of the items will be added to their taxable income. By the way, the value you are taxed on is the manufacturer’s suggested retail price, which may be considerably higher than you could buy it for yourself. This could push you into a higher marginal tax bracket.

Pay the Piper or Leave the Prizes

For Schwartz, winning at TPIR meant paying $2,500 on the spot. Fortunately she had also won $1,200 cash playing Plinko on the show, so while that helped, she had not envisioned spending it to pay taxes.

According to the AICPA, Schwartz and anyone who wins and pays state income tax as she did, will be able to claim a tax credit in his or her home state for the taxes paid in the state where the win occurred.

A common question contestants ask is, can they take the value of the prize in cash? According to another TPIR winner, the answer is, not usually unless the prize is not immediately available. Then you might be offered the cash value if you choose not to wait. This winner said on Consumerist.com he won prizes worth $57,000 and owed taxes of between $17,000 and $20,000.

Consumerist.com affirmed that many winners end up declining their prizes because of the tax or other issues. For example, TPIR will only ship prizes to your home address. If you want items shipped elsewhere you have to pay extra. Schwartz lives in an apartment and could not receive the two large tables at her residence. In the end, she sold them on Craigslist for less than one-third the value.

Long Story Short…

Winning is great, but game show prizes generally come with hefty costs. And sometimes the tax has to be paid immediately or you forfeit the prize. Before you go on that game show or enter a contest, find out what the tax implications are so you don’t end up regretting your big win.

Photo: stweedy

What Can NFL Players Deduct on Their Taxes?

Football season just kicked off and fans are keenly aware that the players out there are raking in more money in one season than most people will make in a lifetime. New Orleans Saints quarterback, Drew Brees for instance, is averaging $20 million a year. Most team members don’t make anywhere near that, but rest assured they are well paid.

Big Bucks Big Taxes

NFL players also have enormous out-of-pocket expenses. Naturally they can write off all the usual items as long as they qualify. But what else can they deduct?

  • Agent fees, which are generally a percentage of a player’s income. These max out at 3% but for other income such as endorsements the fees are higher.
  • Ground transportation costs (taxis, parking fees, and tolls) related to away-games, training, meeting with agents, scouts, trainers, etc.
  • Fines for acts which do not violate public law.

“I am often asked if player fines are deductible,” said CPA Robert A. Raiola. “For example a fine for speeding is not deductible but a fine for being late to practice is deductible because it violates team policy, but not public law.” Many people believe fines are deductible because some leagues, including the NFL, donate this money to charity. “That’s a common misconception. Whether the fines are donated or not, they are deductible to the athletes,” said Raiola. Raiola is head of the Sports & Entertainment Group for the New Jersey-based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.

Additional expenses include:

  • Athletic equipment related to his sport. Also deductible are training classes and general workout equipment classes which are part of his overall athletic development.
  • Therapeutic massages may be deductible.
  • Reasonable costs of chiropractic care and body maintenance fees, during the season.
  • Temporary housing, for a definite time period, such as for rehab after an injury.
  • Rookie expenses.

Rookies are generally expected to take the team or a position group out for meals at times. It’s considered a normal business expense in the NFL, and generally it is deductible, subject to the standard 50% meals and entertainment limit.

The Lesson?

The deductions are out there, but it takes the expertise of a trained professional to get the best tax results. That’s true for anyone who receives a large sum of money from any source, such as a lottery win, a legal settlement, an inheritance, life insurance, a gift. You’ve heard the stories of people who were suddenly rich, rolling in money. A few years later they are flatbroke, bankrupt, in tax debt, and with no idea how it happened.

The problem was, they had money coming out their ears, but what they didn’t have was the financial sophistication to handle the money well, guard their assets, and minimize the tax bill. For anyone who gets a large sum of money from any source, the first dollar spent should be to get a good financial professional on your side. It’ll be worth the cost.

