Personal Tax Tips

Tax laws change every year, but generally the following tips apply to any tax year and are suggestions to help maintain records of your financial history. For the most current info check out our blog or call us at (908) 725-4414 to discuss your specific tax situation.

DEFER TAXES

What investments can I make to help defer taxes?

The interest gained from state and local bonds is usually exempt from federal income taxes. These investments generally pay back at a lower interest rate than commercial bonds of similar quality. Since Treasury Bonds are similarly exempt from state and local income tax, they can be a particularly good investment for those who are in high tax brackets and live in high-income-tax states.

What retirement plans are available to aid in the deferral of taxes?

You have the ability to invest some of the money that you would have paid in taxes to add to your retirement fund. Many employers will offer the opportunity to defer a portion of your earnings and contribute them directly to your retirement account. Some of them may even match a portion of your savings. If this is the case, it is always advisable to save at least the amount that your employer will match. This will give you an automatic 100% gain on your money. If you are self-employed, look into getting a Keogh, SIMPLE or a SEP IRA.

IRA Contributions

One popular tax savings outlet available to taxpayers today is the Individual Retirement Account, more commonly referred to as an IRA. There are several options you have when deciding which type of IRA account to enter into. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on whether you or your spouse, if filing jointly, are covered by an employer’s pension plan and how much total income you have. Conversely, you cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Generally, you can contribute a percentage of your earnings for the current year or a larger, catch-up contribution if you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these annual amounts (currently $5,500, or $6,500 if you are age 50 or older).

You can file your tax return claiming a traditional IRA deduction before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. If you haven’t contributed funds to an Individual Retirement Account (IRA) for last tax year, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for last year, not including extensions.

Be sure to tell the IRA trustee that the contribution is for last year. Otherwise, the trustee may report the contribution as being for this year, when they get your funds. If you report a contribution to a traditional IRA on your return, but fail to contribute by the deadline, you must file an amended tax return by using Form 1040X, Amended U.S. Individual Income Tax Return. You must add the amount you deducted to your income on the amended return and pay the additional tax accordingly.

 

RECORD KEEPING

What do I need to keep for tax reasons?

It is a good idea to keep all of your receipts and any other records that you may have of your income and expenses. These will come in very handy if you are audited. It is recommended that you keep these documents for three to seven years, depending on the document.

How long should I keep old tax returns?

If you are audited, it is very likely that the auditor will ask to see the last few tax returns. It is recommended to keep these tax returns forever. An added benefit of keeping your tax returns is that you can see what you claimed last year, allowing you to adjust for the current year.

Tips and Taxes

Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those services is taxable income, advises the IRS. As taxable income, these tips are subject to federal income, Social Security and Medicare taxes, and may be subject to state income tax as well. You must keep a running daily log of all your tip income and tips paid out. This includes cash that you receive directly from customers, tips from credit card charges from customers that your employer pays you, the value of any non-cash tips such as tickets or passes that you receive, and the amount of tips you paid out to other employees through tip pools or tip splitting and the names of those employees.

You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report of Tips to Employer, to record your tip income. For a free copy of Publication 1244, call the IRS toll free at 1-800-TAX-FORM (1-800-829-3676).

If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes and to report the correct amount of your earnings to the Social Security Administration (which will affect your benefits when you retire or if you become disabled, or your family’s benefits if you die).  Contact us so your wages are properly reported!

EDUCATION

Are there available tax breaks for my children’s education?

There are many different ways to use tax breaks for the higher education of your children. Be aware that you can only receive one type of relief for one item. It is best to consult with a professional to determine which would be the most advantageous.

Tax Incentives for Higher Education

The tax code provides a variety of tax incentives for families who are paying higher education costs or are repaying student loans. You may be able to claim an American Opportunity Credit (formerly called the Hope Credit) or Lifetime Learning Credit for the qualified tuition and related expenses of the students in your family (i.e. you, your spouse, or dependent) who are enrolled in eligible educational institutions. Different rules apply to each credit and the ability to claim the credit phases out at higher income levels.

If you don’t qualify for the credit, you may be able to claim the “tuition & fees deduction” for qualified educational expenses. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. This deduction phases out at higher income levels.

You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not have to itemize your deductions on Schedule A Form 1040. However, this deduction is also phased out at higher income levels.

What is the education tax credit?

You must make a choice between two types of tax education credit.

  1. The American Opportunity Tax Credit will work for the first 4 years of college for at least full-time study.
  2. The Lifetime Learning Credit applies for as long as the student studies, but the percentage of savings per year decreases drastically.

