Job search expenses can be deducted as miscellaneous itemized tax deductions if you look for a job in the same field at the same level as the one you left. The job search expenses are deductible even if you don't get the job. You can deduct job-seeking expenses as long as the amount of all miscellaneous itemized tax deductions is more than 2% of your adjusted gross income (AGI).
To figure your tax deduction, subtract 2% of your AGI from the total amount of these expenses.
Job search expense deductions are also subject to the overall limitation on itemized deductions based on income threshold amounts.
Allowable Job Search Tax Deductions
You may be eligible for the following deductions while you're searching for a job.
Employment agency fees: If in a later year your new employer repays your agency fees, you must include the amount in your income up to the amount of the deduction you claimed earlier. If your employer pays fees directly to the agency, you don't have to include them in your income.
Resume preparation: typing and printing, postage, long-distance charges, advertising, and photographs required for your resume.
Travel: airfare, mileage (some automobile expenses have been approved), meals (based on either actual expenses or standard federal per diem rates) and lodging (actual expenses only).
Qualifications: To qualify, your job search must be for a job in your current, or most recent, trade or business and should be at a similar level of responsibility with duties similar to those of your most recent job.
If you haven't held a job in that trade or business for an extended length of time, your job search will be considered for a new trade or business, and your deductions may not be allowed.
If you held a college internship or valid job while in college and your search is for a job in the same trade or business, you will be able to deduct job search expenses.
If you're just out of school and had no paying jobs while in school that were related to your trade or business, your deductions won't be allowed.
Tuesday, January 12, 2010
HSAs and Their Tax Consequences
HSAs
An HSA is a savings account used to pay for out-of-pocket medical expenses. Contributions to your HSA are either tax-deductible (similar to deductible IRA contributions) or made pre-tax if the HSA is offered through an employer's benefit plan (similar to 401(k) contributions). Earnings in the account are not taxed, and distributions from the account that are used to pay for qualified medical expenses are tax-free. To be eligible to contribute to an HSA, you must have a high-deductible health plan, or HDHP. The HDHP:
must have a high deductible; for 2009 the minimum deductibles are $1,150 for self-only HDHP coverage and $2,300 for family coverage.
must not pay medical benefits until the deductible is satisfied. For example, a medical plan that pays for prescription drugs or office visits without regard to the deductible is not a qualifying HDHP.
There are, however, exceptions for preventative or "wellness" benefits, such as basic health check-ups, maintenance drugs, cancer screenings, etc.
Other eligibility requirements:
You must not be a dependent on another person's return, you may not have any other type of health insurance coverage, and you may not be enrolled in Medicare. Certain "permitted coverage" is allowed, including dental, vision and long-term care insurance. There is no earned income requirement.
If you meet all of the requirements, you may contribute up to $3,000 ($5,950 if you have family HDHP coverage) to your HSA. If you are at least age 55, you may contribute an additional $1,000. You may use your HSA funds tax-free to pay for out-of-pocket medical expenses including doctors visits, prescriptions and over-the-counter medicines, laboratory tests and hospital stays. But if you use HSA funds for some other purpose, the distribution is subject to tax at ordinary rates and, if you are younger than 65, a 10% penalty. The HSA/HDHP combination is not for everybody because of the high deductible. If you are taking several prescription medications or if you expect to visit the doctor several times, you would have to pay a great deal out-of-pocket until your HDHP deductible is met. Or, you may not have enough to be able to fund an HSA. But if your medical expenses are relatively low and you are able to contribute consistently to an HSA, consider all of these advantages in addition to the tax advantages:
HSA funds are not "use or lose," unlike flexible spending accounts (FSAs). You may keep the funds in the account as long as you wish and use them only when you need to.
Unlike Roth IRAs, there is no waiting period before you can begin taking tax-free distributions.
You may be eligible for a 1-time rollover of IRA or unused FSA funds to help fund your HSA.
HDHP premiums are often considerably lower than traditional health plan premiums. The lower premiums can mean you have additional funds to handle the HDHP deductible and fund the HSA.
Employers may fund some or all of the HSA for you.
Employer contributions are tax-exempt.
FSAs
Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. A health FSA allows employees to be reimbursed for qualified medical expenses, including co-pays, eyeglasses and prescription and over-the-counter medicine. FSAs are usually funded through voluntary salary reduction agreements with your employer.
You may enjoy several benefits from having an FSA.
Contributions made by your employer can be excluded from your gross income.
