April is an important month for many as tax season comes to a close. If you have not filed your tax returns, please reach out to Dagley & Co. and we can set up a one-on-one appointment before Tax Day on April 18th. Here are all your important individual due dates for the month of April:
April 1 – Last Day to Withdraw Required Minimum Distribution
Last day to withdraw 2016’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2016. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2016 were required to make their 2016 IRA withdrawal by December 31, 2016.
April 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
April 15 – Taxpayers with Foreign Financial Interests
A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114. The form must be filed electronically; paper forms are not allowed. The form must be filed with the Treasury Department (not the IRS) no later than April 15, 2017 for 2016. An extension of time to file of up to 6 months may be requested This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2016. Contact our office for additional information and assistance filing the form or requesting an extension.
April 18 – Individual Tax Returns Due
File a 2016 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.
Caution: The extension gives you until October 16, 2017 to file your 2016 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 18 due date.
Note: the normal April 15 due date is a Saturday, and the following Monday is a federal holiday in the District of Columbia, so for almost all individuals their 2016 Form 1040 returns aren’t due until the next business day, which is Tuesday, April 18.
April 18 – Household Employer Return Due
If you paid cash wages of $2,000 or more in 2016 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 18 – Estimated Tax Payment Due (Individuals)
It’s time to make your first quarter estimated tax installment payment for the 2017 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:
- Payroll withholding for employees;
- Pension withholding for retirees; and
- Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.
When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:
- The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
- The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.
Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.
CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.
April 18 – Last Day to Make Contributions
Last day to make contributions to Traditional and Roth IRAs for tax year 2016.
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REMINDER: April 18, 2017 is the due date to file your return(s), pay any taxes owed, or file for a six-month extension. It is important to know that with this extension you will end up paying the tax you estimate to be due.
In addition, this deadline also applies to the following:
- Tax year 2016 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
- Tax year 2016 contributions to a Roth or traditional IRA – April 18 is the last day contributions for 2016 can be made to either a Roth or traditional IRA, even if an extension is filed.
- Individual estimated tax payments for the first quarter of 2017 – Taxpayers, especially those who have filed for an extension to file their 2016 return, are cautioned that the first installment of the 2017 estimated taxes are due on April 18. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. If the refund won’t be enough to fully cover the April 18 installment, you may need to make a payment with the April 18 voucher. Please call this office for any questions.
- Individual refund claims for tax year 2013 – The regular three-year statute of limitations expires on April 18 for the 2013 tax return. Thus, no refund will be granted for a 2013 original or amended return that is filed after April 18. Caution: The statute does not apply to balances due for unfiled 2013 returns.
If Dagley & Co. is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 18 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 18 deadline, then let the office know right away so that an extension request, and 2017 estimated tax vouchers if needed, may be prepared.
If your returns have not yet been completed, please call Dagley & Co. right away so that we can schedule an appointment and/or file an extension if necessary.
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Married? Thinking about NOT filing a joint return with your spouse? Most likely, you will utilize the ‘married filing separate’, or MFS, filing status. With this, you must be aware that there are special tax codes involved that married individuals CANNOT benefit by filing as MFS. Dagley & Co. describes some of the most frequent issues we’ve encountered when making the choice of the MFS filing status. (Please note, all dollar amounts are those for 2017)
Joint & Several Liability – When married taxpayers file joint returns, both spouses are responsible for the tax on that return. What this means is that one spouse may be held liable for all the tax due on a return, even if the other spouse earned all the income on that return. In some marriages, this becomes an issue and causes the spouses to decide to file separately. In other cases, especially second marriages, the couple may want to keep their finances separate. Unless all the income, exemptions, credits and deductions are divided equally, which usually happens in community property states, this generally causes the incomes to be distorted and could easily push one of the spouses into a higher tax bracket and create a greater combined tax than filing jointly. Being in a separate property state, where each spouse claims their own earnings, can also create an uneven allocation of income and a higher tax bracket for one of the spouses.
Exemptions – Taxpayers are allowed a $4,050 tax exemption for each of their dependents. However, the $4,050 allowance cannot be divided between the MFS filers, so only one of the filers can claim a dependent’s exemption, and where there are multiple dependents, the spouses would need to allocate the exemptions between them.
Itemizing Deductions – To prevent taxpayers from filing MFS and one spouse taking advantage of itemized deductions and the other utilizing the standard deduction, the tax regulations require both to itemize if one of them does.
Social Security Income – When filing a joint return, Social Security (SS) income is not taxable until the modified AGI (MAGI) – which is regular AGI (without Social Security income) plus 50% of the couple’s Social Security income plus tax-exempt interest income and plus certain other infrequently encountered additions – exceeds a taxable threshold of $32,000. However, for married taxpayers who have lived together at any time during the year and are filing married separate, the threshold is zero, generally making more of the Social Security income taxable.
