Are you planning for retirement by saving now? While you probably know that it’s a smart investment in your future, you may not be aware that retirement savings can net you some extra benefits at tax time. Retirement savings can positively affect your tax situation, though you are still responsible for any penalties or fees assessed for late or early withdrawals. There are several different types of retirement savings accounts, so depending on the type you have, the following tax facts apply:

  • 401(k): if you want to save immediately, you can chose to defer paying the income tax on your contributions, and won’t be responsible to pay it until you withdraw the funds. You are allowed to defer tax on up to $18,000 of contributions to a 401(k), 403(b), or a Thrift Savings Plan.
  • IRA: similar to the rules for a 401(k), you can defer tax on up to $5,500 of contributions made to a traditional IRA plan. You should consider making a contribution right before you file your taxes, as it can lower your tax obligation and possibly grant you a bigger refund.
  • Roth IRA: money put into a Roth IRA is subject to the same limitations as a traditional IRA, however the contributions are made after taxes. When you begin distributions during retirement, the money is tax-free.
  • Roth 401(k): while the tax benefit for this type of account isn’t immediate, you aren’t required to pay taxes on any withdrawals from accounts you’ve had longer than five years. Additionally, your savings can multiply with the worry of taxation on your contributions.

Other Retirement Savings

If you are an employee over the age of 50, you are eligible to add $6,000 to a 401(k) or IRA savings plan above the usual limitations. Traditional IRA contributions are finished at the age of 70 ½ so it’s important to plan as necessary.

Early withdrawals can be damaging to both your taxes and your retirement accounts. Early withdrawals occur when a taxpayer takes a distribution of their savings before age 59 ½. The withdrawals are taxed 10%, although exceptions are in place if the money is withdrawn from an IRA and used for college, first home purchase, medical bills, or health insurance.

After the age of 70 ½, you are required to begin distribution from your traditional IRA and 401 (k) plans. If you don’t take a minimum withdrawal amount, you could be penalized at up to 50% tax rate. You can delay your distributions from your current employer if you are still working at age 70 ½ and own less than 5% of the company.

Don’t forget about the Saver’s Credit. It’s in addition to other tax deductions for employees who file Single status and have an adjusted gross income of less than $30,500 ($45,750 head of household, $61,000 for married status). This credit benefit is between 10% and 50% of your current retirement savings, up to $2,000 for single filers, and $4,000 for couples. Basically, the less you make, the bigger you’ll get credit-wise.

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Get a Deduction Just For Your Kids

If you’re a parent, you may find some comfort in the fact that your children can actually save you money. While most of your parenthood is spent, spending, the IRS offers you a tax deduction just for having kids. The following tax savers may come in handy for your family, as far as putting a little extra cash back into your budget.

  • Child Tax Credit allows parents to deduct $1,000 per child under the age of 17. Taxpayers who are married and file jointly with an AGI more than $110,000 may be eligible for a reduced credit of $50 over the AGI limit.
  • The dependent exemption allows parents to save $4,000 per eligible child, in so much so that that amount of the parents’ income will remain untaxed. Generally, taxpayers in the 25% bracket can save $1000.
  • The Child and Dependent Care Credit can save parents who pay for care of their child while they work. There are certain requirements that must be met in order to claim the expenses, and can be worth up to $600 for one dependent.
  • The Adoption Tax Credit is excellent for those who adopted a child during the tax year. This tax credit can cover $13,190 worth of adoption expenses, and has certain limitations for parents at specific income levels.
  • If you chose to employ your own child, under the age of 18, following specific child employment protocol, you may be able to save money at tax time. While you have to file a W-4 and complete all paperwork for employing a child, you may be able to save tax dollars by paying up to the maximum standard deduction, before you’re required to pay employment and income taxes.
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The IRS offers some tax breaks that can help you recover some of the money you spent on higher education, such as tuition costs or interest you’ve paid on student loans. This can help make your college education a bit more affordable in the long run.

Tax Credits

There are two different tax credits that you can assess to your expenses in terms of supplies, books, equipment fees, and tuition. These credits have different rules, so check to see which you qualify for:

  • American Opportunity Credit: Claim up to $2,500 for the first four years of post-secondary school
  • Lifetime Learning Credit: Claim up to $2,000 per student year, applicable to any fees or required tuition in order to attend

Students may be able to add some extra cash to their pocket even if they aren’t required to file a tax return. Some of the additional student credits may be available in these situations.

Student Loan Interest Deduction – If you used student loans to pay for your education, you are eligible to deduct any interest you paid during the tax year. This deduction works for any loans, not just federal loans, which were used for higher education. The deduction caps at $2,500 each year.

