Medical Expenses Add Up to Deductions

Medical expenses can be quite costly, and take a lot of money out of your hands. Instead of deducting your hard earned cash from your wallet, consider taking a deduction of your unreimbursed medical expenses at tax time.

Beginning January 1, 2013, you are able to deduct your total medical expenses paid for you, your partner, and eligible dependents that exceeds 10% of your adjusted gross income. If you or your partner are age 65 or older, the limit is decreased to 7.5%, and remains in effect until December 31, 2016.

To determine your deduction, you’ll have to itemize your expenses and report them on a Schedule A of your Form 1040. Some deductible medical expenses include:

• Fees paid to a doctor, dentist, surgeon, chiropractor, psychiatrist, psychologist and nontraditional medical practitioners.
• Costs for in-patient care, including nursing home services, meals, and lodging in a health care facility.
• Acupuncture, rehab treatment, or smoking cessation program, as long as the treatment is prescribed by a doctor.
• Weight-loss treatment to help with a specific disease or medical condition, excluding the cost of special diet foods and health club memberships
• Insulin and prescription drug costs
• Prosthetic teeth, eyeglasses, contacts, hearing aids, wheelchairs, guide dogs, crutches or other medical supply
• Conference costs and transportation relating to a chronic disease from which you suffer, although meals and lodging at the conference are non-deductible
• Transportation costs to and from a hospital or other medical facility, subject to the standard regulations for travel expenses, including mileage rates
• Insurance premiums that cover medical care or long-term care. Employees shouldn’t deduct premiums paid to an employer sponsored plan unless the premiums are listed on your W-2 in Box 1.

Self-employed individuals may be eligible to take a deduction for self-employment insurance. Generally, it’s taken as an adjustment to income instead of an itemized deduction. If you can’t claim the entire cost of your self-employed medical insurance premiums, you can take the rest of your expense as an itemized deduction when you file your taxes.

Prescription drugs, including insulin and other over the counter drugs acquired through a prescriptions can be deducted as a medical expense. A dr. must provide a written or electronic order for the medication in compliance with all laws of the state where the expense is incurred in order for the deduction to qualify.

Funeral expenses, burial costs, over-the-counter drugs without a prescription, and personal use items such as toiletries are not eligible for deduction. You also can’t deduct nicotine gum or patches, or other smoking cessation devices without a written prescription.

You can only deduct medical expenses that you paid during the tax year in which you are filing your return. If you were reimbursed by any third party, regardless of whether it was paid directly to you or the doctor or hospital, you must subtract the reimbursement from your total expenses before deduction.

Deducting Entertainment Expenses for Business

If you happen to entertain your customers, employee or any others in your business you may be able to deduction expenses that are deemed ordinary and necessary for doing business. Expenses such as these may be deducted if they are related or associated with your business directly.

Proof of the expense must be provided and have information such as the cost, date and location of the entertainment. The relationship of those entertained may also be required to be furnished. Typical cases allow only for a deduction of 50% of meal and entertainment costs.

If you are an employee subject to reimbursement for entertainment expenses, any reimbursement through an accountable plan should not appear on your W-2 as income. If you were not reimbursed or were reimbursed through a non-accountable plan you can deduct expenses through Form 2106, Employee Business Expenses, or Form 2106, Unreimbursed Employee Business Expense. Deductions such as these will appear on your tax return as itemized and are usually subject to a limit of 2% of your adjusted gross income.

If you are self-employed you may take deductions by using Form 1040, Schedule C, Profit or Loss from Business or Form 1040, Schedule C-EZ, Net Profit Form Business. If you are a farmer you will use Form 1040, Schedule F, Profit or Loss from Farming to deduct these expenses.

Going to School? Deduct Your Expenses

Education expenses can add up quickly, and any kind of financial relief can really make a difference. You may be able to deduct certain education expenses at tax time. If you pay tuition for yourself, a spouse, or another dependent, you may qualify to deduct a portion of the expenses. However, it may be more worthwhile to look at using a credit for tuition and fees instead of directly deducting them. You should first check out eligibility for:

• The American Opportunity Tax Credit (AOTC)
• Lifetime Learning Credit (LLC)
• Deducting the expense as an itemized business expense

If you want to deduct tuition and fees, you don’t have to itemize expenses. Instead, you can just adjust your income on your Form 1040. If you are married, you have to file jointly in order to claim education expenses, and you can’t be listed as a dependent on another taxpayers return.

Taxpayers are subject to certain limitations related to their modified adjusted gross income. Those with a MAGI that exceeds the limit will receive a reduction or even a complete elimination of the education expense deduction depending on which status is used to file. You can’t claim a deduction along with one of the educational credits for the same student in one tax year. Although, you may be able to combine your tuition and fees with eligible business expenses. These expenses can’t be claimed more than once.

You can’t claim a deduction if your tuition or other expenses were paid through a grant, scholarship, fellowship, or other eligible savings plan. You also can’t deduct expenses you paid using distributions from an educational tuition plan, though you can claim the portion that is equal to the contribution you made.

