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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So you chose an individual retirement arrangement (IRA) to save for your future. This choice can be beneficial at tax time, as contributions to a traditional IRA may be deductible at tax time. There are several different types of IRA plans, including a traditional and Roth IRA, and are set up through a financial institution, bank, or insurance agent.

If you have a traditional IRA, you may be eligible for a tax credit equal to a percentage of your contribution. Normally, traditional IRAs aren’t taxed until they are distributed. IRAs are individually owned, though a beneficiary can be named.

You can only make contributions to a traditional IRA if you are under the age of 70 ½ by the year end. You have to have taxable income as well, including wages, salaries, tips, bonuses, or commissions. Income can also include money earned from self-employment. Certain compensation payments, like alimony, are considered taxable income.

Income that is not included:

  • Rental income
  • Interest/dividend income
  • Pensions and annuities
  • Deferred compensation

You can calculate your deduction by using Form 1040 worksheets, and attach Form 8606, Nondeductible IRAs if you determine you cannot deduct any of your contributions. You cannot use a Form 1040-EZ, but Form 8880, Credit for Qualified Retirement Savings Contributions, will help you figure out whether or not you qualify for a tax credit.

Traditional IRAs are fully or partially taxed when distributions begin. If you fully deducted your contributions, then distributions are fully taxed. If you receive distributions from a traditional IRA before age 59 ½, you may have to pay an additional 10% tax. At age 70 ½ you should begin receiving minimum distributions, which help you avoid excise penalties and taxes.

Roth IRAs, which are designated at setup, vary from traditional IRAs by:

  • Contributions are NOT deductible
  • Qualified distributions are not taxed
  • There is no age limit for contributing

 

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All retirement compensation plans are required to follow the rules enacted in 1974 by the Employee Retirement Income Security Act (ERISA) in order to be considered “qualified” by the IRS at tax time. Generally, most 401(k) plans meet these requirements and is considered a qualifying plan as far as your taxes are concerned.

Your employer contributes a specified percentage of pretax wages to your 401(k) plan, known as elective contributions. Since it is not taxed when it is put into the account, you aren’t required to report it as income on your Form 1040. However, 401(k) contributions are subject to Social Security and Medicare taxation, and your employer must report them as necessary for federal unemployment taxation regulation.

Limitations to elective contributions are applied by both the IRS and your specific 401(k) plan. You’ll find the amount of your contribution on line 12 of your W-2. When the time comes for distribution, you can either choose to accept a lump sum, or roll your funds over into another account, provided certain conditions are met.

Most 401(k) plans have a “hardship” clause that allows for withdrawals limited to the amount your employer contributed. Any income earned on the amount deferred isn’t eligible for hardship withdrawal or eligible for a rollover distribution.

You can be subject to additional taxes of 10% if you withdraw funds from your 401(k) before the age of 59 ½, even if it’s considered a hardship withdrawal. Be sure to check all the conditions of withdrawal and how it will affect your taxes before tapping into your 401(k).

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Sometimes, our job may require us to relocate to a new location. That can get costly, especially if you are paying for it yourself. You may qualify to deduct a significant portion of your relocation expenses if you’ve moved as a result of a change in your job. While you can’t deduct meals, other expenses can be deducted if you meet three tests:

  • The date of your move coincides within a reasonable time frame to the start of the new job
  • You meet the distance requirements
  • You meet the time requirements

Start Date

When you move, your relocation date has to be close to the day you start working at the new job or location. For these purposes, the acceptable time frame is within a year from move to start. The distance between the new location and your new home cannot be greater than the distance between the two places you formerly occupied.

Distance Test

Your new location of employment has to be more than 50 miles farther from your old home than your previous employment. If there was no place of employment prior, your new employment must be more than 50 miles away from your previous home.

Time Test

You have to work full-time for at least thirty-nine weeks within the first year of your move. Self-employed individuals must meet the thirty-nine weeks test as well as have a total workload of 78 weeks within two years from moving. Death, disability, and involuntary separation are a few of the exceptions to the time test. Additionally, military personnel relocating under direct order aren’t required to meet the time test.

Relocation expenses are deducted by making an adjustment to income on a Form 1040, using Form 3903, Moving Expenses, to calculate the deduction.

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Even casual gambling can impact you at tax time. Don’t take the risk and forget to report any winnings from gaming on your tax return. Money you win is completely taxable and needs to be included at tax time. Lotteries, raffles, casino revenue, and money from horse races are all considered gambling winnings, as well as several noncash items including vacations, cars, or electronics. These items are valued at the fair market price.

To file your taxes with gambling income, you should file Form W-2G, Certain Gambling Winnings, once you have reached the amount that is subject to federal taxes. You can report it as “Other Income” on your Form 1040, including winnings that aren’t subject to taxation. A special tax form, 1040NR U.S. Nonresident Alien Income Tax Return, applies to nonresident aliens with gambling income. You may be required to pay estimated taxes on certain winnings.

