What You Should Know About 401(k) and IRA Changes in 2014

Next year will bring subtle changes to 401(k) and IRA rules, with the changes mostly happening for IRAs. There will be one shared change for both retirement plans that introduces a bigger saver's credit threshold which should please many more people.

 

 

IRA

The contribution amount workers can put toward their IRAs will stay the same, at $5,500 in 2014, with individuals ages 50 and up being able to contribute the same catch-up contribution range as last year, up to an additional $1,100.
IRA income limits will change in the following ways:

• Those who have a workplace retirement plan with modified adjusted gross incomes of $60,000 to $70,000 will not be eligible to file for a tax deduction, up from last year's range of $59,000 to $69,000.
• Married couples with workplace retirement plans making between $96,000 to $116,000 per household will not be able to file for the tax deduction either, also up $1,000 from last year.
• Investors without a workplace retirement who are married to a spouse that has one, if their shared income is between $181,000 and $191,000, they will not be eligible for the tax deduction, up $3,000 from 2013.
• Roth IRA income cutoffs will be larger, as workers can now earn an additional $2,000 more, with couples being able to earn an additional $3,000 and still qualify to contribute to a Roth IRA.
• Individuals with an adjusted gross income of $114,000 to $129,000 will not qualify for a Roth IRA, nor will married couples making between $181,000 to $191,000.

401(k)

Like the IRA contribution limits, 401(k) contributions will remain the same, with the maximum being $17,500. This extends to taxpayers contributing to their 401(k), 403(b) and most 457 plan, as well as the federal government's Thrift Savings Plan. Employees 50 and older will be able to contribute an additional $5,500, the same as last year.

Overlapping changes

Great news for low and moderate income workers saving in 401(k)s and IRAs, who can claim a tax credit that could be up to $1,000 for individuals, and $2,000 for married couples. Couples will be eligible to claim the saver's credit up until their adjusted gross income exceeds $60,000 (up $1,000 from 2013), heads of household can claim the credit until theirs AGI exceeds $45,000, and individuals can claim it until they reach $30,000.

Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

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WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2013 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2013 tax return. People have until April 15, 2014, to set up a new individual retirement arrangement or add money to an existing IRA for 2013. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2014 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

• Married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014;
• Heads of Household with incomes up to $44,250 in 2013 or $45,000 in 2014; and
• Married individuals filing separately and singles with incomes up to $29,500 in 2013 or $30,000 in 2014.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2011, the most recent year for which complete figures are available, saver’s credits totaling just over $1.1 billion were claimed on nearly 6.4 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $166 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2013, this rule applies to distributions received after 2010 and before the due date, including extensions, of the 2013 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.

10 Savvy Tax Moves to Make Before Jan. 1st

April 15 is the target date for taxes, but to ensure that you pay the Internal Revenue Service the least possible amount on that date, you need to make some tax moves before the tax year ends.

The good news this year is that the federal tax laws are in place, unlike at the end of 2012, when Congress was still fighting over legislation.
The bad news is that if you earn a lot of money, you could face some new taxes.
The best news, regardless of your income level, is that you still have time -- until Dec. 31 -- to reduce your tax bill.
Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Following are 10 year-end tax moves to make before New Year's Day.

1. Defer your income
The top tax rate is 39.6 percent on taxable income of more than $400,000 for single taxpayers; $450,000 for married couples filing joint returns ($225,000 if filing separately); and $425,000 for head-of-household taxpayers.If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you're self-employed, don't send out invoices for year-end jobs until early 2014.
This strategy works even if you're not in the top tax bracket, but just about to cross into the next higher one.

2. Add to your 401(k)
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you'll have a bit less income that the Internal Revenue Service can touch. (Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth.) Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.
Few of us will reach the maximum $17,500 that employees can stash in a 401(k), but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $5,500.
In most cases, you can modify your 401(k) contributions at any time, but double check with your benefits office to be sure of your plan's rules.

3. Review your FSA amounts
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you don't waste it. You can contribute up to $2,500 to an FSA via paycheck withdrawals. If that limit seems lower, you're right. As part of the Affordable Care Act the maximum contribution amount was set at $2,500; before the health care law change there was no statutory limit.
As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. And though the U.S. Treasury recently announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to take steps to adopt it.
Be sure to check with your employer, and if you must use your FSA money by Dec. 31, make sure you do.

4. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax . This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.
If you do face the 3.8 percent surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.

5. Make the most of your home
Homeownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year's tax bill. Make your January mortgage payment by Dec. 31 and deduct the mortgage interest on your coming tax return. The same is true for early property tax payments.
You also might be able to get some tax savings from upgrades to your primary residence. The residential energy efficient property credit is available for such things as added insulation, new windows and whole house fans .
The maximum credit amount is $500, and you must count any previous years' tax credit claims against that limit. But even if you can only claim $50 or $100, it is a credit, meaning it will reduce your final tax bill by that amount. Just make sure the home improvements are in place by Dec. 31.

6. Bunch your deductible expenses
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.
Medical and dental expenses , for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses , which include business expense claims, must be more than 2 percent of AGI.
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process the better. It's much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.

7. Go shopping
A popular itemized expense is for other taxes you've paid. Most people deduct state and local income taxes on Schedule A. But if you live in a state with no income tax or your income tax rate is low, it will be more advantageous to deduct your state and local sales tax amounts.
The IRS provides tables with the average amount of state sales taxes paid in each state. A worksheet (or program in your computer tax software) also helps you figure any local sales taxes to add to the table amount.
You also can add to the average sales tax amounts any levy on the purchase or lease of a vehicle. This isn't limited to cars; you also can count sales tax on trucks, motorcycles or motor homes, as well as boats and airplanes. Keep your sales receipts, too, for a mobile or prefabricated home purchase or for material used to substantially renovate your residence. Sales taxes on these purchases also are deductible as additions to your state's average sales tax table amount.

8. Be generous to charities
As you're putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles , with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you've held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset's value at the time of gifting. Even better, you don't have to worry about capital gains taxes on the appreciation of your gift.
Older individuals get a special donation option. If you're age 70 one half and don't need the money that the IRS says you must take as a required minimum distribution from your traditional IRA , you can directly transfer that required minimum distribution, or RMD, to a qualified charity. There's no deduction for this trustee-to-trustee transfer, but you'll meet your RMD obligation and won't have to count the distribution as taxable income.

9. Pay college costs early
The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return.
The American Opportunity credit replaced the Hope tax credit in 2009 and is in effect through the 2017 tax year. It's worth up to $2,500 with up to 40 percent of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.

10. Adjust your withholding
Did you write the U.S. Treasury a big check in April? Or did you get a large refund from Uncle Sam instead? Neither is a particularly good financial or tax plan.
Most of us cover our eventual tax bills through payroll withholding. Ideally, you want the amount coming out of your paychecks throughout the year to be as close as possible to your final tax bill. If you have too much withheld, you'll get a refund; too little withheld will mean you'll owe taxes when you file.

You can correct the imbalance by adjusting your payroll withholding now. The correct amount taken out of your final 2013 paychecks will help ensure that you don't over- or underpay the tax collector too much next filing season.

Questions and Answers on the Premium Tax Credit

The Basics

1. What is the premium tax credit?
The premium tax credit is an advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange, beginning in 2014. You can choose to have the credit paid in advance to your insurance company to lower what you pay for your monthly premiums, or you can claim all of the credit when you file your tax return for the year. If you choose to have the credit paid in advance, you will reconcile the amount paid in advance with the actual credit you compute when you file your tax return.

2. What is the Health Insurance Marketplace?

The Health Insurance Marketplace, also known as the Exchange, is the place where you will find information about private health insurance options, purchase health insurance, and obtain help with premiums and out-of-pocket costs if you are eligible. Open enrollment to purchase health insurance for 2014 through the Marketplace begins Oct. 1, 2013, and continues through March 31, 2014. The Department of Health and Human Services (HHS) administers the requirements for the Marketplace and the health plans offered. Learn more about the Marketplace at HealthCare.gov.

3. How do I get the premium tax credit?

When you apply for coverage in the Marketplace, the Marketplace will estimate the amount of the premium tax credit that you may be able to claim for the tax year, using information you provide about your family composition and projected household income. Based upon that estimate, you can decide if you want to have all, some, or none of your estimated credit paid in advance directly to your insurance company to be applied to your monthly premiums. If you choose to have all or some of your credit paid in advance, you will be required to reconcile on your income tax return the amount of advance payments that the government sent on your behalf with the premium tax credit that you may claim based on your actual household income and family size.

