There's good news for tax procrastinators: just one more day of suffering! This year's tax filing deadline is midnight April 18th and if you’re getting a late start, here are some last minute tax tips via Q&A: What if you owe money, but can’t pay in full by the April 18th deadline?
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.
The 2014 tax filing season officially opened on January 20th and by now, you should have received all of the documents necessary to attack your taxes. For the technophobes out there, the IRS has a reminder: filing electronically is the most accurate and fastest way to get a refund. The error rate for electronically filed returns is less than one percent, compared to 20 percent for paper returns. The IRS said that the average tax refund for past few years has been about $3,000 and like last year, the IRS expects to issue more than nine out of 10 refunds within 21 days. Because of IRS budget cuts, it will likely take an additional week or more to process paper returns, which means that the IRS will likely issue those refunds in seven weeks or more.
And another outcome of the smaller IRS staff: the agency is unlikely to answer even half the telephone calls it receives and taxpayers who miraculously manage to get through, are expected to wait on hold for 30 minutes on average and considerably longer at peak times. In other words, try to use IRS.gov.
Now, on to the changes for this filing season! This year’s return will include new questions to incorporate provisions of the Affordable Care Act (or ACA). According to the IRS, there are four basic categories when it comes to the ACA:
- Covered with qualifying insurance (employer-provided coverage, Medicare, Medicaid, CHIP, Cobra): The IRS has said that the majority of taxpayers - more than three out of four – will fall into this category. These people will simply check a box acknowledging coverage.
- Qualifies for an exemption: Those who can not afford coverage, are not U.S. citizens, had a gap in coverage for less than three consecutive months, are a member of a recognized religious sect with objections to health insurance, are a member of a federally recognized Indian tribe are among those who qualify for exemptions. (Go here to review the full list of exemptions.) Eligible taxpayers need to complete the new IRS Form 8965.
- Will make the Individual Shared Responsibility Payment: If you don’t have qualifying coverage and do not qualify for an exemption, you have to pay the greater of: $95 per uninsured adult in each household, capped at $285 per household or one percent of household income.
- Will Claim Premium Tax Credit: If you received healthcare through the marketplace and qualified for atax credit, you should have received tax form 1095A by now, which contains details of your coverage and premium tax credit. If you don’t receive the form or misplace it, the federal and most state exchanges should make them available online. If you benefited from advance payments of the premium tax credit, you may see a different tax refund/liability than you were expecting. Use IRS Form 8962 to calculate the premium tax credit and reconcile the credit with any advance payments.
With ACA out of the way, the rest of your taxes should be a breeze, because most of the rest of the changes are inflation adjustments to various thresholds. That’s because at the end of 2014, Congress reauthorized more than 50 tax breaks (the so-called “extenders” or The Tax Increase Prevention Act), including:
- The deduction for state and local sales taxes: The option to deduct state and local sales taxes instead of deducting state and local income taxes could be beneficial those who live in no-income tax states. If you didn’t keep your sales-tax receipts, use the IRS’s sales tax deduction estimator
- Above-the-line deduction of up to $4,000 for higher education expenses
- $250 above-the-line deduction for teachers’ supplies
- The ability to exclude up to $2 million in discharge of residential mortgage indebtedness from gross income
- The deduction for mortgage insurance premiums
- Energy-efficient home improvements tax credit
- Tax-free distributions from an Individual Retirement Account for charitable purposes for taxpayers over 70 ½.
This is just the beginning – are we having fun yet? Stay tuned for another post, where I will review deductions, credits and Individual Retirement Accounts (IRAs).