No employment or federal income taxes are deducted from the contributions.
Withdrawals may be tax-free if you pay qualified medical expenses.
You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.
You contribute to your FSA by electing an amount to be withheld from your pay by your employer. At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change the amount you designate at the beginning of the plan year only if a specified event occurs.
Examples include marriage, divorce, birth or death of a child, loss of coverage under other insurance, and a change in employment status. You aren't taxed on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. Usually, the amount of money you contribute that isn't spent by the end the plan year is forfeited. In other words, the money is use-or-lose. But some plans contain a provision that allows you an additional 2½ months to use the money. Be sure to base your contribution on a reasonable estimate of the qualifying expenses you expect to have during the year.
Because of the tax savings, an FSA may be advantageous even if you have a small amount of money you'll have to forfeit. You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage.
Dependent Care FSAs
FSAs can also be established to pay for dependent (usually child) care. The amount you can set aside for dependent care generally is limited to $5,000 a year. Although you receive a tax advantage with a health FSAs, dependent care FSAs are a tradeoff between pre-tax deductions and tax credits, such as the Child Care Credit. Generally, the higher your income, the lower the Child Care Credit you'll receive due to income phaseouts. Check with your tax professional to see which is more beneficial to your situation.
An HSA is a savings account used to pay for out-of-pocket medical expenses. Contributions to your HSA are either tax-deductible (similar to deductible IRA contributions) or made pre-tax if the HSA is offered through an employer's benefit plan (similar to 401(k) contributions). Earnings in the account are not taxed, and distributions from the account that are used to pay for qualified medical expenses are tax-free. To be eligible to contribute to an HSA, you must have a high-deductible health plan, or HDHP. The HDHP:
must have a high deductible; for 2009 the minimum deductibles are $1,150 for self-only HDHP coverage and $2,300 for family coverage.
must not pay medical benefits until the deductible is satisfied. For example, a medical plan that pays for prescription drugs or office visits without regard to the deductible is not a qualifying HDHP.
There are, however, exceptions for preventative or "wellness" benefits, such as basic health check-ups, maintenance drugs, cancer screenings, etc.
Other eligibility requirements:
You must not be a dependent on another person's return, you may not have any other type of health insurance coverage, and you may not be enrolled in Medicare. Certain "permitted coverage" is allowed, including dental, vision and long-term care insurance. There is no earned income requirement.
If you meet all of the requirements, you may contribute up to $3,000 ($5,950 if you have family HDHP coverage) to your HSA. If you are at least age 55, you may contribute an additional $1,000. You may use your HSA funds tax-free to pay for out-of-pocket medical expenses including doctors visits, prescriptions and over-the-counter medicines, laboratory tests and hospital stays. But if you use HSA funds for some other purpose, the distribution is subject to tax at ordinary rates and, if you are younger than 65, a 10% penalty. The HSA/HDHP combination is not for everybody because of the high deductible. If you are taking several prescription medications or if you expect to visit the doctor several times, you would have to pay a great deal out-of-pocket until your HDHP deductible is met. Or, you may not have enough to be able to fund an HSA. But if your medical expenses are relatively low and you are able to contribute consistently to an HSA, consider all of these advantages in addition to the tax advantages:
HSA funds are not "use or lose," unlike flexible spending accounts (FSAs). You may keep the funds in the account as long as you wish and use them only when you need to.
Unlike Roth IRAs, there is no waiting period before you can begin taking tax-free distributions.
You may be eligible for a 1-time rollover of IRA or unused FSA funds to help fund your HSA.
HDHP premiums are often considerably lower than traditional health plan premiums. The lower premiums can mean you have additional funds to handle the HDHP deductible and fund the HSA.
Employers may fund some or all of the HSA for you.
Employer contributions are tax-exempt.
FSAs
Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. A health FSA allows employees to be reimbursed for qualified medical expenses, including co-pays, eyeglasses and prescription and over-the-counter medicine. FSAs are usually funded through voluntary salary reduction agreements with your employer.
You may enjoy several benefits from having an FSA.
Contributions made by your employer can be excluded from your gross income.
No employment or federal income taxes are deducted from the contributions.
Withdrawals may be tax-free if you pay qualified medical expenses.
You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.
You contribute to your FSA by electing an amount to be withheld from your pay by your employer. At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change the amount you designate at the beginning of the plan year only if a specified event occurs.
