By: Gary M. DellaPosta, CPA
If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you're required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you've had too much federal income tax withheld from your pay or qualify for certain tax credits.
Even if you've determined that you don't need to file a tax return this year, you may still want to file. Here are five reasons why:
1. Federal Income Tax Withheld. If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year's tax, you could be due a refund. File a return to claim any excess tax you paid during the year.
2. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891. You can't get the credit unless you file a return and claim it. Give us a call if you're not sure you qualify for the EITC.
3. Additional Child Tax Credit. If you have at least one qualifying child and you don't get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit. If you need help filling out this form, please give us a call.
4. American Opportunity Credit. If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit. Don't hesitate to give us a call if you need help with this form.
5. Health Coverage Tax Credit. If you're receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. Email or call us today to see whether you're eligible for a 72.5 percent tax credit on payments you made for qualified health insurance premiums.
Want more information about filing requirements and tax credits? Give us a call. We're here to help.
By: Gary DellaPosta, CPA
Confused about which credits and deductions you can claim on your 2012 tax return? You're not alone. Even in an ordinary tax year, it's hard to remember which tax breaks you can take, but the fiscal cliff fiasco this year made it even more difficult to keep everything straight. With that in mind here are six tax breaks for 2012 that you won't want to overlook.
1. State Sales and Income Taxes
Thanks to the fiscal cliff deal, the sales tax deduction, which expired at the end of 2011, was reinstated retroactive to 2012 (it expires at the end of 2013). As such, IRS allows for a deduction of either state income tax paid or state sales tax paid, whichever is greater.
If you bought a big ticket item like a car or boat in 2012, it might be more advantageous to deduct the sales tax, but don't forget to figure any state income taxes withheld from your paycheck just in case. If you're self-employed you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2011 tax return in 2012, you can include the amount when you itemize your state taxes this year on your 2012 return.
2. Child and Dependent Care Tax Credit
Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent. The credit is worth a maximum of $1,050 or 35% of $3,000 of eligible expenses per dependent.
3. Job Search Expenses
Job search expenses are 100% deductible, whether you are gainfully employed or not currently working--as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses
greater than 2% of your adjusted gross income (AGI).
4. Student Loan Interest Paid by Parents
Typically, a taxpayer is only able to deduct interest on mortgages and student loans if he or she is liable for the debt; however, if a parent pays back their child's student loans the money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.
5. Medical Expenses
Most people know that medical expenses are deductible as long as they are more than 7.5% of AGI for tax year 2012 (10% in 2013). What they often don't realize is what medical expenses can be deducted such as medical miles (23 cents per mile) driven to and from appointments and travel (airline fares or hotel
rooms) for out of town medical treatment.
Other deductible medical expenses that taxpayers might not be aware of include: health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.
6. Bad Debt
If you've loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify however, the debt must be totally worthless, in that there is no reasonable expectation of payment.
Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.
Are you getting all of the tax credits and deductions you are entitled to? Maybe you are...but maybe you're not. Why take a chance? Make an appointment with us today and we'll make sure you get the tax breaks you deserve.
Here's what individuals and families need to know about tax changes for 2012.
From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.
The personal and dependent exemption for tax year 2012 is $3,800, up $100 from 2011.
In 2012 the standard deduction for married couples filing a joint return is $11,900, up $300 from 2011 and for singles and married individuals filing separately it's $5,950, up $150. For heads of household the deduction is $8,700, up $200 from 2011.
The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.
Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.
Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts remains at $13,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately.
Marriage Penalty Relief
For 2012, the basic standard deduction for a married couple filing jointly is $11,900, up $300 from 2011.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not
apply for 2012, but like many other tax provisions, are set to expire at the end of the year.
Flexible Spending Accounts (FSA)
FSA (Flexible Spending Arrangements) are limited to $2,500 per year starting in 2013 and indexed to
inflation after that and applies only to salary reduction contributions under a health FSA. However, IRS guidance issued this year recognizes that the term "taxable year" refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.
Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.
Long Term Capital Gains
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.
Individuals - Tax Credits
In 2012 a refundable credit of up to $12,650 is available for qualified adoption expenses for each eligible child. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.
Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
The $1,000 child tax credit has been extended through 2012 as well. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2012, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270 (up from $49,078 in 2011). The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals - Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2012. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2012, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2012, The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
Student Loan Interest
For 2012 (same as 2011), the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for married taxpayers filing joint returns at $125,000, and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges
remain at the 2011 levels.
Individuals - Retirement
For 2012, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $16,500 to $17,000. For persons age 50 or older in 2012, the limit is $22,500 (up from $22,000 in 2011). Contribution limits for SIMPLE plans remain at $11,500 for persons under age 50 and $14,000 for persons age 50 or older in 2012. The maximum compensation used to determine contributions increases to $250,000.
In 2012, the AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, $43,125 for heads of household, and $28,750 for married individuals filing separately and for singles.
Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you. You can email us at firstname.lastname@example.org or reach out office at 508-540-3683 Or you can comment below!
For 2012 the maximum adoption credit per eligible child is $12,650, down from $13,360 in 2011. The credit is no longer refundable and must be used as a credit against tax liability. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees, and travel expenses. Special needs adoptions are eligible for the full credit regardless of whether expenses are qualified.
In order to claim the credit however, your modified adjusted gross income (MAGI) must be less than $229,710. This credit is set to expire on December 31, 2012, but can be carried forward over the next five additional years until the credit is used up or the time limit expires. Moving forward, in 2013 domestic adoptions of special needs children are eligible for a tax credit of $6,000.
If you adopted a child this year, or are planning to adopt a special needs child in 2013, you may be eligible for this credit. Additionally, if you adopted a child in 2010 or 2011 and didn't claim the refundable credit, you may be able to file an amended return. Be sure to contact us if you need assistance. We are here to help.