Health Care Coverage and Your Tax Return

Since the enactment of the Affordable Care Act, your taxes are now affected by your health care coverage status. The new policy states that all Americans must have qualified health insurance, though there are a few circumstances in which an exception may apply.

Generally, 3/4^ths of the taxpayers who file a return will only be required to check a box on their form that indicates that they have health insurance. This applies to those who are covered under an employee sponsored health plan, or government plans such as Medicare, Medicaid, or military health benefits.

If you purchased health care coverage through the Marketplace, you may have received an advanced tax credit to supplement the cost of your monthly premiums. If you chose to use the tax credit when you purchased your plan, you will have to reconcile the mount you received with the amount you were eligible for on your tax return.

The tax credit is based on your estimated household income, which you supply when you purchase coverage through the marketplace. At tax time, if your actual income is more than you estimated, you may have received a larger tax credit than you are eligible for. If this happens, you may have to pay back the excess credit. You can do so by deducting the amount from any refund you are owed on your taxes, if applicable.

You will receive a document that indicates the amount you received for the credit and other pertinent information in order to file your tax return.

How to Tell If You Should File a Tax Return

Not everyone is required to file a tax return. Most people are, but for those who aren’t, it may still prove beneficial to do so anyway. If you’re not sure if you have to file a tax return, you should familiarize yourself with the rules before tax season approaches.

Income, age, and filing status all factor into determining whether or not you need to file. More requirements apply to those who are self-employed or considered a dependent of another taxpayer. You will need to cover all bases when deciding whether you’re required to file a return.

You’ll need To File If:

You’ll be required to file a return if your employer withheld federal tax from your salary throughout the year, or you are self-employed and made estimated tax payments each quarter. When you file, you may be entitled to a refund if you overpaid, but the only way to know is to file a return.

Also, if you purchased health care through the Health Insurance Marketplace and opted to use the premium tax credit to lower your monthly costs, you’ll need to reconcile the amount you received. To do so, you’ll have to file a return. You’ll receive Form 1095-A, the Health Insurance Marketplace Statement by the beginning of February. This form will have all the information you need to reconcile the credit you received with the amount you are actually allotted.

If you made less than $53,267 last year may be eligible to receive the Earned Income Tax Credit, which can save you up to $6,242 for 2015. Even if you have no qualifying children, there’s a possibility you can still qualify, but you’ll have to file a return to know.

If you qualify for the Child Tax Credit, but don’t receive the entire credit amount, you may be eligible for the Additional Child Tax Credit. Again, the only way to know if to file a return.

The American Opportunity Credit is one other reason you may want to file a return. Each eligible student enrolled in post-secondary education may receive a credit of up to $2,500. You are able to claim yourself or a dependent, but the student has to be enrolled for an entire academic period for at least half-time. You don’t have to owe any taxes in order to claim the credit, but you will have to file Form 8863, Education Credits with a tax return if you wish to claim it.

Dealing with Capital Assets at Tax Time

Anything you own, whether it’s something you use for personal reasons or an investment purpose, is considered a capital asset. Things like your home, furniture, and vehicle, as well as stocks and bonds are all examples of the types of capital assets many people own.

If you chose to sell one of these assets, the result will either be a capital gain or a capital loss, depending on the base cost of the asset and what you sold it for. Selling for a greater amount than you paid for the asset will result in a capital gain, while a capital loss occurs when the sale price is lower. Any loss from the sale of personal use property (a home or vehicle) isn’t eligible for deduction at tax time.

Capital losses and gains are considered either long-term or short-term depending on how long you held the asset in your possession. Anything less than a year is typically a short-term capital loss, while longer times are long-term. The day you acquired the asset from the day you sold it or got rid of it is the period of possession.

You have to report any transactions on capital assets at tax time using Form 8949, Sales and Other Dispositions of Capital Assets. Any capital gains or deductions of losses can be done on a Schedule D or Form 1040. Generally, the taxation rate is 15% or less for net capital gains, determined by your tax bracket. Some net gains are taxed at 20% depending on the income threshold of the asset holder in relation to an ordinary tax rate of 39.6%.

Other rates of taxation of capital gains apply when:

• The gain is from the sale of a section 1202 qualified small business stock. These will be taxed at a maximum rate of 28%.
• Collectible items, such as art or coins, are sold for a net gain. The taxation rate is 28%.
• An uncaptured section 1250 gain results from the sale of a 250 real estate property. The tax is applied at 25% max.

Income graduation rates apply to short-term capital gains, which may require you to make estimated tax payments throughout the year.

During the year, if you’ve encountered more capital loss than gain, you can claim the lesser amount of two options:

1. $3,000 ($1,500 if filing married, separately)
2. your total net loss as reported on line 16 of Form 1040

You can carry forward any additional amounts of your total net loss exceeding $3,000 to the next tax year.

The Individual Shared Responsibility Provision for 2015

A special provision of the Affordable Care Act, which requires each taxpayer to have qualifying health care, comes into effect when you file your tax return.