Examples include marriage, divorce, birth or death of a child, loss of coverage under other insurance, and a change in employment status. You aren't taxed on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. Usually, the amount of money you contribute that isn't spent by the end the plan year is forfeited. In other words, the money is use-or-lose. But some plans contain a provision that allows you an additional 2½ months to use the money. Be sure to base your contribution on a reasonable estimate of the qualifying expenses you expect to have during the year.
Because of the tax savings, an FSA may be advantageous even if you have a small amount of money you'll have to forfeit. You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage.
Dependent Care FSAs
FSAs can also be established to pay for dependent (usually child) care. The amount you can set aside for dependent care generally is limited to $5,000 a year. Although you receive a tax advantage with a health FSAs, dependent care FSAs are a tradeoff between pre-tax deductions and tax credits, such as the Child Care Credit. Generally, the higher your income, the lower the Child Care Credit you'll receive due to income phaseouts. Check with your tax professional to see which is more beneficial to your situation.
What Are Estimated Tax Payments
What are estimated taxes?
You're required to pay estimated tax if you receive income from which tax isn't withheld, including income from self-employment, investments and alimony, and your tax (after subtracting credits and withholding) is expected to be $1,000 or more. Here are a few good things to know about estimated tax payments:
The payments are due April 15, June 15, Sept. 15 and Jan. 15.
If you fail to pay enough on each installment due date, you may be subject to the penalty for underpayment of estimated tax even if your return shows a refund.
If you pay in as much as your tax liability for the previous year, you can pay your balance due without penalty when you file your return, regardless of the amount. See below for an exception if your prior-year income was high.
How much do I pay?
As part of your year-end planning, compare your projected year-end tax payments with your expected tax liability. If your payments are expected to be less than 90% of current-year tax, you generally will have to increase your withholding or make estimated tax payments. However, if your payments are made timely and will be at least as much as your prior-year tax liability, you're probably safe from the penalty. But if your prior-year adjusted gross income was more than $150,000 ($75,000 if Married Filing Separately), you'll have to pay 110% of your prior year tax liability to avoid the penalty. Figure your estimated tax with Form 1040-ES - Estimated Tax for Individuals.
Withholding Taxes
Tax withheld from your paycheck is considered to be paid evenly throughout the year, which means extra tax withheld late in the year can make up for earlier underpayments. If you have a job, you can file a new Form W-4 with your employer to withhold extra amounts from the final paychecks of the year so you're not subject to the penalty when you file your return.
Underpayment of Estimated Taxes
If you do not pay enough estimated tax and are subject to the penalty, don't automatically pay it. There are several exceptions to the penalty. Information can be found in the instructions for Form 2210.
You're required to pay estimated tax if you receive income from which tax isn't withheld, including income from self-employment, investments and alimony, and your tax (after subtracting credits and withholding) is expected to be $1,000 or more. Here are a few good things to know about estimated tax payments:
The payments are due April 15, June 15, Sept. 15 and Jan. 15.
If you fail to pay enough on each installment due date, you may be subject to the penalty for underpayment of estimated tax even if your return shows a refund.
If you pay in as much as your tax liability for the previous year, you can pay your balance due without penalty when you file your return, regardless of the amount. See below for an exception if your prior-year income was high.
How much do I pay?
As part of your year-end planning, compare your projected year-end tax payments with your expected tax liability. If your payments are expected to be less than 90% of current-year tax, you generally will have to increase your withholding or make estimated tax payments. However, if your payments are made timely and will be at least as much as your prior-year tax liability, you're probably safe from the penalty. But if your prior-year adjusted gross income was more than $150,000 ($75,000 if Married Filing Separately), you'll have to pay 110% of your prior year tax liability to avoid the penalty. Figure your estimated tax with Form 1040-ES - Estimated Tax for Individuals.
Withholding Taxes
Tax withheld from your paycheck is considered to be paid evenly throughout the year, which means extra tax withheld late in the year can make up for earlier underpayments. If you have a job, you can file a new Form W-4 with your employer to withhold extra amounts from the final paychecks of the year so you're not subject to the penalty when you file your return.
Underpayment of Estimated Taxes
If you do not pay enough estimated tax and are subject to the penalty, don't automatically pay it. There are several exceptions to the penalty. Information can be found in the instructions for Form 2210.
Kiddie Tax for Dependents - 18 and Under
The Kiddie Tax rules provide that investment income in excess of $1,900 (for 2009) will be taxed at the higher of the parent's rate or the child's rate. For this purpose, investment income is income other than earned income. However, income splitting can still save your family money.
