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.