Section 179 Deduction – Businesses can elect to expense, instead of depreciate, up to $510,000 of business purchases, generally including equipment, certain qualified leasehold property and off-the-shelf computer software. The $510,000 cap is reduced by $1 for every $1 that the qualifying purchases exceed $2,030,000 for the year. Married taxpayers are treated as one taxpayer for purposes of the Section 179 expense limit. Thus, they generally must split the limit equally unless they can agree upon and elect an unequal split.
Special Passive Loss Allowance – Passive losses are generally losses from business and rental activities in which a taxpayer does not materially participate. Those losses are not allowed except to offset income from other passive activities. Rental property is an example of a passive activity, and for lower-income taxpayers, a special allowance permits taxpayers who are actively involved in the rental activity to currently deduct a loss of up to $25,000 if their AGI does not exceed $100,000. That $25,000 special loss allowance phases out by 50 cents for each $1 of AGI over $100,000 and is completely eliminated when the AGI reaches $150,000. When filing separately, this special allowance is not allowed unless the spouses live apart the entire year, and then the allowance is reduced to $12,500 each.
Traditional IRA Deduction Phase-Out – If a married taxpayer filing jointly is participating in a qualified employer pension plan, the deductibility of a traditional IRA contribution is phased out ratably for an AGI between $99,000 and $119,000. If the taxpayers file married separate, the phase-out begins at $0 if the taxpayer participates in their employer’s plan, and when the AGI reaches $10,000, no traditional IRA deduction is allowed. So little, if any, IRA deduction will be available to such an MFS filer.
Roth IRA Contribution Phase-Out – Taxpayers may choose to contribute to a non-deductible Roth IRA. However, Roth IRA contributions are ratably phased out for higher-income married filing jointly taxpayers with an AGI between $186,000 and $196,000. For a married taxpayer filing MFS status, that AGI phase-out range drops to $0 through $9,999, virtually eliminating the possibility of a Roth contribution.
Coverdell Education Accounts – Taxpayers are allowed to contribute up to $2,000 per beneficiary to a Coverdell education savings account annually. However for joint filers, the amount that can be contributed ratably phases out for AGIs between $190,000 and $220,000. For married filing separate taxpayers, the phase-out is half that amount, from $95,000 to $110,000.
Education Tax Credits – Taxpayers are allowed a tax credit, called the American Opportunity Tax Credit, of up to $2,500 per family member enrolled at least half-time in college for the cost of tuition and qualified expenses. This credit phases out ratably for higher-income married taxpayers filing jointly with an AGI between $160,000 and $180,000.
There is a second higher-education credit called the Lifetime Learning Credit, which provides a credit of up to $2,000 per family. This credit also phases out ratably for higher-income married taxpayers filing jointly with an AGI between $112,000 and $132,000.
However, neither credit is allowed for married filing separate taxpayers.
Higher Education Interest – Taxpayers can take a deduction of up to $2,500 for student loan interest paid on higher-education loans. Like other benefits, it is phased out for higher-income married taxpayers filing jointly, in this instance when the AGI is between $135,000 and $165,000. It is not allowed at all for taxpayers filing as married separate.
Education Exclusion For U.S. Savings Bond Interest – Although not frequently encountered, interest from certain U.S. Savings Bonds can be excluded if used to pay higher-education expenses for the taxpayers and their dependents. The exclusion phases out for married taxpayers with an AGI between $117,250 and $147,250. This deduction is not allowed at all when filing married separate.
Premium Tax Credit – For married taxpayers who qualify for the PTC (health insurance subsidy) under Obamacare, if they file married separate, they may be required to repay the subsidy.
Earned Income Tax Credit – This is a refundable tax credit that rewards lower-income taxpayers for working and can be as much $6,318 for families with three or more qualifying children. Taxpayers filing as married separate are not qualified for this credit.
Child Care Credit – If both spouses work and incur child care expenses, they qualify for the child care credit. However, for those married filing separate, the credit is not allowed.
Halved Deductions & Credits – Many of the deductions and credits allowed to a married couple filing jointly are cut in half for the married filing separate filing status. They include:
- Standard Deduction
- Standard Deduction Phase-Out
- Alternative Minimum Tax Exemptions
- Alternative Minimum Tax Exemptions Phase-Outs
- Child Tax Credit Phase-Out
Head of Household Filing Status – Where a married couple is not filing jointly, one or both spouses may qualify for the more beneficial Head of Household (HH) filing status rather than having to file using the MFS status. A married individual may use the HH status if they lived apart from their spouse for at least the last six months of the year and paid more than one-half of the cost of maintaining his or her home as a principal place of abode for more than one-half the year of a child, stepchild or eligible foster child for whom the taxpayer may claim a dependency exemption. (A non-dependent child only qualifies if the custodial parent gave written consent to allow the dependency to the non-custodial parent or if the non-custodial parent has the right to claim the dependency under a pre-’85 divorce agreement.)