What is a Coverdell (Section 530)?

A Coverdell Education Savings Account (ESA) is a savings account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross (MAGI) income is less than an annual, constantly changing maximum. Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

With an education IRA:

  • Withdrawals aren’t taxed if used for qualified education expenses.
  • Contributions can be made only up until the point that the client reaches 18, and all funds must be distributed by the time that they are 30.
  • Contributions are not tax deductible
  • It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.
  • The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.

What is a qualified tuition program?

The Section 529 is a college savings program available in most states. Money is invested to cover the costs of future education. These investments grow tax free and the distributions may also be tax-free.

What differentiates the Coverdell Section 530 and the Section 529?

  • The Section 529 allows for much larger yearly investments, whereas the Section 530 currently only allows for $2000 annually.
  • The choice of investments in the Section 529 is extremely conservative and limited while the Section 530 allows for many different options.
  • The Section 530 is a nationwide program while the 529 varies from state to state.
  • The Section 530 will let you use its funds for primary and secondary education, while the Section 529 can only be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiaries choosing.

Can I take money from my traditional or Roth IRA to fund my child’s education?

Yes, you can take distributions from your IRAs for qualifying education expenses without having to pay the 10% additional tax penalty. You may owe income tax on at least part of the amount distributed, but not the additional penalty. The amount of the distribution that is more than the education expense does not qualify for the 10% tax exception.

What tax deductions can be used for college education?

There is a limited deduction allowed for higher education and related expenses. In addition, business expense deductions are allowed, without a dollar limit, for education related to the taxpayer’s business, employment included.

Is student loan interest tax deductible?

In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.

  • The deduction ceiling is $2,500.
  • If you are a dependent, you may not claim the interest deduction.
  • You need to be the person liable for the debt and the loan must be purely for education.

Can I deduct for education that helps at the workplace?

If you are receiving this education to maintain or improve skills at your current job, yes, but not if it is to meet the minimum requirements.

MARITAL STATUS

After marriage, what are the tax implications?

You are entitled to file a joint income tax return upon marriage. Although this simplifies the filing process, you will more than likely discover that your tax bill is either higher or lower than when you were single. It’s higher when you file together, as more of your income is taxed in the higher tax brackets. This is commonly known as the marriage tax penalty. In 2003, a tax law that intended to reduce the marriage penalty went into effect, but this law didn’t get rid of the penalty for higher bracket taxpayers. Once married, you may not file separately in an attempt to avoid the marriage penalty. Actually, filing as married filing separately can raise your taxes. For the optimal filing status for your situation you should call our office.

Marriage or Divorce

Newlyweds and the recently divorced should make sure that names on their tax returns match those registered with the Social Security Administration (SSA). A mismatch between a name on the tax return and a Social Security number (SSN) could cause your tax return to be rejected by the IRS.

For newlyweds, the tax scenario can begin when the bride says “I do” and takes her husband’s surname, but doesn’t tell the SSA about the name change. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the SSN.

Similarly, after a divorce, a woman who had taken her husband’s name and had made that change known to the SSA should contact the SSA if she reassumes a previous name.

It’s easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency’s Web site, www.ssa.gov, by calling toll free 1-800-772-1213 and at local offices. The SSA Web site provides the addresses of local offices.  Alternatively, please contact us as we can be of even greater assistance with your spousal situation.

Can married couples hold property?

Yes. After marriage, there are many ways of owning property. They differ from state to state.

  • Sole tenancy, which is when one individual has ownership. The property is passed on in accordance with the will at death.
  • Joint tenancy, with the privilege of survivorship. Two or more people have equal ownership. The property is passed to the joint owner upon death. This should be used to effectively avoid probate.
  • Tenancy in common, property has joint ownership with the privilege of survivorship. The property is passed on according to your will upon death.
  • Tenancy by the entirety, like joint tenancy, with privilege of survivorship. This doesn’t allow a spouse to get rid of the property without the other’s consent and is only possible for spouses.
  • Community property, property that is gained through marriage that has equal ownership. States such as AZ, CA, ID, LA, NV, NM, TX, WA, and WI allow community property.

With a divorce, what are the tax implications?