If you do not opt for advance credit payments, you may claim the credit when you file your tax return for the year, which will either lower the amount of taxes owed on that return or increase your refund.

4. What happens if my income or family size changes during the year?

The actual premium tax credit for the year will differ from the advance credit amount estimated by the Marketplace if your family size and household income as estimated at the time of enrollment are different from the family size and household income you report on your return. The more your family size or household income differs from the Marketplace estimates used to compute your advance credit payments, the more significant the difference will be between your advance credit payments and your actual credit. If your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain caps, will be subtracted from your refund or added to your balance due. If your actual allowable credit is more than your advance credit payments, the difference will be added to your refund or subtracted from your balance due.

Notifying the Marketplace about changes in circumstances will allow the Marketplace to update the information used to determine your expected amount of the premium tax credit and adjust your advance payment amount. This adjustment will decrease the likelihood of a significant difference between your advance credit payments and your actual premium tax credit. Changes in circumstances that can affect the amount of your actual premium tax credit include:

• Increases or decreases in your household  income.
• Marriage.
• Divorce.
• Birth or adoption of a child.
• Other changes to your household composition.
• Gaining or losing eligibility for government sponsored or employer sponsored health care coverage.

Eligibility

5. Who is eligible for the premium tax credit?
You are eligible for the premium tax credit if you meet all of the following requirements:

• Purchase coverage through the Marketplace.
• Have household income that falls within a certain range (see question 6).
• Are not able to get affordable coverage through an eligible employer plan that provides minimum value (see questions 8 and 9).
• Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
• File a joint return, if married.
• Cannot be claimed as a dependent by another person.

6. What are the income limits?
In general, individuals and families whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the premium tax credit. An individual who meets these income requirements must also meet the other eligibility criteria described in question 5. Thus, if you have household income between 100 percent and 400 percent of the federal poverty line, but are eligible for coverage through your state’s Medicaid program (for example, because your state provides Medicaid to individuals with household income up to 133 percent of the federal poverty line), you are not eligible for the premium tax credit.
For 2013, for residents of one of the 48 contiguous states or Washington, D.C., the following illustrates when household income would be between 100 percent and 400 percent of the federal poverty line:

• $11,490 (100%) up to $45,960 (400%) for one individual.
• $15,510 (100%) up to $62,040 (400%) for a family of two.
• $23,550 (100%) up to $94,200 (400%) for a family of four.
  

Note: The federal poverty guidelines — sometimes referred to as the “federal poverty line” or FPL — state an income amount considered poverty level for the year, adjusted for family size. HHS determines the federal poverty guideline amounts annually. The government adjusts the income limits annually for inflation. The Federal Register publishes a chart reflecting these amounts at the beginning of each calendar year. You can also find this information on the HHS website. HHS provides three federal poverty guidelines: one for residents of the 48 contiguous states and D.C., one for Alaska residents and one for Hawaii residents. For purposes of the premium tax credit, eligibility for a certain year is based on the most recently published set of poverty guidelines at the time of the first day of the annual open enrollment period. As a result, the tax credit for 2014 will be based on the 2013 guidelines.
7. What is household income?

For purposes of the premium tax credit, your household income is your modified adjusted gross income plus that of every other individual in your family for whom you can properly claim a personal exemption deduction and who is required to file a federal income tax return. Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).
8. How do I know if the insurance offered by my employer is affordable?
An employer-sponsored plan is affordable if the portion of the annual premium you must pay for self-only coverage does not exceed 9.5 percent of your household income. (See question 7 for what is included in household income.) The affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. If the employer offers multiple health coverage options, the affordability test applies to the lowest-cost option available to you that also satisfies the minimum value requirement. If your employer offers any wellness programs, the affordability test is based on the premium you would pay if you received the maximum discount for any tobacco cessation programs, and did not receive any other discounts based on wellness programs.

9. How do I know if the insurance offered by my employer provides minimum value?
An employer-sponsored plan provides minimum value if the plan covers at least 60 percent of the expected total allowed costs for covered services. Beginning in 2014, your employer will provide you with a document called a Summary of Benefits and Coverage. That document will give you information about the benefits and coverage under your employer-sponsored plan, including whether the plan provides minimum value. Also, under the Fair Labor Standards Act, most employers will provide employees with a notice about their options in the Marketplace and their potential eligibility for a premium tax credit. This one-time notice will include information about whether the employer has a plan that provides minimum value.