As you can see, there are a significant number of issues that need to be considered when making the decision to use the married filing separate status. And these are not all of them, but only the more significant ones. The filing status decision should not be made nonchalantly, as it can have significant impact on your taxes. Please contact Dagley & Co. for assistance in making that crucial decision.
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Each year, the IRS publishes its list of the “dirty dozen” tax scams. This list is a variety of common scams that taxpayers may encounter anytime. Don’t fall prey!
Urgent appeals for aid – whether in person, over the phone, by mail, via e-mail, on a website, or through a social networking site – may not be on the up-and-up. Fraudsters pop up after natural disasters such as earthquakes and floods to try to coax people into making donations that will go into the fraudsters’ pockets – not to help victims of the disaster.
Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid the swindlers who are trying to take advantage of your generosity. Here are tips to help make sure that your charitable contributions actually go to the cause that you support:
- Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
- Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don’t get clear answers – or if you don’t like the answers you get – consider donating to a different organization.
- Don’t give out personal or financial information — such as your credit card or bank account number – unless you know for sure that the charity is reputable.
- Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
- Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: Once you send it, you can’t get it back.
- If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
- Check out the charity’s reputation using the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Navigator, or Charity Watch.
Remember that, to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary, or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state, or local government, qualifying veterans’ or fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs, and homeowner’s associations, as well as gifts to individuals, cannot be deducted.
To claim a cash contribution, you must be able to document that contribution with a bank record, receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization, the date of the contribution, and the amount of the contribution. Valid types of bank records include canceled checks, bank or credit union statements, and credit card statements. In addition, to deduct a contribution of $250 or more, you must have certain payroll deduction records or an acknowledgment of your contribution from the qualified organization.
Be aware that, to claim a charitable contribution, you must also itemize your deductions. It may also be beneficial for you to group your deductions in a single year and then to skip deductions in the next year. Please contact Dagley & Co. if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.
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Last week, on March 6th, the House Republicans unveiled their draft legislation that would repeal and replace the Affordable Care Act (ACA). This plan would ultimately continue the ACA’s premium tax credit through 2019 and then replace it in 2020. Then, a new credit for individuals without government insurance and those who are not offered insurance by their employer will be available.
Additional details are provided below. Dagley & Co. wants you to keep in mind that the legislation is only a draft legislation and is subject to changes.
Repeal of the Individual Mandate
Background: Under the ACA, individuals are generally required to have ACA-compliant health insurance or face a “shared responsibility payment” (penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.
GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.
Repeal of the Employer Mandate
Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.
GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.
Recapture and Repeal of the Premium Tax Credit
Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.
GOP Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.
Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.
GOP Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.
Refundable Tax Credit for Health Insurance
Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the GOP Legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and un-subsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.
The credit is determined monthly and ranges from $2,000 for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.
Health Savings Accounts
Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, non-qualified distributions are taxable and generally subject to a 20% penalty.
GOP Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:
- Allow both spouses to make catch-up contributions (applies to those age 55 through 64) beginning in 2018.
- Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently only expenses incurred after the HSA is established qualify).
- Lower the penalty for non-qualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).
Medical Deduction Income Limitation
Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.
GOP Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).
Repeal of Net Investment Income Tax
Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 and $250,000 for married taxpayers filing jointly.
GOP Legislation: The new legislation would repeal this tax after 2017.
Repeal on FSA Contribution Limits
Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.
GOP Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.
Repeal of Increased Medicare Tax
Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 or $250,000 for married couples filing jointly.
GOP Legislation: The new legislation would repeal this surtax beginning in 2018.
- Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, individuals will need to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.
- Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.
- Small Business Health Insurance Tax Credit – Repealed after 2019
- Medical Device Tax – Repealed after 2017
- Tanning Tax – Repealed after 2018
- Over-the-Counter Medication Tax – Repealed after 2017
This is a proposed law change, and it may not ultimately turn out as described here. If you have any questions, please give Dagley & Co. a call.
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Have not yet filed your 2013 federal tax return? If not, you need to act quickly because your return must be filed by April 18, 2017. Otherwise, you forfeit your refund, and the money becomes the property of the U.S. Treasury.
The IRS estimates that more than 1 million taxpayers have not filed their 2013 tax returns and that more than $1 billion of unclaimed refunds are available for those taxpayers. The IRS estimates that these taxpayers will have an average refund of $763.