IRA Disbursements – You are eligible to use disbursements from your IRA in order to pay for higher education expenses for yourself, spouse or dependent. The total is subject to federal income tax, however you won’t be assessed early withdrawal fees.

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You may qualify for the Child Care Credit if you are employed and pay for childcare services where you work. There are certain requirements that you must meet in order to claim the credit on your federal tax return. Ask your tax adviser if you need help determining whether you qualify to claim the child care tax credit.

Which Types of Child Care Qualify?

Day care services are the most common types of child care that meets the criteria for the child care tax credit. While overnight camps do not qualify, day camp expenses are eligible. The child care services must be used so you can work or seek regular employment opportunities. Taxpayers can claim the credit whether they file single or jointly. If you are married and you claim the Child Care Tax Credit both you and your spouse must work, or be a full-time student.

Which Children Qualify?

Children who are your dependents and under age 13 who receive care from a qualified child care provider are eligible to have expenses considered under the Child Care Tax Credit. The age requirement is extended for children over the age of 12 who are physically or mentally incapable of self-care. The child must live in your residence for at least half of the year in order for their expenses to be eligible. Major life changes, such as birth, death, or divorce can alter the requirements.

Who is a Qualified Provider?

Certain providers, such as a nanny or babysitter, may provide child care in your home and still qualify. Your spouse does not qualify as a care provider in terms of the Child Tax Credit, nor does care services provided by another dependent child or a non-dependent under the age of 19.

What is the Maximum Credit?

If you pay for care for one child you can claim up to $3,000 of expenses, with the limit extended to $6,000 for two or more children. The credit is then assessed at 20 to 30% of your unreimbursed childcare expenses.

Which Form to File?

When filing your tax return, you must include Form 2441, Child and Dependent Care Expenses. You’ll be required to provide the child care servicer’s contact information, including name address and employer identification number.

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If Social Security or Railroad Retirement Benefits are your entire source of income for the tax year, you may not have to file a tax return. Even if you received any other form of income, your benefits are typically tax-free as long as your modified adjusted gross income (MAGI) is more than the base level for the filing status you use.

Even if your Social Security benefits aren’t taxed, you may still need to file a tax return if you receive other income. You can use a Form 1040 worksheet to calculate your MAGI and which portion of your benefits are taxable. If you receive benefits for prior tax years, you may be able to claim a lump-sum election, which lessens the benefit amount subject to taxes.

To determine if your benefits are taxable, you’ll have to include in your gross income those benefits which you have a legal entitlement to. If both you and a dependent (such as a spouse or child) receive benefits, you only have to calculate those you are entitled to, no matter who the check was distributed to. So, if your child receives benefits in your name, you do not calculate those benefits in your own tax return, and instead will have to be added into other sources of income for the child.

Those who have taxable benefits will need to file a Form 1040 or 1040A, U.S. Individual Income Tax Return. You can’t file a 1040EZ. The benefits you receive will be documented on either Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board. These forms will also state any worker’s compensation benefits you received, as well as the amounts paid to legal recipients.

If you file a joint return, you need to combine your income, as well as social security benefits and railroad retirement benefits. You’ll have to add your spouse’s income in order to calculate the correct amount of benefits that are taxable.

You can chose to withhold additional tax from income sources outside of your benefits in order to cover the amount you may owe in taxes, or you can pay estimated tax quarterly throughout the year. You can also opt to have income tax withheld directly from your benefits.

Categories: General Tags: ,

Alimony and the IRS

August 25, 2015

If you pay alimony as part of a divorce or separation agreement, you need to know how it will affect your taxes. In order for payments to be considered alimony, they must meet seven requirements:

  1. You can’t file a joint return with your former partner
  2. You pay via cash, check, or money order
  3. The payment goes directly to your former spouse
  4. The divorce or separation decree does not state specifically that the money is NOT alimony
  5. You don’t have to continue payments once your former spouse becomes deceased
  6. The payment isn’t considered child support or property settlement
  7. You are not living together at the time of payment

Not every payment you make to your spouse as per the legal separation decree is necessarily considered alimony. Alimony payments do not include:

  • Voluntary gifts or payments
  • Property use
  • Payments for property maintenance
  • Your spouse’s portion of community property income
  • Noncash property settlements
  • Child support payments

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Does someone owe you money? Are you afraid you’ll never see it again, primarily because you have no way to collect the funds? You’re faced with “Bad Debt”. Don’t worry though, you are able to deduct bad debt at tax time, as long as you have previously included the amount in your income. You had to have actually received the money at some point, which means you can’t deduct rent or payment for services that you anticipated, but never actually got. You’ll also need to show proof that the money you lent wasn’t a gift, and that repayment was directly stated and understood by both parties.