10. Am I eligible for the premium tax credit if I enroll in coverage through an employer?

If you enroll in an employer-sponsored plan, including retiree coverage, you are not eligible for the premium tax credit even if the plan is unaffordable or fails to provide minimum value.

Reporting and Claiming

11. Will I have to file a federal income tax return to get the premium tax credit?  
For any tax year, if you receive advance credit payments in any amount or if you plan to claim the premium tax credit, you must file a federal income tax return for that year. If you receive any advance credit payments, you will use your return to reconcile the difference between the advance credit payments made on your behalf and the actual amount of the credit that you may claim. This filing requirement applies whether or not you would otherwise be required to file a return. If you are married, you must file a joint return to be eligible for the premium tax credit.

12. If I get insurance through the Marketplace, how will I know what to report on my federal tax return?
The Marketplace will send you an information statement showing the amount of your premiums and advance credit payments by January 31 of the year following the year of coverage. For example, you will receive the 2014 information statement by Jan. 31, 2015, and can use this information to compute your premium tax credit on your 2014 tax return and to reconcile the advance credit payments made on your behalf with the amount of the actual premium tax credit.

13. How is the amount of the premium tax credit determined?
The law bases the size of your premium tax credit on a sliding scale. Those who have a lower income get a larger credit to help cover the cost of their insurance. In other words, the higher your income, the lower the amount of your credit.

Additionally, the premium tax credit is a refundable tax credit. This means that if the amount of the credit is more than the amount of your tax liability, you will receive the difference as a refund. If you owe no tax, you can get the full amount of the credit as a refund. However, if you receive advance payments of the credit, you will reconcile the advance payments with the amount of the actual premium tax credit that you calculate on your tax return. If your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain caps, will be subtracted from your refund or added to your balance due. If your actual allowable credit is more than your advance credit payments, the difference will be added to your refund or subtracted from your balance due. (See question 4 for information on changes in circumstances.)

7 Money Moves You Should Tell Your Tax Preparer About

When it comes to making your money work for you, transparency is key. Just like it's important to disclose potentially embarrassing life events to your wealth advisor, it's equally, if not more, important to be honest with your tax preparer.  

However, that's not always the case. In a 2011  IRS report , twice as many Americans (8%) believed a little fibbing on tax returns is "fine," compared to the same survey issued in 2010.
And although it's true that the IRS doesn't exactly go after "small potatoes" taxpayers for fibs (generally, you'd need at least $1 million in assets to interest them), even a few missing details could put your refund in jeopardy.
Here are seven confessions we recommend making:
"I made a nondeductible contribution to a traditional IRA."  "While nondeductible contributions have no impact on your tax liability in the year they are made, by not reporting these contributions on your return, it’s more difficult to claim these same amounts are not taxable when they’re later withdrawn from the IRA, usually many years later," says Tim Steffen, CPA and director of financial planning at Baird.
"I've earned income outside of my regular 9-to-5 job." Whether it's a lawn-mowing service you keep on the side, or freelance writing gig at your local newspaper, any additional income will need to be reported on your tax forms.
We know. It's a pain to gather all your 1099 forms and keep track of every dollar and cent that you've earned yourself, but it's a big red flag to potential auditors if you don't. At least 4 million people were audited in 2010 for under-reporting their income, according to Minyanville.
The IRS uses document-matching programs that let agents cross-check income reported on tax returns against what is reported on forms like a W-2, 1099-INT, 1099-DIV, and 1099-B.
"I converted my IRA to a Roth IRA." If you're among the plethora of workers who've decided to  ditch the traditional IRA model  in favor of a Roth IRA, you'll need to tell your tax preparer. Since Roth contributions aren't taxed when you contribute, half of that the amount you converted to a Roth is considered taxable in the year you switch and the other half in the following year.
"I rented out my apartment to get through the housing slump."  Even part-time landlords are required to fill out a Schedule E form at tax time if they're planning on claiming deductions, and Minyanville's Stephanie Christenson stresses the importance of knowing all of the nuances behind the process.
"R eal estate rentals tend to reflect losses due to depreciation write-offs, and most of the time, those losses are limited on an individual's tax return — unless he or she qualifies as a real estate professional," she writes. "M any taxpayers take the losses on their individual tax returns, and as a result, get audited."
"I exercised employer stock options (or received restricted stock) and then sold the shares right away."   Even if the sale didn't net any profit for yourself, the IRS will still want to see it reported on your tax return, Steffen says. Your broker should issue a 1099-B form with that information included.
"I earned interest from municipal bonds."  "While that interest is usually not taxable for federal purposes, the interest on some bonds is taxable under the [ Alternative Minimum Tax ] rules," Steffen says. "In addition, that interest is usually taxable for state tax purposes."
"I've had credit debt forgiven by debt collectors." Negotiating with debt collectors to settle unpaid debts for a lesser amount is a smart way to dig out of debt for people who have no hopes of paying off the full balance. But things get tricky when tax season rolls around.
As far as the IRS is concerned, that debt you got away with is considered income.
"If a debt is canceled, forgiven, or discharged, you must include the canceled amount in your gross income, and pay taxes on that 'income,' unless you qualify for an exclusion or exception," writes Credit.com's Gerri Detweiler.  "Creditors who forgive $600 or more are required to file Form 1099-C with the IRS."

