Once you’ve started repaying your student loans, you’ll understand how important it is to save money wherever possible. At tax time, you may be eligible to claim a deduction on interest you’ve paid on your student loan. Worth up to $2,500 off your taxable income, this deduction can really help students and graduates pinch pennies when possible. Taxpayers in the 15% bracket may receive a minimum of $375 in student loan interest deduction when they file their return.

Other Educational Deductions and Credits

As with any loan, you’ll generally pay back more than the amount you originally borrowed, due to interest. The student loan interest deduction is available to taxpayers with an AGI under $80,000 annually, and directly relates to how much you’ve paid in interest. Those who fall between $65,000 and $80,000 are subject to a reduced interest amount.

Parents may also deduct interest on loans they’ve taken to pay for their child’s education. Be aware though, if you took a loan in your name, and your parents claim you as a dependent, you sacrifice your claim to the deduction.

You don’t have to have already graduated to claim the deduction either, as students who have started making payments while in school are also eligible, if they are paying interest.

There are additional education deductions for students while they are in school. For example, students can claim up to $4,000 in tuition and fees or claim one of two education credits: The American Opportunity Tax Credit or the Lifetime Learning Credit. These are worth up to $2,500 and $2,000 respectively, each with their own requirements and rules.

After determining all your eligibility and income, you should claim the credit that will be the most beneficial to your taxes. Generally, credits offer the best benefit in comparison to deductions, as the latter reduces your taxable income. Credits decrease the amount you pay in taxes.

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It’s common for many people to make a little mistake on their tax return. In doing so, it can delay your refund. However, if you make a mistake when claiming the Earned Income Tax Credit, you may wait months to receive that portion of your refund. Depending on the situation, some errors can lead to a denial of the full credit.

If this happens, you may face some penalties such as repayment of the credit amount you’ve received with interest. You may have to file Form 8862, “Information to Claim Earned Income Credit After Disallowance” before you can claim the EITC again on a tax return.

Should the IRS determine the mistake was reckless or intentional, you’ll be blocked from claiming the EITC again for two more years following. If it’s determined fraud was a factor in filing, you’ll be denied ability to claim the EITC for the next ten years.

Check your return carefully to ensure accurate filing.

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When tax season approaches, one of the most common terms you’ll hear is “dependent”. That’s because many credits and deductions, as well as which filing status you’re eligible to use, relate directly to whether you claim dependents, and if so, how many. First, you’ll need to understand the qualifications necessary to be considered a dependent.

Generally, children of the taxpayer qualify to be claimed as dependents, as they receive a majority of their financial support from the taxpayer. Dependents aren’t just limited to children however, as many other relatives may meet the criteria for specific tax benefits. For example, parents, grandparents, nieces, nephews, and others can all qualify to be claimed as a dependent if they meet either the rules of qualifying child or qualifying relative.

Qualifying Child

The criteria for qualifying child requires that they be less than 19 years old as of the last day of the tax year. Full-time students can be 24 or younger and still qualify. The age restriction does not apply to dependent children that are totally and permanently disabled.

Additionally, the child must have lived in your residence for over half of the year. Students can live on campus I a dorm and still meet this requirement, as it’s considered a temporary absence and your home is the permanent residence. Your dependent must actually be dependent on you financially, as you have to provide more than 50% of their financial support during the tax year.

Qualifying Relative

With almost identical criteria to qualifying child rules, the qualifying relative dependent can also help you save money at tax time. There are no age or disability requirements, however the relative cannot be claimed by another taxpayer as a qualifying child. They must have resided with you for the whole tax year, not just half, though parents and siblings are exempt from this rule in certain situations. The entire income the dependent makes must be less than their personal exemption for the year.

Dependents are a big benefit to taxpayers, as they can save you a bunch. You’re able to claim a personal exemption for each dependent. Having dependents can make you eligible for the Earned Income Tax Credit, The Child Tax Credit, and Child and Dependent Care Credit. Additional credits exist for student dependents, such as educational credits and deductions.