Photo: Matt McGee

Rashia Wilson, Queen of Tax Fraud

The Tampa Federal court has sentenced self-proclaimed “First Lady” and “Queen of Tax Fraud” Rashia Wilson to a 21-year prison sentence for multiple criminal charges. Charged with aggravated identity theft, wire fraud and a felon for possessing a firearm, she pled guilty to all charges. Her most egregious crime is stealing north of $3 million from the Internal Revenue Service (IRS) through fake tax returns. Authorities claim she actually stole $20 million. Along with her prison sentence, the court ordered her to remit $2.2 million of the traced proceeds connected with the criminal charges.

Wilson, 27, grew up with little money and a diagnosed bi-polar disorder. Her father was in prison during her childhood and her mother a reported drug addict. But recent reports have her enjoying a very comfortable lifestyle from her tax refund schemes. Spending more than $30,000 for her daughter’s birthday party with carnival games, she also reportedly bought an Audi vehicle for $90,000. This is in addition to a list of other cars and designer clothing, vacations, and jewelry.

Based on court documents, Wilson testified that she and an alleged accomplice, Maurice J. Larry, used bogus identifications and hijacked social security numbers to collect misrepresented tax returns from April 2009 to September 2012.  The two worked together out of Wilson’s home, Tampa hotels and other workspaces. Reports have her system performed so efficiently that taxpayers with legitimate claims had to wait up to 12 months.

Courts documents detail how she and the alleged co-conspirator Larry ran their scheme. Tax returns were submitted to the IRS in other taxpayer’s name without their approval or understanding. Upon acceptance, Wilson obtained prepaid debit cards and refund checks for the refunds for the fraudulent tax filings. Searches of Wilson’s home and Larry’s storage unit discovered countless medical bills among the list of thousands of Social Security numbers and names. The home also contained jewelry, a firearm and luxury goods.

After noticing a lull in drug dealing in Wilson’s area, Tampa authorities, the United States Postal Inspection Service, and other federal officials launched “Operation Rain Maker” to look into the increase in the amount of money reaching her mailbox.

According to her Facebook page, she said was “untouchable.” Comments on her Facebook page included, “I’m Rashia,” proclaiming that she is, “the queen of IRS tax fraud.” She eluded to her financial status, “I’m a millionaire for the record,” alluding to how she felt about the government coming after her, “so if U think indicting me will B easy it wont.”

The Queen of Tax Fraud was wrong. As Assistant Inspector in Charge Barney Morris stated, “The culmination of the Rashia Wilson investigation reflects what can happen when local, state and federal law enforcement agencies work collaboratively to combat these types of crimes.”

Kid-Friendly Tax Breaks

Couples are often struggling to make ends meet. Add a few kids to the mix, and the expenses become endless. It seems that there is a never-ending stream of costs associated with having kids: diapers and childcare, clothing, and everyday essentials. Before you know it, field trips, extra-curricular activities, and school events add to that tally.

The Wall Street Journal estimates that the average family will spend around $300,000 raising a child to adulthood, and that number doesn’t even include college costs. Fortunately, there are some kid-friendly tax breaks that will help you recoup a little of your money, or at least get your tax bill down to a manageable level each year.

Child and Dependent Care Credit

If you have children under the age of 13 this tax credit can help with child care costs–but there are a few rules involved. To claim this credit, you must be either working or looking for a job during child care. The cost of summer camp or other programs can also be included.

Run a small business and work for yourself? You can still claim this credit. Keep good records by tracking your hours, income and expenses, and file them in case the IRS ever questions the deduction. Under normal circumstances, this shouldn’t raise any red flags. The credit is worth as much as $3000 for one child or up to $6000 for more than one child. Note: If your family earns more than $43,000 a year, you will only be allowed to claim 20 percent of the deduction.

Adoption Credit

If you are thinking about adopting a child, you can drastically reduce the cost of adoption with the Adoption Credit. In 2012, the adoption tax credit for costs directly associated with adoption was $12,650. Although you can only claim as much as you owe in taxes, you can space the deduction out and claim part of it the following year. This is a large credit and the IRS will likely look at the return closely. It is a good idea to keep meticulous records and a paper trail, and have a tax specialist look over your return. When claiming this deduction, you must file with a paper return instead of an electronic one.