Unless you meet a certain exemption, you are expected to have a health care plan which meets the minimum requirements of the Affordable Care Act. The Individual Shared Responsibility Provision states than any taxpayer who can afford health care and isn’t exempt from purchasing it must make a payment at tax time. This payment is calculated using Form 8965.

Many taxpayers will simply check a box on their return that indicates that they had acceptable health care coverage for the tax year. You are responsible for ensuring both you and your dependents are covered, unless you qualify for an exemption. While some exemptions have to be claimed through the Marketplace, many are claimed directly on your tax return.

Choosing to file your tax return electronically can save you time and ensure you have prepared your return correctly, regardless of your health care coverage status. Electronic filing uses special software that will help you accurately claim an exemption, indicate your coverage, or even make a quick individual shared responsibility payment effortlessly. This year, chose to e-file and learn more about how the Affordable Care Act affects your taxes.

Unemployment Compensation & Taxes

Do you receive unemployment benefits? Depending on which program the benefits are distributed from, you may be responsible for paying taxes on the income. Taxable compensation amounts include money received from any of the following programs:

• State unemployment insurance
• Federal Unemployment Trust Fund
• Railroad unemployment compensation
• Disability compensation
• Allowances paid in accordance with the Trade Act of 1974
• Disaster Relief and Emergency Assistance Act of 1974

If you received benefits from the above programs, you may be required to pay taxes on the income. Some types of income are not considered to be unemployment compensation, such as worker’s compensation payments, or distributions from a private unemployment fund. Private unemployment benefits are taxed as if you received a larger sum than you contributed, and is reported on line 21 on your Form 1040. Supplemental unemployment benefits from a fund that your employer supports are also not considered unemployment compensation, and are subject to income tax, Social Security and Medicare taxes, as per regular income. You will find these amounts reported on your W-2 from your employer.

You should include unemployment compensation amounts in your gross income at tax time. You can either chose to have taxes withheld from your benefits, or you may be required to makes estimated tax payments. If you receive unemployment benefits from the government you should receive a Form 1099-G, Certain Government Payments, which documents the total amount of compensation you received. You should seek advice from a qualified tax assistant in order to correctly report your benefits on your tax form.

Tax Savers for Single Parents

Raising children on your own isn’t easy. Single parents can use any help they can get, which is why, at tax time, there are certain tips that can come as a welcome relief. When filing your tax return as a single parent, consider the following eight points:

1. Head of Household Status – if your children lived with you for over 50% of the year, and you were single by the end of the tax year, you can file using the head of household status. You have to have made a majority of the household income, but it can greatly reduce your tax burden and offer new deductions.
2. Dependent Qualifications – the amount of dependents you claim can change which credits and deductions you may be eligible for. Deductions for one child can’t be split between parents, so usually a written decree (from divorce or separation) is in place to state who can claim the child. Generally, the custodial parent is entitled to the deduction for dependents, as they meet all the requirements on care and household support. A dependent child is one who lived with you for at least six months of the year and has been financially supported by your income during that time.
3. Exemptions – Every taxpayer is entitled to a personal exemption, but you can also claim a dependent exemption for each of your qualified dependents. These exemptions can add up, but if you make over $279,650 a year and claim Head of Household, you can’t claim these exemptions.
4. Dependent Credits –those who earn less than $75,000 are able to claim a $1000 credit per dependent child under the age of 17 on the final day of December.
5. Child Care Tax Credit – paying for someone else to care for your child while you work can net you a $3,000 credit for a single child ($6,000 for two or more). The types of child care that qualify vary, but can include after school programs and day camps.
6. Dependent Spending Accounts – You can contribute up to $5,000 tax free in a special account provided by your employer that allows for dependent expenses.
7. Earned Income Credit – parents who earn less than $46,997 and have three or more dependent children qualify for this credit, which is based on income and dependent amounts. Taxpayers with less children may qualify for a portion of the credit.
8. Adoption credit – Federal tax credits apply to help offset the costs you may have incurred for an adoption throughout the tax year.

The Big 3: Different Types of Businesses

If you sell a service or a product, the money you make is generally defined as business income. Additionally, business income includes real estate rents and any fees for service that is paid to an individual. Business income must be reported at tax time, regardless of the type of business.

There are three different classifications for the type of businesses one can own.

1. Sole Proprietorship is defined as an individual-owned business that has no incorporation. If the owner leaves, the business is no longer active. An important distinction is that all business debts and expenses belong to the individual owner and are considered personal. If your business is registered as a limited liability corporation (LLC), the IRS will consider it a sole proprietorship if you are the only owner. However, you can chose to have your LLC taxed as a Corporation if you chose. Sole Proprietorship businesses will file Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ when completing a tax return. These types of businesses which make greater than $400 net profit are required to pay Social Security and Medicare taxes, which can be calculated by filing a Schedule SE, Self-Employment Tax.