Millions of Americans forfeit critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for low-to-moderate-income individuals who work. Taxpayers who qualify and claim the credit could owe less federal tax, owe no tax, or even receive a refund.
The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must be a US citizen, have a valid social security card, and file a tax return to claim the credit.
General requirements: If you were employed for at least part of 2012 and are at least age 25, but under age 65, and are not a dependent of anyone else you may be eligible for the EITC based on these general requirements:
- You earned less than $13,980 ($19,190 married filing jointly) and did not have any qualifying children.
- You earned less than $36,920 ($42,130 married filing jointly) and have one qualifying child.
- You earned less than $41,952 ($47,162 married filing jointly) with two or more qualifying children.
- You earned less than $45,060 ($50,270 married filing jointly) with three or more qualifying children.
Tax Year 2012 Maximum Credit
- $5,891 with three or more qualifying children
- $5,236 with two or more qualifying children
- $3,169 with one qualifying child
- $475 with no qualifying children
Investment income must be $3,200 or less for the year.
If you think you qualify for the EITC but aren't sure, call our office.
By: Krista Royal, CPA at Gary DellaPosta, CPA & Business Advisors
There are many tax changes coming for the end of 2012 and 2013! With all the current back and forth in the political arena and the complicated tax code, it can be hard to understand what is changing and who it affects, so we have simplified it for you and what it means for you!
Here are just a few that directly impact families:
Dependent Care Tax Credit:
- Depending on their income, taxpayers may receive a tax credit for child care expenses for dependents under age 13 that allow taxpayers to work or look for work.
- The maximum expenses qualifying for the dependent care credit will decrease from $3000 to $2400 for one child and will decrease from $6000 to $4800 for two or more children.
Impact: lower income working taxpayers with children.
Child Tax Credit
- Depending on their income, taxpayers with one or more qualifying children may be able to claim a
child tax credit of up to $1000 per qualifying child.
- Since 2003, the child tax credit has been $1000 for each qualified child of a taxpayer who is under
age 17 at the end of the year. However, this was a temporary provision that expires at the end of 2012 and beginning in 2013, the credit will revert to $500 per child. In addition, the refundable portion of the credit
will be reduced.
Impact: lower income taxpayers with children.
Earned Income Tax Credit:
- The earned income tax credit is a benefit for certain people who work and have low to moderate
- In 2009, a separate credit category for three or more children was added, provoking an increased
credit for taxpayers with three or more qualifying children. However, that was a temporary measure which will expire at the end of 2012. This will reduce the maximum credit for individuals with three or more
children by $650 in 2013. Other changes that enhanced and simplified the credit calculation are also set to
Impact: lower income taxpayers with large families.
American Opportunity Tax Credit:
- This tax credit provided a tax credit up to $2500; up to 40% of the tax credit is refundable in many instances. The tax credit is for qualified college expenses (tuition, books, room and board, etc). This tax credit provided potential refunds for taxpayers for up to 4 years, and expires in 2012.
Impact: lower income families with parents and/or qualifying children in college.
*** A tax credit means more money in your pocket. It reduces the amount of tax you owe and may also give you a refund.
Lending money to a cash-strapped family member or friend is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications down the road.
Let's say you decide to loan $5,000 to your daughter who's been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation. Here's why.
When you make an interest-free loan to someone, you will be subject to "below market interest rules". IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you and you will need to pay taxes on these interest payments when you file a tax return. Further, if the imaginary interest payments exceed $13,000 for the year, there may be adverse gift and estate tax consequences.
Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000 and the borrower doesn't use the loan proceeds to buy or carry income-producing assets.
In addition, if you don't charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule) and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan--or the IRS decides to audit you and decides your loan is really a gift.
Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it's legally binding.
As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.
AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which change frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.
Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, in this case your daughter cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest--as long as the promissory note for the loan was secured by the residence.
If you have questions about the tax implications of loaning a family member money, don't hesitate to call us. We're here to help. ~ Gary email@example.com (508)540-3683
Dependents and Exemptions: 6 Important Facts
~Cape Cod Mommies Advisor-Gary DellaPosta, CPA~
Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.
1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you're filing a separate return, you may claim the exemption for your spouse only if they had no
gross income, are not filing a joint return, and were not the dependent of another taxpayer.
3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an
4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
5. If you are a dependent, you may not claim an exemption. If someone else -- such as your parent -- claims you as a dependent, you may not claim your personal exemption on your own tax return.
6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.
If you need help determining who you can claim as a dependent and how much you can deduct for each exemption you claim, don't hesitate to call. We're here to help!
It's not too late to take advantage of the American Opportunity Tax Credit, a credit that helps parents and college students offset the cost of college. This tax credit is part of the American Recovery and Reinvestment Act of 2009 and is available through December 31, 2012. It can be claimed by eligible taxpayers for college expenses paid until 2012.
Here are six important facts about the American Opportunity Tax Credit:
1. This credit, formerly known as the Hope Credit, has been expanded. Eligible taxpayers can claim qualified tuition and related expenses paid for higher education through 2012. Qualified tuition and related expenses include tuition, related fees, books, and other required course materials.
2. The credit is equal to 100 percent of the first $2,000 spent per student each year and 25 percent of the next $2,000. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an
3. The full credit is generally available to eligible taxpayers who make less than $80,000, or $160,000 for married couples filing jointly. The credit is gradually reduced, however, for taxpayers with incomes above these levels.
4. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
5. The credit can be claimed for qualified expenses paid during any of the first four years of post-secondary education.
6. You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to take either the credit or the deduction.
If you would like more information about the American Opportunity Tax Credit please call us. We're more than happy to help. Contact our office at 508-540-3683 or email me directly at firstname.lastname@example.org
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