When parents are divorced, dependency rights are generally granted to the custodial parent, though they can waive their right to claim the personal exemption for the child. In doing so, the other parents can claim the child as a dependent, though the custodial parent should still be eligible to claim the EITC and file as Head of Household if necessary.

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Tax credits come in two varieties: refundable and non-refundable. The majority of tax credits fall under the latter, though there are some that can put more of your hard-earned money back into your bank account. At tax time, you need to know if the credit you are claiming is refundable or not, so you know exactly what to expect when you calculate your refund.

Like all tax credits, non-refundable ones still serve their purpose of reducing the amount of taxes due to the IRS. In some situations, tax credits can completely eliminate your tax debt. How non-refundable credits work:

You owe the IRS $1,500 in taxes but qualify to claim a $2,000 non-refundable tax credit. Your tax debt is reduced to zero, and the remaining $500 from the credit is eliminated. You won’t receive any money back, and the balance is non-transferable and can’t be carried over to another tax year.

Refundable tax credits are slightly different. If the tax credit in the previous situation was refundable, the $500 balance (after your tax debt was eliminated) would be awarded to you in a refund. These types of credits are two-fold: they can eliminate your tax debt fully and return some much-needed cash back to your hands!

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Tax credits can really make a difference for your refund at tax time. Refundable tax credits are even better, as they can offer you money back even if your tax liability is reduced to zero. One of the most popular refundable tax credits you may be eligible to claim is the Earned Income Tax Credit.

The Earned Income Tax Credit was enacted in 1975 to replenish the pockets of low to moderate income families. As the name suggests, to be eligible for the credit, taxpayers must have earned income either through self-employment or as an employee of another. Additionally, you must have less than $3,450 in investment income to qualify to claim the credit. Other requirements include:

  • Taxpayer must be between the ages of 25 and 65 years old.
  • Taxpayer must have lived for a minimum of six months in the United States during the tax year.
  • Taxpayer can’t be claimed by another as a dependent.
  • Married taxpayers must file jointly.

The amount of the credit depends on your yearly income and the number of people you claim as dependents. The more dependents, the higher your credit will be; however, you can still claim the credit even without any children. You’ll need to fall under the income threshold as well. With the lowest amount of income and three or more dependents, the Earned Income Tax Credit can be worth up to $6,318.

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Often, people mistakenly use the terms “credits” and “deductions” interchangeably. However, at tax time, it’s important to understand the difference between the two, and ensure you’re utilizing them to your advantage. Generally, tax credits are the more beneficial of the two, though when used correctly, both can save you significantly when you file your taxes.

Deductions

Tax deductions decrease your taxable income amount. If your annual earned income reported at tax time is 70,000, and you’re eligible to claim $15,000 in deductions, you’d only be taxed on $55,000 of your income.  Tax deductions are an excellent way to reduce your tax liability and save money, so be sure you claim as many as you qualify for.

Credits

Credits are usually dollar-for-dollar deductions on the amount of taxes that you owe to the IRS. They don’t reduce your income, like deductions do, but instead decrease the amount you must pay once your liability is calculated. If your tax return requires you to pay the IRS $1,500, and you find that you’re eligible to claim a $1,500 tax credit, your tax debt is abolished. You won’t owe anything to the IRS. If you owed $2,000 and claimed the same $1,500 credit, you’d only be responsible for paying $500 (the difference after the credit is subtracted from your balance). There are even some tax credits, like the Earned Income Tax Credit, that are refundable, meaning the IRS may owe you money. Refundable credits allow you to collect the balance of the credit once your tax liability becomes zero.

When filing your tax return, it’s essential to claim all deductions and credit you are eligible to maximize your savings!