Upon completion of a divorce, individual tax returns will be filed. There are a few areas that may result in tax consequences. The following are the most common:

  • Child Support. It is not taxable to the recipient and is not deductible by the payer. If it is specially designated as child support in a divorce agreement or lessened by the occurrence of a contingency relative to the child, meaning a child reaches a specified age, it is considered as a payment.
  • It is taxable to the recipient and deductible by the payers. It is known as a payment in accordance with a divorce agreement other than child support or when allocated in the decree as something other than alimony. In a separation agreement, similar treatment is in accordance with separate maintenance payments. Payments may not end upon death of the recipient and may not be front-loaded.
  • Property Settlements. When in accordance with the divorce or separation, they are not taxable. In the event of transfers of assets amongst spouses, they do not become taxable income, gains, loses, or deductions. The recipient spouse gets the cost basis of the property. Your spouse may provide you with an equal share of the property based on a fair market value, but be careful with the lower basis. In the end, it can produce a taxable gain at the asset’s sale.

When retirement plans or IRAs are divided in a divorce, what happens?

If in accordance with the qualified domestic relations order or other order of the court in the case of an IRA, these plans are separated as non-taxable. However, this is the case only if the assets stay in the retirement account or IRA. Once the funds are allocated, they will be taxed to the recipient. The payer does not get the benefit of a deduction and the recipient does not have taxable income when divided.

Am I entitled to deduct the dependency exemption of a child after divorce?

Typically, the custodial parent has the right to the deduction. This is normally discussed in divorce agreement negotiations. If agreed to in writing, the non-custodial parent may have the deduction.

INHERITANCE

Are surviving family members entitled to Social Security benefits?

If the deceased has paid Social Security for a minimum of ten years, he/she is covered. Contact your local Social Security office or call 800-772-1213 to find out if the deceased was eligible. There are two types of available benefits, if eligible:

  • One-time death benefit – A death benefit is paid by Social Security towards burial expenses. To apply the payment to your funeral bill, simply complete the form necessary at your local Social Security office or ask the funeral director to complete the application. This is only available to eligible spouses or a child that is entitled to the benefits of the survivor.
  • Benefits of a survivor for a spouse or children – The spouse will be eligible for benefits if he/she is 60 years old or older. The benefit amount collected before the age of 65 will be less than that due at the age of 65 or older. Widows who are disabled are eligible for benefits at age 50. If the deceased’s spouse cares for dependent children under the age of 16 or for disabled children, they may qualify for benefits before age 60. The deceased’s children who are disabled or younger than 18 may also qualify for the benefits.

Upon a family member’s death, what taxes are due?

The following sums up the different taxes that may need to be paid upon death of a family member:

  • Federal Estate Tax. Amounts that are given to the surviving spouse or to a charity are typically exempt from estate tax. Normally, the estate tax is only owed on estates (which, after decreasing the amount by what is given to the spouse and charity, surpasses the unified credit exemption equivalent). If you need to file an estate tax return, get in touch with the IRS to get a Form 706. Within nine months of the death, absent extension date, a federal estate tax return must be filed.
  • State Estate Taxes. These differ by state. States may enforce estate taxes that may be applied on top of the federal estate taxes while others may be utilized when federal estate taxes don’t. There are inheritance taxes that some states impose, which are on the individuals that receive the inheritance, rather than on the estate itself.
  • Income Taxes. The deceased’s state and federal income taxes are due for the year of death. Unless an extension is solicited, the taxes are due on the regular filing date of the coming year. For the year of the death, the deceased’s spouse may file a joint federal income tax return. If the spouse has a dependent child, he/she may file for an additional two years. It might be helpful to look at the IRS’s Publication 559, “Information for Survivors, Executors and Administrators”.

May I refuse inherited property in order to reduce taxes?

To refuse all or part of the property that is being passed on to you by a will, intestacy laws or the operation of law, you should make use of the disclaimer. The property is passed to the next beneficiary in line with an effective disclaimer. By the property passing directly from the decedent to the next beneficiary, it could possible save thousands of dollars in estate taxes. The wise use of the a disclaimer and the condition for a disclaimer in a will permits the shifting of assets and income to maximize the estate tax marital deduction, unified credit and the lower income tax brackets. To provide for financial contingencies, disclaimers may also come in handy. For instance, if someone needs funds, you can disclaim an interest to them.

My spouse died this year; may I file a joint return for this year?

Of course. If the surviving spouse didn’t remarry before the end of the tax year, he/she may choose to file a joint return.

Do I owe taxes on life insurance profits payable to me?

Typically not. Unless the recipient paid for the privilege to collect the life insurance policies, they are non-taxable income. For instance, if a policy was purchased as an investment.

Are distributions of a retirement plan or IRA of the deceased taxable?