By failing to file a return, people stand to lose more than just refunds for taxes withheld or paid during 2013. In addition, many low- and moderate-income workers did not claim the Earned Income Tax Credit (EITC), which helps individuals and families with incomes below certain thresholds. For unmarried individuals in 2013, these thresholds were $46,227 for those with three or more children, $43,038 for those with two children, $37,870 for those with one child, and $14,340 for those with no children. Each amount is $5,340 more for married joint filers. In addition, parents who are eligible to claim the refundable portion of the child tax credit and the American Opportunity Tax Credit (education tax credit) will forfeit those benefits if they don’t file a return.
When filing a 2013 return, the law requires that the return be properly addressed, mailed and postmarked by April 18th. There is no late-filing penalty for those who qualify for a refund.
As a reminder, taxpayers seeking a 2013 refund should know that their checks will be held if they have not also filed tax returns for 2011 and 2012. In addition, their refunds will first be applied to any amounts that they still owe to the IRS and may be used to offset unpaid child support or past-due federal debts caused by student loans, repayment of unemployment compensation and state taxes owed.
Contact Dagley & Co. with any questions, or make your tax appointment today.
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Many people do not realize that education credits are not only available for your child’s tuition. Instead, they are also available for you, your spouse, or your dependents. Even if you attend school part-time, these credits may still be available.
There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary post-secondary institution that can participate in the U.S. Department of Education’s student aid programs.
The credits phase out for higher-income taxpayers who are married filing jointly (MFJ) or who are unmarried. Those who are married filing separately (MFS) do not qualify for either credit.
The following table provides the qualifications for both credits:
QUALIFICATIONS AOTC LLC Allowance Period First 4 years of post-secondary education Any post-secondary education for any number of years Enrollment Must be considered at least a half-time student by the educational institution Not required to be enrolled at least half-time Program Type Must be pursuing a program leading to a degree or another recognized educational credential Not required to be enrolled for the purpose of obtaining a degree or other credential Credit Applied Per student Per family Credit Amount 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses 20% of up to $10,000 in qualified expenses Qualified Expenses Qualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendance Qualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution High Income Phase-out Based upon filing status and adjusted gross income (inflation-adjusted annually; 2017 amounts shown) MFJ: $160,000 to $180,000MFS: No credit allowedUnmarried: $80,000 to $90,000 MFJ: $112,000 to $132,00MFS: No credit allowedUnmarried: $56,000 to $66,000 Refundable* Partially; 40% of the credit is treated as refundable No
*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.
Many individuals who both work and attend school can be enrolled less than halftime and still qualify for the LLC.
Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses. Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education; the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.
Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent); this includes the information necessary to complete the IRS form and claim the credit. Unless the IRS has exempted the educational institution from having to file a 1098-T, the law requires the taxpayer to have this 1098-T in hand to claim either of the credits.
If you have questions about how this these education tax credit provisions apply to you, please give Dagley & Co. a call.
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Did you know, direct deposit is the quickest way to obtain your refund? At Dagley & Co., we don’t recommend waiting around for your paper check in the mail. We’ve broke down the crucial info to be aware of when it comes to finally receiving your hard-earned tax refund:
- Speed—When combining e-file with direct deposit, the IRS will likely issue your refund in no more than 21 days.
- Security—Direct Deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as un-deliverable mail.
Direct deposit eliminates un-deliverable mail and is also the best way to guard against having a tax refund check stolen.
- Easy—Simply provide this office with your bank routing number and account number when we prepare your return and you’ll receive your refund far more quickly than you would by check.
- Convenience— The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
- Eligible Financial Accounts – You can direct your refund to any of your checking or savings accounts with a U.S. financial institution as long as your financial institution accepts direct deposits for that type of account and you provide valid routing and account numbers. Examples of savings accounts include: passbook savings, individual development accounts, individual retirement arrangements, health savings accounts, Archer MSAs, and Coverdell education savings accounts.
- Multiple Options—You can deposit your refund into up to three financial accounts that are in your name or your spouse’s name if it is a joint account. You can’t have part of the refund paid by paper check and part by Direct Deposit. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions. Check with your bank or other financial institution to make sure your Direct Deposit will be accepted.
- Deposit Can’t Be to a Third Party’s Bank Account—To protect taxpayers from scammers, direct deposit tax refunds can only be deposited into an account or accounts owned by the taxpayer. Therefore, only provide your own account information and not account information belonging to a third party.
- Fund Your IRA—You can even direct a refund into your IRA or myRA account.
To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Be sure to have these numbers available at your appointment.
For more information regarding direct deposit of your tax refund and the split refund option, Dagley & Co. would be happy to discuss your options with you at your tax appointment.
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