If you want to deduct gambling losses, you’ll need to itemize your deductions. You also can’t deduct more than you won. Claim these losses on Form 1040, Line 28, Other Miscellaneous Deduction. This only applies to U.S. citizens, as nonresident aliens are not eligible to deduct gambling losses.

As with all deductions, you will need to keep an accurate record of losses and gains in order to substantiate your claims. You will have to prove the amount of losses by showing receipts, statements, tickets, or other proof that can verify your claim to the deduction.

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If you travel for business you know that sometimes it can take you on a new adventure to unknown places that you may like to explore a little more. If you take advantage of organizing your schedule correctly you may be able to get the most of your business trip by mixing in some pleasure.

In order to take advantage of this you will have to make sure you spend enough days doing actual business so you can deduct your travel expenses. You will have to spend over half of the days conducting business domestically and over 75% of the time on overseas international trips.

Just four hours of work is considered a work day, what you do for the rest of the day does not matter. As long as you put in at least four hours of work you can figure out how much of a percentage of you trip is used for business in order to determine your eligibility for deduction. For each day you work you can deduct the cost of hotels, meals and other expenses related to work, even if you only spend four hours a day working.

One way to take advantage of business trips is by making sure you work at little as it is necessary to be eligible for the deduction. In order to do this you may want to arrange your schedule so you only work four hours each business day when possible. You may also be able to spread out your business over the length of your trip so that you have business activity each day. Other options such as using slower transportation, since travel days count as business days. Drive when you can, as opposed to flying to maximize your travel and your deductions, doing this does not violate any tax codes.

The IRS says that days between your work days that you take off can be counted as business days if it is cheaper to spend time at the business location then to return home. So if you have to work on Friday and again on Monday, you can count the weekend as two business days even if you didn’t perform any work.

Any personal expenses incurred when you stop at different locations not related to your business are not eligible for deduction. For example if you stop at a tourist location on your way to a meeting in another town you may not be able to deduction any expenses incurred there since they are not part of the expense of conducting business.

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You will receive a 1099-R if you have received any payment from sources such as pensions, annuities or similar plans. This form will report any income earned from these distributions.

Pension and Annuity Payments

By setting up a retirement funds with your employer you are arranging a compensation agreement. Many retirement plans are contributed to pretax through your payroll and the tax is paid when you take distributions from the plan.

If you retire or become disabled and unable to work you can start receiving your pension and annuity distributions. Some funds will also make payments to a beneficiary of an employee who is deceased. If you made your fund contributions after-tax, only a portion of the distribution is subject to tax. Otherwise if you contributed pre-tax the full amount is usually taxable income at distribution.

Rollover

If you decided to move your retirement funds from one plan to another this is considered a rollover. Your Form 1099-R will who you any direct rollovers in box 7 with either a code of G or H.

Early Distributions

If you receive any payments prior to turning 59 ½ years old it will be considered an early distribution and is subject to additional taxes. The Federal government imposes a 10% early withdraw tax to discourage people from using retirement funds for other purposes. In addition to any extra federal taxes paid on early distributions, you may also be subject to state penalties.

There are exceptions for early distribution, some of them include: death, disability, medical costs more than 10% of your AGI and levies by the IRS.

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If you have income from investments you might notice a new tax. If you have regular income over a certain level and you receive investment income you may be responsible to pay this new tax, known as the Net Investment Income Tax. You will want to know a few basic rules about the new NIIT if you think you might be subject to it.

The Net Investment Income Tax is either applied at a rate of 3.8% on your income from investments or by the amount that your modified adjusted gross income in more than a limit set on your filing status, this is dependent on which is less.

You may be subject to the new tax if you have income from these sources below.

  • Interests & Dividends
  • Income from Rental Properties
  • Capital Gains Income
  • Income from Non-Qualified Annuity plans.

Most of the time NIIT does not include wages you would have earned, even if they are earned via self-employment. Other items such as Social Security benefits, unemployment compensation and alimony are not considered Net Investment Income. It also does not cover any income made from the sale of your home that is not included in your income.

You can deduct any credits you qualify for once you total your investment income. Any amount left over after deductions is considered your Net Investment Income. To figure out your MAGI or Net Investment Income and if you are responsible to pay taxes on it, you can use Form 8960.

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You should be aware if you have been awarded money or damages through a court of law that the fund may be taxable. To figure how if any settlements or judgements are supposed to be included in your yearly income you need to determine what item the money is taking place of. The below items need to be added to your yearly income for tax purposes:

  • Any interest that results from an award
  • Income that was awarded due to loss wages or profits
  • Punitive damages
  • Income from pension rights, that you did not contribute to

If you were awarded any damages through the courts you will need to include the following as income:

  • Patent breaches or copyright infringements
  • Contract violations
  • Damages due to obstruction of business operations
  • Any awards that were gained under the Age Discrimination in Employment Act

If you are awarded settlements from cases of personal injury or physical sickness you are not required to calculate these into your taxes, whether if you took installment or a lump sum payment.

If you received a monies from a judgement due to character defamation, surrendering the custody of a minor or alienation of affection you are subject to special requirements.

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