1. Partnership is defined as a business venture with two or more individuals responsible for the operation of the business, trade or finances. This type of business is not incorporated, and each “owner” is responsible for the operation of the business in order to gain shares and the rights to losses. LLCs with multiple owners are treated as a partnership, unless the LLC has opted to be taxed as a corporation. Each partner is responsible for a distribution of the taxes, instead of the entire partnership being taxed as a single business. The partners will report on their individual returns the amount of partnership taxes stated on a Form 1065 Schedule K-1.

1. Corporation is defined as its own legal entity that is completely detached from both owners and shareholders. Businesses, such as LLCs, can chose to be taxed under the corporation regulations. In doing so, all businesses taxed as a corporation are required to report their net profits using Form 1120, U.S. Corporation Income Tax Return. Corporations can chose to be taxed as a subchapter S corporation, provided certain regulations are met. S corporations generally are taxed under the guidelines for a partnership, where regular income tax is not applicable. Instead, the shareholders are taxed and need to report the amount individually on their tax returns.

A Notice for Stockholders at Tax Time

Are you a stockholder for any corporations? In some cases, stockholders can receive dividends from the corporation as property distribution. These dividends are generally paid in cash, though they may also be distributed as additional stock or property.

Dividends may also be received through trusts, estates, partnerships, and associations subject to tax as either a corporation, or a subchapter S corporation. If you’re a stockholder in any of those firms, you’ll be able to receive a dividend if the corporation has paid your debt, otherwise you have received services from the corporation or have be granted access to use the property of the corporation. Any services you give for the corporation could also be reciprocated through dividend payments in far more than what a third party would charge for the identical services. Distributions received as stock rights or additional stock within the corporation might not qualify as dividends.

Dividends originate from the profits of the corporation and are the most popular distribution. Dividends are divided into two categories:

1. Ordinary: taxed similarly to regular income
2. Qualified: taxed at a lower rate as long as they meet certain circumstances.

If you receive a distribution that qualifies as a return of capital, it’s not thought of as a dividend. If some or all of your stock is returned by an organization that’s thought of a return of capital, this may cut back your stock holdings during a company. If the corporation you have got endowed in didn’t have any current year earnings or profits, a distribution is usually seen as a come of capital.

Capital gain distributions will return from regulated investment firms (RICs), like mutual funds, exchange listed funds, or securities industry funds, or they’ll return from realty investment trusts (REITs). These long capital gains should be reportable on a Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.

You will receive a Form 1099-DIV, Dividends and Distributions, for every payment of $10 or additional. Those received through partnerships, trusts, estates or subchapter S firms would require a Schedule K-1 from the entity that states the ratable dividends you have got been paid. Form 1099-DIV will list the breakdown of received dividends into the correct classification. Avoid penalties and backup withholdings, by providing an accurate Social Security number to the remunerator. You’ll wish to think about paying income tax on dividends received in important amounts. The IRS needs you to report all dividends in spite of whether or not or not you receive forms from the payers.

On a Roll to Retirement

If you have money or assets saved in an eligible retirement plan, you may be able to transfer the funds to a different retirement plan without having to pay taxes on the withdrawal, as long as you perform a rollover. In order to be considered a rollover, the transfer has to happen within sixty days, and although it isn’t taxed, the distribution will be shown on your tax return. Not every distribution is eligible for a rollover. Some examples of non-eligible distributions include:

• Post-tax contributions to retirement plans. There are some exceptions to this rule which may allow certain non-taxed distributions to be eligible, so as your financial planner for assistance in determining if your distributions fit the exception.
• Distributions that are a portion of a life-time payment to you or a beneficiary, or any distributions which will be made over a period of ten years or more.
• Distributions made as part of a required minimum statement
• Hardship distributions
• Dividends from employer securities
• Life insurance coverage expenses

As with most rules, there are exclusions and fine print that relates to certain corrective distributions and loans. Any distributions that are not rolled over into a new plan have to be accounted for in your income for the year.

There is a time-sensitive period for which you can roll an eligible distribution into another plan. The sixty day rollover period applies from the day you received the eligible distribution. If your benefit came from an employer sponsored plan, regardless of whether or not you chose to roll it over into a new plan, it will be subject to 20% income tax. However, you can chose to defer that tax, but you will need to add the same amount you withheld from an additional source. You can also opt to have the payer automatically roll your funds into a new account directly, and avoid the mandatory taxation altogether.

Retirement distributions to those under the age of 59 ½ are subject to 10% additional tax. This penalty is applicable unless a specific exemption suits the taxpayer. There are some plans, like a SIMPLE IRA in which the distribution may be subject to a 25% penalty tax.

Premium Tax Credit is An Incentive

If you purchased your health care through the Health Insurance Marketplace, you may have been eligible to receive a tax credit with can assist with the cost of your monthly premiums. This tax credit can be applied up front to help lower the cost of your premiums, in the form of an advance payment. In the Marketplace, the tax credit is estimated based off the income and household information you supply.

If you chose to use the tax credit as an advance payment of your premiums, you’ll have some calculations to do at tax time. You’ll have to reconcile the amount of the credit that you received with the actual amount you are eligible to receive by using Form 8963, Premium Tax Credit. You will have to use your actual income to determine the amount you should have received as an advance. If you received more of a credit than your income deems you eligible for, you will have to repay the excess you received. There are limitations on the amount you will be required to pay back.