Bad debt can be from business or personal situations. Business bad debt typically comes from operating expenses, and is deducted on your income tax form. This type of bad debt can include loans to customers, credit sales, business loan guarantees.

It’s still necessary to include these debts in your income, even with a business. Business debts are deducted using either the charge-off method or the nonaccrual-experience method, and can be deducted either partially or in full.

Other types of bad debt are considered nonbusiness related. In order to be deducted, they have to be completely valueless, meaning there is no reasonable expectation of repayment based on the facts. You’ll need proof that several methods were used to attempt to collect the debt appropriately. Bad debt deductions need to be taken in the year when the debt becomes worthless, and with the right proof, you can avoid court.

Nonbusiness bad debts are reported as short-term capital loss on a Form 8949, Sales and Other Dispositions of Capital Assets, along with a detailed statement regarding the bad debt and attempts to collect.

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Taking out loans to pay for your education is the only option to afford college for some students. This can get expensive quickly, depending on your interest rate. However, any interest you pay on certain student loans may be deductible when you file your tax return. You are able to deduct up to $2,500 in interest, or the actual amount you paid, depending on which amount is less. Student loan interest deduction is dependent upon your modified adjusted gross income, and can be reduced if you exceed the limit annually. You don’t need to itemize to take this deduction, since it makes an adjustment to your income.

There are five requirements which must be met in order to deduct student loan interest:

  • You paid the interest on a student loan that is qualified for deduction within the tax year
  • You are required to pay the interest
  • Your filing status is not married, filing separately
  • Your modified adjusted gross income is less than the annual threshold
  • You (or your spouse if filing jointly) are not claimed as a dependent on another’s return

Normally, qualified loans are those which are used to pay for higher education. Be sure to check which expenses meet the rules for qualification.

Your student loan lender will supply you with a Form 1098-E, Student Loan Interest Statement, for interest payments in excess of $600. You claim the deduction as an adjustment to income on your Form 1040. Certain restrictions apply to students who file foreign tax returns or different tax forms.

Categories: Deductions Tags: , ,

Having outstanding debt can hurt you in a variety of ways. Debt is defined as any amounts owed for property or services, whether you are personally liable or there is property securing the amount of the debt. If debt is secured by property and is canceled, whether fully or partially, as a result of foreclosure, repossession, abandonment, voluntary surrender, or loan modification, you will receive a Form 1099-C, Cancellation of Debt at tax time. This form documents the canceled amount as gross income, as long as there are no exceptions or exclusions.

You are required by the IRS to report the taxable amounts of cancelled debt, as you may be held liable for these amounts, even if you don’t receive a Form 1099-C. You report these amounts on your regular Form 1040 when filing your taxes.

If your debt is secured by property which is taken by the creditor as payment of your debt, you’ll need to consider it as sold property in the eyes of the IRS. This means your property may be subject to taxable gains or losses, and you need to understand the different taxes that apply to property sold for capital gains. This is a separate taxation from the canceled debt, and will be taxed separately. (more…)

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Having some way to help pay for college expenses can make the whole process a lot easier. Scholarships, grants, and fellowships are a great way to make payment easier. Scholarships and grants are generally paid to a student for a specific school or institution. Fellowships are similar, although money can be used for study and research reasons. If you are the recipient of a scholarship, grantor fellowship that helps fund your education, Congratulations! However you need to know how these awards can affect you at tax time.

There are different need-based grants available to students, such as the Pell Grant or Fulbright Grant. These grants and scholarships may be fully or partially tax-free. In order to get a tax-free grant, fellowship, or scholarship, you must:

  • Seek a degree at an institution that qualifies and has regular enrollment and attendance, as well as regular faculty and a physical location and curriculum.
  • Use the amount to pay tuition and other fees, or purchase required books, supplies and equipment.

You’re required to include in your gross income:

  • Any amount you used to pay incidentals such as travel, lodging and optional supplies.
  • Any amount received in exchange for services such as teaching, researching, or other stipulation. National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program amounts are not required to be added to income.

Amounts of these awards that apply to your gross income will have to be reported to the IRS at tax time on Form 1040A. Enter SCH in the space to the left of “wages, salaries, and tips”. Other Form 1040‘s have a specific line for scholarship awards. IF you received additional funds through a grant, you may have a newly generated W-2, which you can use to file your tax return. Be aware that you may need to make estimated tax payments throughout the year.

 

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