Month: July 2017

Making the Most out of Miscellaneous Deductions

Making the Most out of Miscellaneous Deductions (IRS Tax Tip 2017-09)

Miscellaneous deductions are tax breaks that generally don’t fit into a particular tax category.  They can help reduce taxable income and the amount of taxes owed.  For example, some employees can deduct certain work expenses like uniforms as miscellaneous deductions.  To do that, they must itemize their deductions instead of taking the standard deduction on their tax return. 

Here are several tips from the IRS about miscellaneous deductions:  

  • The Two Percent Limit.  Most miscellaneous costs are deductible only if the sum exceeds 2% of the taxpayer’s adjusted gross income (AGI).  For example, before being able to deduct certain expenses, a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions.  Expenses may include:
    • Unreimbursed employee expenses.
    • Job search costs for a new job in the same line of work.
    • Job tools.
    • Union dues.
    • Work-related travel and transportation.
    • The cost paid to prepare a tax return. These fees include the cost paid for tax preparation software. They also include any fee paid for e-filing a return.
  • Deductions Not Subject to the Limit. Some deductions are not subject to the 2% limit. They include:
    • Certain casualty and theft losses. In most cases, this rule is for damaged or stolen property held for investment. This may include property such as stocks, bonds and works of art.
    • Gambling losses up to the total of gambling winnings.
    • Losses from Ponzi-type investment schemes.

Taxpayers can’t deduct some expenses. For example, personal living or family expenses are not deductible. To claim allowable miscellaneous deductions, taxpayers must use Schedule A, Itemized Deductions. For more about this topic, see Publication 529, Miscellaneous Deductions. Get them on IRS.gov/forms at any time.

Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Newlyweds Should Think About Taxes

Summer Newlyweds Should Also Think About Taxes

(IRS Summertime Tax Tip 2017-08 – July 19, 2017)

Spring showers bring summer flowers and weddings typically aren’t far behind. Newlyweds have a lot to think about and taxes might not be on the list. However, there is good reason for a new couple to consider how the nuptials may affect their tax situation.

The IRS has some tips to help in the planning:

  • Report changes in:
    • Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at SSA. If it doesn’t, it could delay any refund. To update information, file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
    • Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, send the IRS Form 8822, Change of Address. Notify the postal service to forward mail by going online at USPS.com or at a local post office.
  • Consider changing withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Allowance Certificate, within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator at IRS.gov to help complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
  • Decide on a new filing status. Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of Dec. 31, the law says they’re married for the whole year for tax purposes.
  • Select the right tax form. Choosing the right income tax form can help save money. Newly married taxpayers may find they now have enough deductions to itemize them on their tax returns. Newlyweds can claim itemized deductions on Form 1040, but not on Form 1040A or Form 1040EZ.
  • Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Members of the Armed Forces Get Special Tax Benefits

Members of the Armed Forces Get Special Tax Benefits (IRS Tax Tip 2017-06)

Members of the military may qualify for tax breaks and benefits. Special rules could lower the tax they owe or give them more time to file and pay taxes. In addition, some types of military pay are tax-free.

Here are some tips to find out who qualifies:

  1. Combat Pay Exclusion. If someone serves in a combat zone, or provides direct support, part or even all of their combat pay is tax-free. However, there are limits for commissioned officers. See Earned Income Tax Credit below for important information.
  2. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  3. Special Deductions:
  • Reservists’ Travel.  Reservists whose duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
  • Moving Expenses.  Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
  • Uniform.  Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
  1. Earned Income Tax Credit or EITC. If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
  2. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
  3. ROTC Allowances.  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
  4. Separation and Transition to Civilian Life. If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
  5. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.

For more, refer to IRS.gov/Military or Publication 3, Armed Forces’ Tax Guide, on IRS.gov.

Summer Camp Costs May Qualify for the Child and Dependent Care Tax Credit

Summer Camp Child and Dependent Care Tax Credit

Many parents send their children to summer day camps while they work or look for work. The IRS urges those who do send their children to summer camps or day care to save their paperwork for the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it on their taxes in 2018 if they paid for day camp or for someone to care for a child, dependent, or spouse during 2017.

Here are a few key facts to know about this credit:

  1. Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
  2. Work-Related Expenses. The care must have been necessary so the taxpayer could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
  3. Earned Income. The taxpayer — and their spouse if married filing jointly — must have earned income for the tax year. Special rules apply to a spouse who is a student or disabled.
  4. Credit Percentage/Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.
  5. Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return. The childcare provider cannot be the taxpayer’s spouse, dependent or the child’s parent.
  6. Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer.  Make sure you consult your tax advisor to understand those rules.
  7. Special Circumstances. Since every family is different, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit. Make sure you consult your tax advisor to understand the exceptions.

Even if the childcare provider is a sitter in the home, taxpayers may qualify for the credit. Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer. If you are deemed a household employer, you may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax for those who provide child care.