You should expect to receive Form 1095-A, Health Insurance Marketplace Statement by the beginning of February if you used the marketplace to purchase insurance. You’ll use this form to complete your tax return, as it includes the name of your insurer, the date you are insured, premium amounts, and the amount of the credit you received, if you opted to use it. You’ll also use this form to complete the premium tax credit section of your tax return.

Is Interest Taxable?

Interest bearing accounts can help you add a little bit extra to your savings. However, if you are able to withdraw the funds without any type of penalty, then you should be aware that interest paid to those funds is considered taxable income for the year you made it available. Interest will be reported on a Form 1099-INT or a 1099-OID, and you will be responsible for transcribing the information onto your return. All taxable interest must be reported, whether or not you receive documentation from the payer.

Examples of taxable interest:

• Interest on savings bonds. You can include the interest each year of the bond, in which case you won’t have to report the interest once the bond has matured.
• Treasury notes that accrue interest, even if they are exempt from state or local taxes, as they are still subject to federal taxes.
• Bank accounts, money market accounts, certificates of deposit and insurance dividends that have accrued interest. Typically, dividend distributions are taxable and include share accounts from cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings bank accounts.

You don’t have to include non-taxable interest as part of your gross income. Exceptions apply in certain situations, which may make taxable interest not required for income inclusion:

• Any interest from a Series EE or Series I bonds issued after 1989 and used to pay for higher education that meets the requirements of the Educational Savings Bond Program. Calculate the excluded interest using Form 8815 and then use Form 1040A to report it.
• Interest on bonds, issued by a state, the District of Columbia or a U.S. Territory, which you purchased to finance government operations. However, you need to report the interest throughout the year as tax-exempt income.
• Interest on Dividends from the U.S. Department of Veterans Affairs

If you received any notes or bonds at a discount, tax rules say you may have to include the interest each year in relation to the discount.

In some situations, you may be considered a nominee recipient of someone else’s interest. If that occurs, you’ll need to contact the IRS and ensure the original owner of the interest has been issued a Form 1099-INT. You are required to report nominee interest on your Form 1040 at tax time. Your tax preparer can help you in filing appropriate nominee interest paperwork and ensure its accuracy.

How do Taxes Apply to Annuity and Pensions?

Some distributions from retirement plans, allotted from qualifying annuity or pension plans through your employer, may be taxable.

If any of the following statements are true, your benefits may be taxable:

• You didn’t contribute to your pension or you aren’t a contributing party to the annuity.
• Your employer didn’t deduct the contributions from your salary.
• You received your contributions without any applicable taxes in years previous.

Annuity payments may be partially taxable, provided you contributed the funds after they were taxed. You will not be taxed again on the portion you contributed post-tax, and is considered to be your investment in the contract. There are two methods to calculate the tax on pensions that are partially taxable: The General Rule and the Simplified Method. The Simplified Method is recommended for all annuity payments starting after November 18, 1996.

You may be subject to a penalty if you accept pension retirement benefits before you reach age 59 ½. Unless you qualify for an exemption, the penalty is an additional 10% tax. There are some tax-free distributions which are not subject to the penalty for early distribution. Examples of tax-free distributions include:

• A portion of a series of substantial payments, processed in a specific time frame that begin immediately after your last day of service.
• Permanent disability distributions
• Any payments distributed after the original owner of the plan has died
• Distributions received after service and either in or after you reach 55 years of age.

Generally, federal income tax will apply to any portion of payments that are taxable.

You can chose to not have your tax withheld from your benefits during distribution, or you can specify exactly how much tax to withhold. To do so, you should provide the payer with a Form W-4, Withholding Certificate for Pension or Annuity Payments. This is only applicable for U.S. citizens and resident aliens who can provide a U.S. address (including possessions). The tax is calculated similarly to salaries and wages. Without the form, you are considered a married taxpayer with three withholding allowances.

You need to provide an accurate Social Security number along with the form, otherwise you will be taxed as an individual with no withholdings.

If you don’t have enough tax withheld, you will be responsible for making estimated tax payments to cover the underpayment.

Qualified retirement plans distributing non-periodic payments have their own set of rules. If you accept a distribution that is eligible to be rolled over, you are required to withhold 20%, regardless of what you do with it later. A direct rollover will help you avoid the 20% withholding.

What is Gross Income?

We all like getting paid. When payday rolls around, it can be the happiest time of the month, at least until the next one. But did you know any salary, wages or tips you receive are considered part of your gross income and must be included at tax time. Withholdings, such as Medicare, income tax, and Social Security, are included in your income for the tax year they were withheld.

If you contribute to a pension through your employer, you typically don’t have to report those contributions as part of your gross income, as well as withholdings that were part of a salary reduction plan. It’s important to note that such withholdings are still subject to Social Security and Medicare taxes for the year they were withheld.

Your employer will provide a Form W-2, stating the total amount of income you received from them, as well as withholdings they took. You’ll need this information to complete a tax return, and should you chose to file jointly with your spouse, you’ll also have to include their gross income.