Claiming kids and relatives as dependents on your taxes

Tax season is swiftly approaching and as you gather together all of your tax forms and receipts, you may be wondering how to claim a dependent on your tax return. While the process of claiming a dependent on your income tax return can be confusing, if you follow a few basic rules, it can actually be quite simple.

Why Claim a Dependent?

Claiming a dependent affords a taxpayer many benefits. For instance, claiming a dependent increases a taxpayer’s exemptions, which in turn decreases his or her tax liability, or the amount of tax owed to the Internal Revenue Service (IRS) for the year. A dependent may be claimed in a number of ways, most typically as a dependent child or dependent relative.

Claiming a Dependent Child

A child may be claimed as a dependent on a taxpayer’s return if he or she qualifies under a few fairly straightforward rules. The IRS states that a child may be biological, a step-child, an adopted child, and certain qualifying foster children. In addition to this description, the child must meet four other requirements:

• The child must be related to the taxpayer in some way (e.g. child can be biologically yours, adopted, foster, brother, sister or decedent of other relative).
• The child must meet the residency requirements as set forth by the IRS which state that the child must live with the taxpayer for more than one half of the year.
• A dependent child must also meet certain age requirements: he or she must be under 19 years of age, or must be under 24 years old and attending school as a full-time student for more than five months out of the year.
• The claiming taxpayer must provide more than half of the child’s support throughout the year.

Claiming a Dependent Relative

If you are providing support for your mother-in-law, a cousin, or even in some cases a child who does not qualify as a dependent child, you may be able to claim them on your taxes as a dependent. A relative may be claimed as a dependent if they meet the following requirements:

• The relative is not a qualifying dependent child.
• If the individual’s gross income (before taxes) is less than the personal exemption amount which varies from year to year. For 2013 taxes, the amount is $3,900.
• If you provide more than half of the individual’s total support, you may claim them.
• If you are in some way related to the individual – biologically or through marriage – you may claim them as a dependent.

Things to Keep in Mind

Only one taxpayer may claim a dependent child. In the case of a divorced couple, only one parent may claim a dependent child on their tax return. This parent is the one with whom the child resides for a majority of the year. Some dependents who are not relatives may be claimed as a dependent, such as friends, boyfriends and girlfriends, and domestic partners. These individuals must meet many of the same requirements as a dependent relative, except that a non-related dependent must reside with you for the entire year.

In scenarios where several people are helping to care for an adult relative, the tax rules can become tricky. In order to clear up confusion, individuals should keep active records of how many days the person lives with them, how much financial and medical support is being provided and how much income the individual receiving care brings in. It's also critical to consult tax professional to learn about any other criteria that must be met. 

Three Tax Scams to Beware of This Summer

Are you thinking about taxes while you’re enjoying the warm summer months? Not likely! But the IRS wants you to know that scammers ARE thinking about taxes and ways to dupe you out of your money.

Tax scams can happen anytime of the year, not just during tax season. Three common year-round scams are identity theft, phishing and return preparer fraud. These schemes are on the top of the IRS’s “Dirty Dozen” list of scams this year. They’re illegal and can lead to significant penalties and interest, even criminal prosecution.
Here’s more information about these scams that every taxpayer should know.

