Parents Don’t Miss These Tax Savers!
IRS to Parents: Don’t Miss Out on These Tax Savers
Children may help reduce the amount of taxes owed for the year. If you’re a parent, here are several tax benefits you should look for when you file your federal tax return:
- Dependents. In most cases, you can claim your child as a dependent. You can deduct $3,950 for each dependent you are entitled to claim. You must reduce this amount if your income is above certain limits.
- Child Tax Credit. You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit.
- Child and Dependent Care Credit. You may be able to claim this credit if you paid for the care of one or more qualifying persons. Dependent children under age 13 are among those who qualify. You must have paid for care so that you could work or could look for work.
- Earned Income Tax Credit. You may qualify for EITC if you worked but earned less than $52,427 last year. You can get up to $6,143 in EITC. You may qualify with or without children.
- Adoption Credit. You may be able to claim a tax credit for certain costs you paid to adopt a child.
- Education tax credits. An education credit can help you with the cost of higher education. There are two credits that are available. The American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the credit reduces your tax to less than zero, you may get a refund. Even if you don’t owe any taxes, you still may qualify.
- Student loan interest. You may be able to deduct interest you paid on a qualified student loan. You can claim this benefit even if you do not itemize your deductions.
- Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid during the year. This may include the cost to cover your children under age 27, even if they are not your dependent.
As always, please give us a call or shoot us an email if you have any questions or concerns.
We see it happening more and more with the passing of each tax season. Scammers are out in full-force becoming sneakier all the time. Here’s a typical scenario –
You get a phone call from someone who says they are from the Internal Revenue Service and they claim you owe taxes and must submit payment through a wire transfer or prepaid debit card. Or you receive an email supposedly from the IRS asking you to share your bank account, credit card or Social Security number. We even had a customer receive a text message saying it was someone preparing their tax returns. What would you do if you found yourself in this situation?
The sad truth is that many scammers pretend to be IRS agents as part of an identity theft attempt or other criminal activity.
Most tax scams are an attempt at identity theft.
If you receive a surprising or suspicious communication purportedly from the IRS, we would urge you to call us immediately. We can help you identify a bogus request for information and work with you to respond to a legitimate IRS contact. You can also call the IRS directly at 800-829-1040 to verify any communication you receive. We have additional information on protecting yourself from identity theft as well as the exact steps you must take if you find that your identity has been comprised in a tax scam.
WELCOME TO A NEW YEAR! We are happy to report the changes made to deductible mileage rates for tax year 2015! It’s never too soon to start your tax planning for this year.
- The IRS recently announced that the mileage rate for business driving in 2015 will be 57.5¢ a mile, a slight increase from the 2014 rate of 56¢ per mile. The rate can be used for cars, vans, pickups, and panel trucks.
- Companies that don’t want to keep track of the actual costs of using a vehicle for business purposes may use this standard mileage rate instead. An annual study of the fixed and variable costs of operating an automobile is used to determine what the standard mileage rate will be for a given year.
- In addition to the standard mileage rate, a separate deduction may be claimed for parking fees, tolls, vehicle loan interest, and state and local personal property taxes.
- The standard business mileage rate can’t be used for automobiles used for hire (e.g., taxicabs) or for fleets of automobiles used simultaneously by the taxpayer. Nor can the standard rate be used if the vehicle was previously depreciated by other than the straight-line method, including using bonus depreciation or the Section 179 deduction.
- When the business mileage rate is used in 2015, depreciation will be considered to have been allowed at a rate of 24¢ a mile. This depreciation reduces the taxpayer’s cost basis in the vehicle.
- The 2015 rate for medical and moving driving decreases to 23¢ a mile.
- The rate for charitable driving remains at 14¢ a mile.
Have questions or concerns about deducting travel and vehicle expenses? Download our free white paper here!
In its final session of the year, Congress extended a long list of tax breaks that had expired, retroactive to the beginning of 2014. But the reprieve is only temporary. The extensions granted in the Tax Increase Prevention Act of 2014 remain in effect through December 31, 2014. Essentially, they’ve already expired for this tax year. For these tax breaks to survive beyond 2014, they must be renewed by Congress this year, setting up another lengthy debate. But with a new Congress instituted this year, there is hope that these breaks might be permanently extended.
Although certain extended tax breaks are industry-specific, others will appeal to a wide cross-section of individuals and businesses. Here we lay out a few of the most popular items:
- Taxpayers can still choose the optional deduction for state sales taxes in lieu of deducting state and local income taxes. This is especially beneficial for residents of states with no income tax, or for those with large purchases in the year and little if any earned income.
- The maximum $500,000 Section 179 deduction for qualified business property, which was scheduled to drop to $25,000, is preserved. The deduction is phased out above a $2 million threshold, up from $200,000. The phase-out threshold applies to total fixed asset purchases during 2014.