You may receive multiple W-2s if you have multiple employers. If you file your return, and then receive another W-2, you’ll have to file an amended return through Form 1040X. You’ll need to receive all of your W-2s by January 31^st, so you can file before the deadline.

Self-employed individuals will report their income on a Form-1099 MISC, which is used like a W-2 to file a tax return.

Cash in on the Dependent Care Credit

Working parents know how difficult it can be to find appropriate care for their children while they work. If you pay for someone to watch your children while you work, there’s a possibility you may be eligible to claim the Dependent Care Credit. This credit has certain requirements that must be met in order to be eligible to claim it on your tax return, but it can be a big benefit for parents.

The care must be provided during work hours, and the credit is deducted as a percentage of 20% to 35% of all expenses that qualify. The credit accounts for up to $3,000 of qualifying expenses for parents with one child, and double that for two or more dependents. If child care expenses are reimbursed by your employer, the IRS allows you to exclude up to $5,000 in reimbursement from your income.

What are the Requirements?

The following six qualifications must be met in order to claim the credit:

1. Expenses must result from child care provided to you so you can earn a living.
2. The child cared for must be your dependent, and you must financially support him/her.
3. You must pay for at least half of the household expenses.
4. Married taxpayers are required to file jointly with their spouse.
5. Expenses have to exceed and reimbursement amounts provided by an employer.
6. The child care provider must meet certain requirements and you must provide their information to the IRS

What Types of Expenses Qualify?

There are different types of child care expenses which can qualify you to claim the credit. These can include:

• Day care center
• In-home care by a specialized service
• Babysitting costs
• Nursery school
• Private school for students in kindergarten and below (exceptions apply to handicapped children)
• Transportation expenses by a third party to a child care facility (personal transportation is not eligible)

Depending on Exemptions for Tax Savings

Exemptions are a quick way to save money when you file your tax return. In addition to a personal exemption, taxpayers can take an exemption for each dependent they claim, known as the dependency exemption. There are a few requirements that parents must meet in order to claim an exemption for each dependent. The exemption amount is equivalent to the personal exemption: $4,000. There are two different categories for dependents, qualifying child and qualifying individual, and each has a different set of rules and regulations.

Qualifying Child

There’s four different requirements a qualifying child must meet in order to claim the dependency exemption:

• Relationship: The dependent must be your biological child, stepchild, and adopted children or eligible foster children. The dependent may also be a grandchild, sibling or stepsibling, niece or nephew who are younger than the person claiming the dependency exemption. The dependent must also be under age 19, or under age 24 if they are a full-time student. If the dependent is permanently disabled, there is no required age limit. Additionally, the dependent must reside in the taxpayer’s household for more than half of the year.
• Support: The qualifying child must rely on the claiming taxpayer for more than half of his or her support. This means that the child cannot provide more than 50% of their own support, but scholarship awards are not counted toward support figures. Because the taxpayer who claims the dependent is generally accountable for most of the expenses related to the child, the IRS hasn’t set a gross income test for qualifying children. If the parents are divorced, only the parent who actually supports the child over 50% of the time can claim the dependency exemption, unless otherwise stated in a divorce decree or separation agreement.
• Residency: the dependent must be a citizen of the United States, or a resident of either the U.S., Mexico, or Canada.
• Filing Status: The dependent can’t file a joint return if they are married by the conclusion of the tax year.

Qualifying Individual

Taxpayers may be able to claim an individual that they support that is not their child. Similar to the requirements for a qualifying child, in order to be a qualifying individual, the dependent must meet ALL of the following in their entirety:

• Relation or Household Member: the dependent has to be a relative, whether they live with you or not, such as a parent, or a member of your household for the entire tax year. Certain relationships, such as grandchildren, great-grandchildren, in-laws, siblings and other blood-related persons do not have to live in your house, while other relations, such as cousins have to spend the whole tax year in your home.
• Gross Income: the dependent you claim has to have a gross income lower than the exemption amount of $4,000. Gross income is defined as money and other income that is taxable, including the portions of Social Security benefits which are taxed.
• Taxpayer support: You must provide over half of the support for the person you are claiming as a dependent. In order to calculate this figure, you need to know the person’s income versus their living expenses, and then calculate your portion of the expenses that you pay. Benefits received from the government errs on the side of the dependent and classifies as support for themselves. Support includes education expenses, food, entertainment, medical expenses, and housing.
• Residency: the qualifying individual has to be a citizen of the U.S., or a resident of the U.S., Canada or Mexico.
• Filing Status: Married dependents can’t file a joint return with their spouse unless the sole purpose is to claim a refund, and both spouses have income under the exemption amount.

Don’t Mistake the Importance of Accuracy

When the time comes to file your tax return, it’s incredibly important to ensure you’ve filled out every section with the utmost accuracy. Otherwise, you risk a delay in processing and incorrect refunds. Before you click “submit” or drop your return in the mailbox, double check all sections for the most common tax filing mistakes made each year.

