In a separate post, I outlined "What’s New for 2014 Tax Filing Season". Today, we return to tax basics, starting with tax credits, which provide a dollar-for dollar reduction of your income tax liability. Here are some of the most popular and widely available credits:
- The Child Tax Credit: Up to $1,000 for each qualifying child who was under the age of 17 at the end of 2014. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples earning over $110,000 ($75,000 for singles). (IRS Publication 972.)
- The Child and Dependent Care Credit: Available if you pay someone to care for your dependent that is under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 -- the size of your credit depends on your income. (IRS Publication 503.)
- The Earned Income Tax Credit: A refundable credit for married couples with 2014 earned income under $52,427 and singles who made less than $46,997. The more children you have, the more money you receive. Your income and family size determine the amount of the credit, but the maximum credit is $6,143 this year. (IRS Publication 596.)
- The American Opportunity Tax Credit: A refundable tax credit for undergraduate college education expenses that was extended through December 2017. The credit modifies the Hope Credit for higher education expenses, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. The full maximum annual credit of $2,500 per student is available to individuals, whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing a joint return.
- Lifetime learning credit income limits: In order to claim a lifetime learning credit, your MAGI must be less than $63,000 ($127,000 MFJ).
Deductions: Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions. If your deductible expenses exceed the 2014 standard deduction limits of $6,200 for single and $12,400 MFJ, you should itemize and grab these write-offs:
- Miscellaneous deductions: Tax-preparation fees, job-hunting expenses, business car expenses, and professional dues are deductible if they total more than two percent of your adjusted gross income (AGI).
- Medical and dental expenses: You can deduct only the part of your medical and dental expenses that exceed 10 percent of your AGI or 7.5 percent if either you or your spouse is age 65 or older.
- Standard mileage rates: The rate for business use of your vehicle is 56 cents per mile. The rate for use of your vehicle to get medical care or move is increased to 23.5 cents per mile. The rate of 14 cents per mile for charitable use is unchanged.
Tax time also means scrambling to make contributions to Individual Retirement Accounts (IRAs). As a reminder, when you contribute to a traditional IRA, you will snag a tax deduction right now, but will pay tax on the money when you withdraw it during retirement. With a Roth, you are not entitled to a tax deduction today, but when you withdraw the money later, there is NO tax due.
For tax year 2014, your total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. One last note: If you're covered by a retirement plan at work, you may also be able to deduct contributions to an IRA, subject to income limits (single: $60,000-$70,000, MFJ $96,000-$116,000).
Tools/Info: The IRS provides free tax prep software (“Free File”) to taxpayers whose incomes are $60,000 or less; electronic e-filing is available to all taxpayers, regardless of income; and the IRS2Go mobile app or the Where’s My Refund? tools allow you to track refunds within 24 hours after the IRS has received an e-filed return or within four weeks after you have mailed a paper return.
Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE): Low-and moderate-income taxpayers can get help for free by visiting one of the more than 12,000 community-based tax help sites staffed by more than 90,000 volunteers. To find the nearest site, use the VITA/TCE Site Locator.