- A 50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179 and unlike Section 179 is not limited by taxable income.
- Parents may be able to claim a tuition-and-fees deduction for qualified expenses. The amount of the deduction is linked to adjusted gross income, the higher your income, the less likely you are to qualify for any education tax incentives.
- An individual age 70½ and over could transfer up to $100,000 tax-free from an IRA to a charity. The transfer counts as a required minimum distribution (RMD). Higher income taxpayers who don’t need the income from the required IRA distribution will especially benefit from this extension.
- Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million. This tax break is only available for a principal residence.
- The new law preserves bigger tax benefits for mass transit passes. Employees may receive up to $250 per month tax-free as opposed to only $130 per month.
- A taxpayer is generally entitled to credit of 10% of the cost of energy-saving improvements installed in the home. Other special limits may apply.
- Educators can deduct up to $250 out of their out-of-pocket expenses. This deduction is claimed “above the line” so it is available to non-itemizers.
The remaining extenders range from enhanced deductions for donating land for conservation purposes to tax credits for research expenses and hiring veterans.
Finally, the new law authorizes tax-free accounts for disabled individuals who use the money for qualified expenses like housing and transportation, as well as providing greater investment flexibility for Section 529 accounts used to pay for college. Have questions or concerns about how these extensions affect your tax situation? Give us a call or shoot us an email and we’ll be happy to answer any of your questions.
Interested in a more detailed summary of the TIPA? Download one here!
A significant change in tax law became effective on January 1, 2013 – the implementation of the 3.8% Medicare surtax on net investment income of individuals, estates and trusts. This new tax came about as part of the funding provisions of the new healthcare legislation being phased in over the next few years. The tax affects all estates and trusts with a low taxable income as well as individuals with incomes starting as low as $125,000 (married filing separately), $200,000 (single) and $250,000 (joint/surviving spouse). With the imposition of this new tax, maximum federal tax rates for higher income individuals sky-rocket to as much as 43.4%!
For individuals, the tax applies to “net investment income” also called “unearned income” which is derived from deducting qualified investment expenses from gross investment income. Taxpayers that meet the income thresholds and also have income from interest, dividends, annuities, royalties, rents, or capital gains will be subject to the tax. Interesting planning opportunities are available for investors in pass-through entities, such as S-corporations, who might become subject to the tax due to the different types of income that generate from these entities and wind up on the shareholder’s individual income tax returns.
Since the current provisions seem to exempt trade or business income from non-passive pass-through entities for exclusion from the tax, S-corporation shareholders in particular who are currently treated as “passive” will want to consider the possibility of changing the nature of their investment from passive to non-passive by increasing their material or “active” participation in the activity. Taxpayers with more than one passive activity may be able to group similar passive activities, for which there is also common ownership and control or an inter-dependence between the activities, to meet the “active participation” requirements. This grouping is done on the individual’s tax return itself and not at the entity level. Investors who desire to take this route will want to ensure that they understand the time and managerial participation requirements put forth by the regulations. Although the rules allow for a taxpayer to switch between passive and non-passive treatment from year to year, depending upon the individual circumstances applying to each tax year, careful structuring of the shareholder’s role in the pass-through entity is necessary to ensure that the taxpayer can defend the change in case of subsequent tax authority examination or audit of the taxpayer’s tax returns. Taxpayers will want to discuss the passive activity and material participation rules with their CPA every year to ensure that the activities are treated correctly each year on the tax return.
Regardless of whether a shareholder is considered passive or non-passive, if they have outstanding loans to the corporation that are subject to either imputed or stated interest (typically a loan principal amount of $10,000 or more), the interest charged to the corporation and picked up by the shareholder will be considered subject to the new tax. With this in mind, the corporation can review and revise the interest rate to current market rates, which are still at considerable record lows. If possible, the company may want to refinance the shareholder’s loans through an unrelated funding source such as a bank, or possibly by factoring their receivables. Otherwise, the shareholder can choose to convert all or a portion of the loan to additional paid in capital. Many times capital contributions can be paid back as a tax-free return on investment once the company is in a position to do so. As long as the principal loan amount is below $10,000, it typically is not subject to deemed interest. Be warned however, that sometimes it is inadvisable to pay back shareholder loans, especially if the company has experienced net losses in prior years, as this may trigger other taxable income to the shareholder in turn negating the original purpose behind the effort of minimizing the 3.8% Medicare surtax in the first place.
Again, as with any tax planning strategy, these approaches should be carried out with care, in line with the bylaws of the corporation and properly documented. Shareholders should not wait until year-end to discuss these issues with both their CPA and attorney to ensure that transactions are correctly structured as early as possible in the year. Why not discuss these items with your tax preparer when you make your annual appointment this year? You’ll be glad you did.