Forgetting to Sign

Your signature makes everything official and certifies that the information you have provided is correct. However, the IRS reports that submitting a return without a signature is one of the most common mistakes seen on tax returns. If you file jointly with your spouse and use a paper return, both parties have to sign. This is one of the major benefits to filing an electronic return because you can’t send it to the IRS without a digital signature.

Using the Wrong Filing Status

While it may not be difficult to determine if you are married or single, other filing statuses can cause taxpayers a bit of confusion. Generally, the Head of Household status is the biggest culprit of misused filing status errors, whether it is done on purpose or not.

Incorrect Social Security Number

You are required to enter social security numbers for yourself, your spouse, and your dependents when filling out a return. In many cases, the person preparing the return enters the incorrect number for one of one of these persons. Double check the numbers enter to ensure they represent what is printed on the official card.

Incorrectly Claiming Credits and Deductions

Many taxpayers don’t claim all the credits or deductions they are eligible for, or they try to claim ones they don’t actually qualify for. The Child and Dependent Care Credit, the standard deduction and the Earned Income Tax Credit are both the most incorrectly claimed and the most overlooked. The tax code changes frequently, so keeping up can get confusing, and it’s easy to understand why these types of mistakes are so common.

Miscalculations

Another benefit of electronically filing your return is that you’re less likely to make any accounting mistakes. Those who opt to file paper returns are 20 times more susceptible to making calculation errors. Regardless of how you file our taxes, you should always double check your calculations.

Incorrect Taxpayer Name

Surprisingly, a growing number of tax returns are filed with the wrong name listed. Either because of marriage or other changes in a surname, or a misspelling of either name, mismatched IRS returns can cause significant delays.

Wrong Bank Account Information

Having just one number wrong in your account information can throw everything off, causing a major delay in the processing of your refund. Ensure that if you opt for direct deposit, you have submitted the correct bank account number.

Don’t Miss Out on the Earned Income Credit

Unfortunately, every tax year 20% of Americans who are eligible for the Earned Income Credit don’t claim it, which can mean a loss of $2,400 for those taxpayers. It’s simple to determine your eligibility, so there’s no reason you shouldn't claim the credit if you can. If you have qualifying children, the income threshold goes as high as $53,267, which can net you a refund of up to $6,242. Even without children, a married couple filing jointly may be eligible for a credit up to $503.

How to Qualify
You have to meet the following qualifications in order to claim the Earned Income Tax Credit:

• Citizen: You are a U.S. citizen with a valid Social Security Number or were a full year resident alien.
• Income: You must have earned your income through self-employment or through another employer.
• Investment income: You cannot have more than $3,400 in investment income.
• Dependent: You cannot be listed as a qualifying child on another’s tax return in which they claim the EITC.
• Filing status: You can’t file separately with your spouse. If you are married, you must file jointly.
• Forms: You are not able to file Forms 2555 or 2555-EZ, Foreign Earned Income.

Spouses who file together, without any qualifying children may still meet the requirements to claim the EITC if:

• Both parties lived in the U.S. for six or more months throughout the tax year.
• Both parties are between the ages of 25 and 65.
• Are not claimed as a dependent on anyone else’s tax return.

A child must meet the following in order to be deemed a “qualifying child” in reference to the EITC:

• Relationship: The child must be a son, daughter, adopted child, stepchild, authorized foster child, brother, sister, half-sibling, or a descendant of a sibling, such as niece or nephew.
• Age: The child must be 19 years old or younger at the end of the tax year, as well as younger than the taxpayer who is claiming the EITC. Full time students under the age of 24 also qualify.
• Disability: Children who are permanently or totally disabled may qualify for an exception to the age limitations
• Residency: The child is required to live with the taxpayer who claims the EITC for at least six months of the tax years. Special exceptions apply to active duty military personally stationed outside of the U.S.
• Tax Return: The child cannot have filed a joint return with their spouse, unless the return was only filed to claim a refund.

The Affordable Care Act at Tax Time

If this is the first year you've been affected by the Affordable Care Act, you may not really know what to expect at tax time. For starters, the bill mandates that all taxpayers have health insurance, and offers a credit to help offset the cost of monthly premiums.

According to the IRS, approximately 80% of taxpayers won’t be affected or notice an impact. The other 20%, however, may notice a big difference at tax-time when it comes to their return. The Affordable Care Act will affect you based on your health care coverage status.

Types of Health Care Coverage
There are four different levels of health care coverage that factor into how you will be taxed under the Affordable Care Act.