Typically, yes because it is considered income with regards to the decedent. The tax is due by the recipient because the deceased had not paid the distribution’s income tax. You may be entitled to a deduction for a segment of the estate taxes paid, if the account’s value was incorporated in the estate tax return of the decedent.

WORK-RELATED

Do I need to report employer reimbursements for travel, entertainment and meals?

If you give back any excess reimbursement, provide your employer with a detailed expense report and meet other requirements. There is no need to report the reimbursement or to deduct the expenses.

Deduction limits are obligatory for your boss, not you, and the limit of 2% on miscellaneous item deductions will not have an effect on your entertainment, travel and meal costs.

Check Withholding to Avoid a Tax Surprise

Whether or not you owed taxes or received a refund last year you check your tax withholding due to the massive changes brought about by the Tax Cuts and Jobs Act of 2017. Owing tax at the end of the year could result in penalties being assessed. On the other end, if you had a large refund you lost out on having the money in your pocket throughout the year. Changing jobs, getting married or divorced, buying a home or having children can all result in changes in your tax calculations.

The IRS withholding calculator on IRS.gov can help compute the proper tax withholding. The worksheets in Publication 505, Tax Withholding and Estimated Tax can also be used to do the calculation. If the result suggests an adjustment is necessary, you can submit a new W-4, Withholding Allowance Certificate, to your employer.

DEDUCTIONS

Is any loan interest tax deductible?

These interests are deductible, some fully, some partially:

  • Education-related interest
  • Business interest
  • Investment interest
  • Mortgage interest

Deducting Mortgage Interest

If you own a home, and you itemize your deductions on Schedule A, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home (including a second home that is also rented out for part of the year, so long as the personal use requirement is met). The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. To be deductible, the loan must be secured by your home but the proceeds can be used for other than home improvements. You can refinance and use the proceeds to pay off credit card debt, go on vacation or buy a car and the interest will remain deductible. There are other financial reasons for not wanting to do this but it will not disqualify the deduction.

The interest deduction for home acquisition debt (that is, a loan taken out after October 13, 1987 to buy, build, or substantially improve a qualified home) is limited to debt of $750,000 ($375,000 if married filing separately).

In addition to the deduction for mortgage interest, points paid on the original purchase of your residence are also generally deductible. Taxpayers who are required to pay mortgage insurance premiums may also be able to deduct this amount subject to certain income limits. For more information about the mortgage interest deduction, see IRS Publication 936.

Refinancing Your Home

Taxpayers who refinanced their homes may be eligible to deduct some costs associated with their loans. Generally, for taxpayers who itemize, the “points” paid to obtain a home mortgage may be deductible as mortgage interest. Points paid to obtain an original home mortgage can be, depending on circumstances, fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.

For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders. Taxpayers may deduct points only for those payments made in the tax year. For example, a homeowner who paid $2,000 in points and who would make 360 payments on a 30-year mortgage could deduct $5.56 per monthly payment, or a total of $66.72 if he or she made 12 payments in one year.

However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off.

Other closing costs — such as appraisal fees and other non-interest fees — generally are not deductible. Additionally, the amount of Adjusted Gross Income can affect the amount of deductions that can be taken.  Please contact us if you’ve recently refinanced, and we can be a big help!

Deductible Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? The IRS says you can if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation. There are four types of deductible non-business taxes:

State and local income taxes, or general sales taxes;

  • Real estate taxes;
  • Personal property taxes; and
  • Foreign income taxes.

You can deduct estimated taxes paid to state or local governments and prior year’s state or local income tax as long as they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. The Tax Cuts and Jobs Act (TCJA) limit the total amount of the above state and local taxes an individual can deduct in a calendar year to $10,000.

Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax.

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

To claim a deduction for personal property tax you paid, the tax must be based on value alone and imposed on a yearly basis. For example, the annual fee for the registration of your car would be a deductible tax, but only the portion of the fee that was based on the car’s value.

Call us or contact us today to find out how we can save you money!

Capital Gains and Losses

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property. A “paper loss” — a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets. If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately). Unused capital losses can be carried over indefinitely to future years to net against capital gains, however the annual limit still applies.

Capital gains and losses are reported on Form 8949, Sales and Other Dispositions of Capital Assets, summarized on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Accounting and planning for the sale and purchase of capital assets is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

DONATIONS

Car Donations

The IRS reminds taxpayers that specific rules apply for taking a tax deduction for donating cars to charities. If the claimed value of the donated motor vehicle, boat or plane exceeds $500, you can deduct the smaller of the vehicle’s FMV on the date of the contribution or the gross proceeds received from the sale of the vehicle. People who want to take a deduction for the donation of their vehicle on their tax return should take quite a few steps, but the most obvious is to check that the organization is qualified. Taxpayers must make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can search Exempt Organizations Select Check online tool to check that an organization is qualified. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified.  Please contact us if you’re considering a car donation for your tax return!