1. Identity Theft.  Tax fraud by identity theft tops this year’s Dirty Dozen list. Identity thieves use personal information, such as your name, Social Security number or other identifying information without your permission to commit fraud or other crimes. An identity thief may also use another person’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special identity protection page on IRS.gov dedicated to identity theft issues. It has helpful links to information, such as how victims can contact the IRS Identity Theft Protection Specialized Unit, and how you can protect yourself against identity theft.

2. Phishing.  Scam artists use phishing to trick unsuspecting victims into revealing personal or financial information. Phishing scammers may pose as the IRS and send bogus emails, set up phony websites or make phone calls. These contacts usually offer a fictitious refund or threaten an audit or investigation to lure victims into revealing personal information. Phishers then use the information they obtain to steal the victim’s identity, access their bank accounts and credit cards or apply for loans. The IRS does not initiate contact with taxpayers by email to request personal or financial information. Please forward suspicious scams to the IRS at phishing@irs.gov. You can also visit IRS.gov and select the link “Reporting Phishing” at the bottom of the page.

3. Return Preparer Fraud.  Most tax professionals file honest and accurate returns for their clients. However, some dishonest tax return preparers skim a portion of the client’s refund or charge inflated fees for tax preparation. Some try to attract new clients by promising refunds that are too good to be true.

Choose carefully when hiring an individual or firm to prepare your return. All paid tax preparers must sign the return they prepare and enter their IRS Preparer Tax Identification Number (PTIN). The IRS created a webpage to assist taxpayers when choosing a tax preparer. It includes red flags to look for and information on how and when to make a complaint. Visit www.irs.gov/chooseataxpro.

For the full list of 2013 Dirty Dozen tax scams, or to find out how to report suspected tax fraud, visit IRS.gov.

Back-to-School Tax Tips for Students and Parents

Going to college can be a stressful time for students and parents. The IRS offers these tips about education tax benefits that can help offset some college costs and maybe relieve some of that stress.

• American Opportunity Tax Credit.  This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. A recent law extended the AOTC through the end of Dec. 2017.

• Lifetime Learning Credit.   With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.

You can claim only one type of education credit per student on your federal tax return each year. If you pay college expenses for more than one student in the same year, you can claim credits on a per-student, per-year basis. For example, you can claim the AOTC for one student and the LLC for the other student.

You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for these credits. The tool is available at IRS.gov.

• Student loan interest deduction.  Other than home mortgage interest, you generally can’t deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.

These education benefits are subject to income limitations and may be reduced or eliminated depending on your income. As with all deductions and credits, you need proof of payment. Save your receipts and payment information. If you have questions please call us at 865-984-6329

Tips for Taxpayers Who Travel for Charity Work

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.

1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.

2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.

3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• Air, rail and bus transportation
• Car expenses
• Lodging costs
• The cost of meals
• Taxi fares or other transportation costs between the airport or station and your hotel

To learn more see Publication 526, Charitable Contributions. The booklet is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Do I Have to Pay Taxes on a Foreclosed Home?

By Gerri Detweiler | Credit.com – 

 