1. Government or Employer sponsored: Generally, these taxpayers are within the 80% that don’t notice much of a change. Whether you have Medicaid, Medicare, or coverage through your job, you only need to check a line on your tax form that indicates you are covered.
2. Marketplace with Tax Credit: A new tax form is sent to taxpayers who purchased health care coverage through the Health Insurance Marketplace. Form 1095-A Health Insurance Marketplace Statement will document all the information you need to file your taxes. If you opted for a premium subsidy, you’ll need to reconcile the amount you received as a credit with the amount you are actually eligible to receive, resulting in either a refund or required payment.
3. Direct Coverage without Credit: in some cases taxpayers can opt to purchase care directly from an insurance company, while others may not have opted to use the premium tax credit on a Marketplace plan. Taxpayers who are directly covered just have to check the appropriate line on the tax form to indicate coverage, while plans without a subsidy will require important information from the Form 1095-A in order to file taxes.
4. No coverage: taxpayers who remain uncovered for three or more months may have to pay a penalty. While the calculation for the penalty is complicated, if you aren't required to pay taxes because your income is below $10,150 as a single filer, you won’t be subject to the penalty, which normally ranges between $95 to $11,000.

The Affordable Care Act has many exemptions that can be applied for, though some have to be claimed directly through the health care exchange. Otherwise, you can claim exemptions on the Form 8965 in which you reconcile your premium credit.

Credits for the Working Taxpayer

Working taxpayers with lower incomes may qualify for a special credit called the Earned Income Tax Credit. It helps ensure those who can work, do, by offering an incentive to low income taxpayers. Next to Medicaid, this credit comes in second as far as the amount of help it provides to taxpayers at lower income levels. The credit takes into account income amounts, filing status, and dependents and is refundable in certain situations.

 

The Earned Income Tax Credit is assessed based on you modified adjusted gross income, earned income, and the number of qualifying children listed on your tax return. In order to be eligible for the credit, you must have income paid to you through an employer or through self-employment.
Who is a Qualifying Child?

The EITC factors the amount of qualifying children you have, although those without children may still meet the requirements to claim a portion of the credit. A qualifying child must meet the following conditions:

• Be eligible for the dependency exemption
• Under 19 years old unless they are a full time student under age 24. (special rules apply to those who are permanently disabled)
• Live in the taxpayers home for greater than 50% of the year
• If married by end of the tax year, must still be eligible to be claimed as a dependent
• Is a resident or citizen of the U.S.

Income and Filing Status Requirements

The EITC uses your earned income in determining your credit amount. Earned income includes wages, salaries, tips, commissions, jury duty pay, certain disability pensions, self-employment earnings, union strike benefits, and specific military wages. Tax-free combat pay for military personnel can be included as earned income for purposes of the tax credit. Generally, earned income doesn’t account for money that isn’t subject to taxation, such as salary deferrals, fringe benefits, or 401k contributions. If you exceed the income threshold, you may be eligible for a reduced credit, or the credit may be depleted entirely.

In order to claim the credit as a married couple, you are required to file a joint return. The only exception to this is if your spouse didn’t live in the same house as you for the last half of the year. IF this occurs, the spouse who paid for the expenses of a household which was occupied by a qualifying child is the one who is eligible to claim the Earned Income Tax Credit.

Have Kids? Cash in at Tax Time

Are you the parent of a child under the age of 17? You can claim a tax credit worth $1,000 per eligible child. Every tax year until the child turns 17 you are qualified to claim the Child Tax Credit in addition to the dependency exemption for the child, which means you can stack the savings.

Because you can claim the credit for each child under the age of 17, you may end up with more in credit than your required tax. If this happens, you may be entitled to a refund as long as you meet certain requirements.
In order to claim the credit, you must:

• Have a qualifying child, defined as a child under the age of 17 by the end of the tax year.
• Have a modified adjusted gross income is less than the set threshold for the year.

If your AGI is more than the threshold, you still may be entitled to a reduced credit amount.
The child tax credit is refundable as long as you exceed the amount you owe in taxes in credit amount. It’s important to note that the credit refund is limited to 15% of all taxable earned income greater than $3,000. Earned income is defined as tips, salaries, wages, bonuses, commissions and other net profits. Even if you have three children but have an earned income less than $3,000, you may still qualify.

If you qualify for a refund of the Child Tax Credit, you can determine your amount through two different ways:

1. Calculate 15% of your earned income in excess of $3,000
2. Take the excess of your Social Security taxes, including the employer portion for self-employed taxpayers.

You should determine which method provides the greatest refund amount and use that one to get the best savings on your tax return.

Dependents Should File A Return

Are you a dependent, in relation to federal taxes, of another taxpayer? If so, you may be wondering whether or not you are required to file your own tax return. The following terms can help you make an accurate determination of your need to file:

• Earned Income: wages, salaries, tips, or other professional monies acquired for services rendered, including taxable scholarships or grants
• Unearned Income: taxable, interest ordinary dividends, and distributions of capital gains received throughout the tax year. Unearned income can include unemployment compensation, annuities pensions, taxable portions of social security benefits, and trust fund payments.
• Gross Income: the combines total of earned and unearned income

Dependents are required to file a tax return when the following statements are true:

• You have unearned income greater than $1,000
• You have earned income over $6,200
• Your gross income was greater than $1,000 or the amount of your earned income (up to $5,850) plus $350.

Dependents under the age of 18 with unearned income that exceeds $2,000 are taxed at the same rate as their parents, if the parental rate is higher. Certain rule apply to older dependents as well.

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.

The Future is Bright with Tax Benefits

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.