Child Tax Credit

If your child is under 17, you probably qualify for up to a $1,000 Child Tax Credit. Read our checklist to see if your child qualifies. You can claim the credit for each child in your household who is eligible.

Earned Income Tax Credit

For those with a low income, the Earned Income Tax Credit (EITC) can really help come tax-time. If you qualify, you can earn a credit of $3,169 for one child, $5,236 for two children and $5,891 for three or more children. As of 2012, the income for married filing jointly with one child cannot exceed $42,130. The amount goes up slightly if you have more children. This information can change a bit from year-to-year, so it’s always best to refer back to IRS publication 596 or contact Optima Tax Relief  for the latest updates. In addition to claiming this credit on your federal return, some states also offer an EITC credit.

Hire Your Child

If you own your own business and they’re under 18, you can further reduce costs by hiring your child to work for you. Most of the time, you won’t have to worry about holding out FICA or Social Security from their wages. The IRS tends to watch this carefully, so be sure the child is old enough to perform the work assigned, that the work is necessary to your business and that you are paying a fair wage (minimum wage is a good bet). Pay your child with a check and not cash so that you have a paper trail if ever questioned. That check can go into a savings account for your child, a Roth IRA in his name or into a special fund that pays out when he reaches adulthood.

Have your child fill out a W-4 before employment because you’ll need to send him a W-2 at the end of the tax year. According to MarketWatch, your child can earn up to $6,100 a year as of 2013 without worries of owing federal taxes. This is another way to shelter some of your income while helping your child save for college or a rainy day fund.

Higher Education

Once your child turns 18, you’ll lose the Child Tax Credit and many other tax breaks. But if you are still supporting your teenager by paying for expenses like food, rent, and/or their college education, there’s good news–you can recoup some of these costs.

The American Opportunity Tax Credit, good through 2017, allows you to claim $2500 per child per each of the first four years of his college career. Your adjusted gross income must be less than $90,000 for single filers and $180,000 for those filing as married-filing-jointly. You may also be able to claim some of the interest paid on student loans with the Student Loan Interest Deduction.

These kid-friendly tax credits can greatly reduce your tax bill at the end of the year. You’ve got enough expenses as it is, so take advantage of these deductions whenever possible.  Although most won’t send up red flags, the IRS does keep a careful eye on some of these deductions because others have abused the system. Don’t let that scare you off from claiming a deduction you are qualified to take.

Lauryn Hill Sentenced to Federal Prison for Tax Evasion

Grammy award-winning hip-hop singer Lauryn Hill was sentenced on Monday to 3 months in federal prison for failing to pay about $1 million in taxes.

Last year, the 37-year-old New Jersey resident pleaded guilty for failing to pay taxes between 2005 and 2007, on income totaling $1.8 million. Yesterday’s sentence takes into account 2008 and 2009, years she also failed to pay federal and state taxes.

Hill claimed that she had always meant to pay taxes on the income, but couldn’t afford to at the time. “I needed to be able to earn so I could pay my taxes, without compromising the health and welfare of my children, and I was being denied that.”

Hill began her career with the Fugees in the early 1990s alongside well-known artist Wyclef Jean. She went solo in 1998 with The Miseducation of Lauryn Hill, an 8x platinum record, before an indefinite hiatus from the music industry.

Even though she’d been inactive musically while raising her six children, Hill earned more than $2.3 million from 2005 to 2009. She operates four companies, and had been preparing for a comeback with her studio album, The Return, which is due for release later this year.

“I love being able to reach people directly, but in an ideal scenario, I would not have to rush the release of new music,” said Hill after being forced to share a link to her first new song in almost a decade. Her comeback was rushed due to her legal situation, and Hill signed a record deal last month with Sony Worldwide Entertainment to assist in paying off her tax bills.

Despite recently paying more than $970,000 in back taxes and penalties, the singer was still sentenced to serve 3 months in federal prison. Following jail time, she’ll have 3 months of house arrest and nearly a year of supervised release. Additionally, Hill must pay a $60,000 fine to the IRS.