Tax Tips
TAX SAVING CREDITS
- Child Care Credit: The Child Care Credit is given to a taxpayer who incurs child or dependent care expenses which enable the taxpayer to work. This credit is non-refundable, but can be for an amount as high as $6,000.
- Foreign Tax Credit: The Foreign Tax Credit reduces US taxes by the amount of foreign taxes paid. This credit is non-refundable.
- American Opportunity Credit: The American Opportunity Credit is for qualified education expenses paid for the taxpayer, the taxpayer’s spouse, and for dependents. This credit is non-refundable and can be for as much as $1,650 per child.
- Lifetime Learning Education Credit: The Lifetime Learning Credit is for qualified education expenses paid for the taxpayer, the taxpayer’s spouse, and for dependents. This credit is non-refundable and can be for as much as $2,000 per year.
- Child Credit: Each qualifying child enables the taxpayer to claim the Child Tax Credit . This credit is partially refundable and is for an amount of $1,000 per child.
- Earned Income Credit: Certain taxpayers whose income falls within specific limits can be eligible to claim the Earned Income Credit. This credit is fully refundable and can exceed $4,500.
- Retirement Saver’s Credit: The Retirement Saver’s Credit encourages retirement savings by allowing a credit based upon a percentage of amounts contributed to an IRA or retirement plan. This credit is non-refundable, but can be for an amount as high as $2,000.
NON-TAXABLE INCOME ITEMS
- Life insurance proceeds
- IRA and pension rollovers
- Most inheritances and bequests
- Most gifts
- Federal income tax refunds
- State income tax refunds if you took the standard deduction on the prior year’s 1040
- Gain on the sale of your personal residence of up to $500,000 if all requirements are met
- Roth IRA qualified distributions
- Interest from municipal bonds
- Workers’ compensation payments
- Disability payments if you paid the premiums on the policy
- Damages for personal physical injuries (damages for emotional distress are generally taxable)
- Health and accident benefits
- Some scholarships and fellowships
- Most foster care payments
- Social security benefits in some situations
- Welfare benefits
- Child support payments
- Certain disaster relief payments
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
COMMON IRS RED FLAGS
- Math errors
- Returns that are filed without the necessary supporting tax return schedules
- Unrealistic figures (such as frequent occurrence of rounded numbers)
- Major, not easily explainable, changes in comparison with prior tax returns
- Certain occupations where payments are commonly made in cash (for example hairdressers)
- Home office expenses shown on Form 8829
- Interest or dividend income that does not agree with 1099 amounts submitted to the IRS
- High mortgage interest in relationship to income
- Travel and entertainment expenses that exceed the industry norm
- High damage or theft loss deductions
- Low S Corporation shareholder salaries in relation to other distributions
- Business losses several years in a row
- Deductions for “independent contractors” (versus employees) on business returns
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
PERSONAL RESIDENCE TAX TIPS
- A tax-free gain of up to $250,000 (single) or $500,000 (married filing jointly) can be made on the sale of a primary residence.
- To qualify for the tax-free gain the owner of the property must live in the property for two out of the last five years.
- Where the “two out of five” criteria has not been met, a modified exclusion may still be taken under certain circumstances.
- A taxpayer can take advantage of this tax break as multiple times, as they qualify.
- A first-time homebuyer can use up to $10,000 from a Roth or regular IRA without paying the early withdrawal penalty.
- Interest on a home mortgage loan of up to $1,000,000 and interest on a home equity loan of up to $100,000 is tax deductible.
- Mortgage interest can be deducted on a second residence in addition to the taxpayer’s primary residence.
- Property tax is a deductible expense for any real estate.
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
RENTAL REAL ESTATE TAX TIPS
- Expenses related to the rental property can be deducted.
- Expenses on a vacant rental property can be deducted as long as tenants are actively being sought.
- Depreciation should be taken on rental property. The IRS considers depreciation to have been taken on your rental whether or not you recorded the depreciation on your tax return. When the property is sold gain needs to be recognized to the extent of any depreciation.
- Rental losses can offset certain types of income. Up to $25,000 of losses can be offset against other taxpayer income where the taxpayer’s gross income is less than $150,000 and the taxpayer is actively involved in the management of the rental property.
- An active real estate professional can take unlimited losses. A person is considered an active real estate professional if 750 hours and more than one half of his or her job or business related time is spent on real estate.
- Planning for the year-end can defer taxes for an entire year. Where possible the taxpayer should pay expenses before the end of the year and arrange for rents to be collected at the beginning of the next year.
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
Reffue, Pas, Jacobson, Knox & Koster, LLP
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