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Though there are no refunds once you have children, they may be worth a credit – a tax credit, that is. Parents can benefit from the Child Tax Credit, a popular tax break that is worth $1,000 per child when you file. Your child must be claimed as a dependent on your tax return and are required to meet certain criteria to qualify for the Child Tax Credit. The child must:

  • Be under 17 years old
  • Have an assigned Social Security number prior to the due date of the year’s tax returns
  • Be a biological child, adopted child, stepchild, or legally placed foster child
  • Not provide more than 50% of their own financial support
  • Be a U.S. citizen
  • Have resided with you for at least half of the year

Like the Earned Income Tax Credit, The Child Tax Credit is subject to income limitations. If you exceed these thresholds, the credit amount is decreased. To claim the full $1,000 per child, your income needs to fall under the following amounts (according to filing status):

  • Single and Head of Household: $75,000
  • Married, filing Jointly: $110,000
  • Married, filing separately: $55,000

For every $1,000 that your income exceeds these limits, the Child Tax Credit is reduced by $50. It is a non-refundable credit.

Taxpayers who earn at least $3,000 in income may qualify to claim the Additional Child Tax Credit, which can be worth as much as 15% of your taxable income over $3,000. Though the Child Tax Credit isn’t refundable, you may see some of it returned to you if you claim the Additional Child Tax Credit and your tax liability is completely fulfilled.

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Being married gives you the option to choose your filing status, you can either file Married Filing Jointly or Married Filing Separately.

Why should I choose Married Filing Jointly?

Depending on your tax situation Married Filing Jointly may get you bigger refunds and smaller tax bills. Most married couples choose to file with the status of Married Filing Jointly. Although in some tax situations there may be an advantage to using the filing status of Married Filing Separately.   Continue reading to find out more about Married Filing Separately and how it affects your tax status.

Married Filing Separately Explained

If you decide with your spouse to us the tax status of Married Filing Separately you both must file your own return, this includes individual income, deductions, exemptions and credits. When you do this, you are only responsible for your own tax liability. Any taxes, penalties or interest that results from your spouse’s return will not be your responsibility. (more…)

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Have you had to pay for someone to take care of your dependents while you worked? If so, you may be able to claim a special tax credit to help offset some of the costs. This credit, the Child and Dependent Care Tax Credit, has certain requirements that taxpayers must meet. These include:

  • You must have incurred the care expenses while you either worked or sought employment. Married taxpayers have to both be working or seeking employment, provided neither of you is disabled or a full-time student. If so, the requirement to work does not apply.
  • The care must have been provided to a “Qualifying person”. A child under age 13, a spouse or dependent who lives with you but is disabled and incapable of caring for themselves, are qualifying persons. You’ll need the Social Security number of the person for whom care was provided in order to claim the credit.
  • You have to have earned income throughout the tax year. Married taxpayers both have to earn income, and any form of dependent care reimbursement by your employer is subject to additional requirements in order to claim the credit.
  • The Child and Dependent Care credit depends on your income, and can be about 20% and 35% of all the allowable expenses incurred, with a max of $3,000 in expenses for one dependent, and $6,000 for two or more dependents.
  • The care provider will have to supply you with their taxpayer identification number, and you’ll have to fill out their name and contact information on the credit claim Form 2441, which you file with your tax return.
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After getting divorced, you may notice a change in your taxes, along with everything else you are altering in your life. Tax time may mean a new filing status, as well as different eligibility for certain tax credits.

If you have always filed using the Head of Household tax status, you may not be eligible to continue to file that way after a divorce. Head of Household typically has a lower tax liability compared to the Single or Married, Filing Separately status that people generally use before they are divorced.

Your custody agreement plays a big part in determining if you are still eligible to file under Head of Household status. The privilege of filing Head of Household usually goes to the spouse who has custody more than 50% of the year. If each parent has a different child, conceived during the marriage, living with them for more than half the year, Head of Household status can be claimed by both spouses. This is the only way the status can be claimed by both parents. (more…)

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