Losing one’s home to foreclosure is never easy. One of our readers, “Kate,” wants to know whether she will still be on the hook for her property tax bill if it gets to that point. She writes:
If one “walks away” from their home mortgage, home goes to foreclosure, but still owed a current property tax due on that home, does the bank pay the tax lien (bill) when the house sells again? Or can the local county come after the old owner ?
Whether or not you will be responsible for the property taxes owed depends in part on where you live. In Florida, for example, “The liability follows the property, not the owner,” says Jo Ann Koontz, an attorney and CPA with Koontz and Associates. When the lender forecloses, the “property tax is paid by the lender in the foreclosure sale. They can’t wait until the bank sells to the next buyer; it has to be paid at the auction,” she explains.
But in other states, that may not be the case, warns Eugene Melchionne, a Connecticut bankruptcy attorney. He elaborates:
Some states do not require an auction as part of a foreclosure. Connecticut and Vermont are examples of this. When the foreclosure completes, the bank may become the owner of the property, but there is no absolute requirement that the taxes which attach to the property be paid at that time. As a result, some municipalities are suffering from declines in tax collection as the lenders fail to pay the taxes timely.
While the personal liability for the future taxes is cut off with the completion of the foreclosure, personal liability for the past taxes remains unless there is a bankruptcy discharge. Therefore, some municipalities can issue a tax warrant for collection against former owners (because they are local and thus easily reached) to collect the old taxes while letting the current taxes accrue.  Since the time to collect property taxes can be quite extended (15 years in Connecticut) unless there is an absolute need for cash, a municipality may elect to sit on the taxes for a while. In Connecticut, taxes bear interest at the rate of 18% annually so it can be considered quite the investment. You might call this ‘Zombie Tax Debt’ as opposed to debt coming from a Zombie Deed.
In addition, it’s important for homeowners to understand that when they walk away from their homes, lenders sometime leave those properties in limbo and fail to actually foreclose. During that time, the homeowner remains the owner of record and remains responsible for certain expenses. For example, “Homeowner association dues continue to be the liability of the property owner if the foreclosure doesn’t happen or is substantially delayed,” Koontz points out.
There’s more to consider. Even though the homeowner may not be living in the property anymore, it’s important to make sure that liability insurance is still in place in case of an accident on the property. And not to be alarmist, but in some jurisdictions of the country, the owner may be criminally liable for failing to maintain a home to code!
Other risks of walking away include the fact that the lender may be able to try to collect a deficiency for several years, depending on state law and whether the loan was a recourse or non-recourse loan. Plus, there could be a hefty tax bill for cancelled debt for those who don’t qualify for an exclusion such as the one offered under the Mortgage Forgiveness Debt Relief Act.
In other words, it’s not as simple as just saying, “Take the house, I don’t want it anymore.”
That’s why I always advise someone who is unable to keep up with their house payments to get professional advice from a real estate and/or bankruptcy attorney, and to talk with a tax professional as well. I know it may feel like throwing good money after bad, but failing to get expert advice could literally cost you tens of thousands of dollars down the road.

More from Credit.com

• A Foreclosure Is Killing My Credit. What Do I Do?
• The First Thing You Must Do Before Paying Off Debt
• My Ex Forced Me Into Foreclosure!

Special Tax Benefits for Armed Forces Personnel

If you’re a member of the U.S. Armed Forces, the IRS wants you to know about the many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return. 

Here are ten of those benefits:

1. Deadline Extensions.  Qualifying military members, including those who serve in a combat zone, can postpone some tax deadlines. This includes automatic extensions of time to file tax returns and pay taxes.

2. Combat Pay Exclusion.  If you serve in a combat zone, you can exclude certain combat pay from your income. You won’t need to show the exclusion on your tax return because qualified pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Some service outside a combat zone also qualifies for this exclusion.

3. Earned Income Tax Credit.  You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.

4. Moving Expense Deduction.  If you move due to a permanent change of station, you may be able to deduct some of your unreimbursed moving costs.

5. Uniform Deduction.  You can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. You must reduce your expenses by any reimbursement you receive for these costs.

6. Signing Joint Returns.  Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.

7. Reservists’ Travel Deduction.  If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain travel expenses on your tax return. You can deduct unreimbursed expenses for traveling more than 100 miles away from home to perform your reserve duties.

8. Nontaxable ROTC Allowances.   Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

9. Civilian Life.  After leaving the military, you may be able to deduct certain job hunting expenses. Expenses may include travel, resume preparation fees and job placement agency fees. Moving expenses may also be deductible.

10. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.

You can learn more about these tax benefits in Publication 3, Armed Forces’ Tax Guide. The booklet is available on IRS.gov or you can order it by calling 1-800-TAX-FORM (800-829-3676).

Six Tips on Gambling Income and Losses

Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler.

1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.

2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You’ll also receive a Form W-2G if the payer withholds federal income tax from your winnings.

3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.

4. If you’re a casual gambler, report your winnings on the “Other Income” line of your Form 1040, U. S. Individual Income Tax Return.

5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.

6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.

To learn more about this topic, see Publication 525, Taxable and Nontaxable Income. Also, see Publication 529, Miscellaneous Deductions. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Renting Your Vacation Home

A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.

In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.

Here are some tips from the IRS about this type of rental property.

• You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.

You may also be subject to paying Net Investment Income Tax on your rental income.

• If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.

Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.

• If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

• If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.

Get Publication 527 for more details on this topic. It is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).