Charitable Contributions

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations can add up to a nice tax deduction for your corporation (if you are a member of a flow-through business entity) or your personal taxes if you itemize deductions on IRS Form 1040, Schedule A. Here are a few tips to help make sure your contributions pay off on your tax return:

  • You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance.
  • To be deductible, contributions must be made to qualified organizations.

CREDITS

Plug-In Electric Vehicles (PEVs)

For vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500. The credit is available only to the original purchaser of a new qualifying vehicle, and the vehicle must be placed in service in the same year the credit is being claimed on the return. If the qualifying vehicle is leased the credit is available only to the leasing company. Also, the vehicle must be used primarily in the United States. Additional conditions regarding qualified manufacturers and phase out rules may also apply in determining credit eligibility. To find out whether your car qualifies for the Qualified Plug-in Electric Drive Motor Vehicle tax credit, you can go to the IRS.gov website and search for “plug-in vehicles” or contact us for more information.

Earned Income Tax Credit

This is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the EITC. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. For more information, see IRS Publication 596, Earned Income Credit (EIC).

Child Tax Credit  

This credit is for people who have a qualifying child. The maximum amount of the credit is $2,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see Pub. 972, Child Tax Credit.

Child and Dependent Care Credit 

This is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. There is a limit to the amount of qualifying expenses. The credit is a percentage of those qualifying expenses. For more information, see Pub. 503, Child and Dependent Care Expenses.

Adoption Credit 

Adoptive parents can take a tax credit of up to $13,460 for 2016 and $13,570 for 2017 for qualifying expenses paid to adopt an eligible child. For more information, see Form 8839, Qualified Adoption Expenses.

 

Credit for the Elderly and Disabled

You may be able to take the Credit for the Elderly or the Disabled if you were age 65 or older at the end of last year, or if you are retired on permanent and total disability, according to the IRS. Like any other tax credit, it’s a dollar-for-dollar reduction of your tax bill. The maximum amount of this credit is constantly changing. You can take the credit for the elderly or the disabled if:

  • You are a qualified individual,
  • Your nontaxable income from Social Security or other nontaxable pension is less than $3,750 to $7,500 (also depending on your filing status).

Generally, you are a qualified individual for this credit if you are a U.S. citizen or resident at the end of the tax year and you are age 65 or older, or you are under 65, retired on permanent and total disability, received taxable disability income, and did not reach mandatory retirement age before the beginning of the tax year.

If you are under age 65, you can qualify for the credit only if you are retired on permanent and total disability. This means that:

  • You were permanently and totally disabled when you retired, and
  • You retired on disability before the end of the tax year.

Even if you do not retire formally, you are considered retired on disability when you have stopped working because of your disability. If you feel you might be eligible for this credit, please contact us for assistance.

Education Credits

There are two credits available, the American Opportunity Credit (formerly called the Hope Credit) and the Lifetime Learning Credit, for people who pay higher education costs. The American Opportunity Credit is for the payment of the first four years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. The Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. A taxpayer cannot claim both credits for the same student in one year. For more information, see Publication 970, Tax Benefits for Education.

Retirement Savings Contribution Credit

Eligible individuals may be able to claim a credit for a percentage of their qualified retirement savings contributions, such as contributions to a traditional or Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be eligible, you must be at least age 18 at the end of the year and not a full-time student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. For more information, see chapter three in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

EXCLUSIONS

Selling Your Home

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. You also must not have excluded gain on another home sold during the two years before the current sale.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home.  Send us a message for more!

Foreign Income

With more and more United States citizens earning money from foreign sources, the IRS reminds people that they must report all such income on their tax return, unless it is exempt under federal law. U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned income, such as wages and tips, and unearned income, such as interest, dividends, capital gains, pensions, rents and royalties.

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $102,100 for 2017 and $104,100 for 2018, of their foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S. Please contact us if you feel you may have earned foreign income to learn more!

Gift Giving

If you gave any one person gifts valued at more than $15,000, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.

The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.

You make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

  • Tuition or medical expenses that you pay directly to an educational or medical institution for someone’s benefit
  • Gifts to your spouse
  • Gifts to a political organization for its use
  • Gifts to charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact us for more!