There are 3 key issues to keep in mind when deciding how much investment income you want to give your child:
The Kiddie Tax applies to unmarried children younger than 18, to children age 18 whose earned income is not more than half their support and to children older than 18but younger than age 24 who are full-time students and whose earned income is not more than half their support.
Your child's earned income from jobs or self-employment is not subject to these rules.
The Kiddie Tax affects only unearned income in excess of an annual threshold ($1,900 for 2009).
In other words, your child can have up to $33,950 of taxable income for 2009 (earned and/or unearned) and pay tax at the 10% or 15% (or 0% on long-term capital gains and qualified dividends — this rate is 5% beginning after 2010) rates.
Investment Options
Because the Kiddie Tax disappears after a child turns 24, consider giving your kids investments that defer income until the Kiddie Tax no longer applies. U.S. savings bonds can be a good choice because income can be deferred until the bond is cashed. If the bond is cashed after the Kiddie Tax no longer applies, the interest that accrued up to that time is taxed at the child's own rate.
However, it may be better to buy the bonds in your name and cash them when your child begins college. If your income is below the limit for the year you cash in the bonds, you can exclude the interest if the amount you redeem is not more than the qualified education expenses for the year.
Stocks are another way around the Kiddie Tax. As the stock appreciates, there's no tax on the paper profit. If the stock is sold after the Kiddie Tax no longer applies, the profit is taxed at the child's rate.
Note: if a child invests in stock mutual funds, rather than individual stocks, the fund may pay out capital-gain distributions each year based on gains recognized by the fund. Such income would be subject to the Kiddie Tax if the child's unearned income exceeds $1,900 for 2009.
For income splitting to work, the child must actually own the assets that generate the income. If you want your son to pay tax at his rate on $1,000 of interest income generated by a $25,000 savings account, you can't simply give him the $1,000. You must give him the $25,000 in the account. Only then will the income it produces be his for tax purposes.
Custodial Accounts
The easiest way to make such a gift to a minor child is to set up a custodial account under your state's Uniform Gift to Minors Act or Uniform Transfer to Minors Act. Banks, savings & loans, credit unions, mutual funds and brokerage firms offer such accounts. All you need is a social security number for the child and a custodian to manage the account until the minor comes of age. You can name yourself custodian, but if you are also the donor and you die before the child reaches maturity, the gift will be considered part of your estate for federal estate-tax purposes.
An important point about custodial accounts is that your gift is irrevocable — you can't get it back. Once the child becomes an adult under your state's law — usually at age 18 or 21 — adult supervision of the account ends and the child can do anything he or she wants with the money.
You don't need a custodial account if you invest the child's money in U.S. savings bonds. Just buy the bonds in the child's name. Don't name yourself co-owner, though, or the income will be taxed to you when the bonds are cashed.
There are 3 key issues to keep in mind when deciding how much investment income you want to give your child:
The Kiddie Tax applies to unmarried children younger than 18, to children age 18 whose earned income is not more than half their support and to children older than 18but younger than age 24 who are full-time students and whose earned income is not more than half their support.
Your child's earned income from jobs or self-employment is not subject to these rules.
The Kiddie Tax affects only unearned income in excess of an annual threshold ($1,900 for 2009).
In other words, your child can have up to $33,950 of taxable income for 2009 (earned and/or unearned) and pay tax at the 10% or 15% (or 0% on long-term capital gains and qualified dividends — this rate is 5% beginning after 2010) rates.
Investment Options
Because the Kiddie Tax disappears after a child turns 24, consider giving your kids investments that defer income until the Kiddie Tax no longer applies. U.S. savings bonds can be a good choice because income can be deferred until the bond is cashed. If the bond is cashed after the Kiddie Tax no longer applies, the interest that accrued up to that time is taxed at the child's own rate.
However, it may be better to buy the bonds in your name and cash them when your child begins college. If your income is below the limit for the year you cash in the bonds, you can exclude the interest if the amount you redeem is not more than the qualified education expenses for the year.
Stocks are another way around the Kiddie Tax. As the stock appreciates, there's no tax on the paper profit. If the stock is sold after the Kiddie Tax no longer applies, the profit is taxed at the child's rate.
Note: if a child invests in stock mutual funds, rather than individual stocks, the fund may pay out capital-gain distributions each year based on gains recognized by the fund. Such income would be subject to the Kiddie Tax if the child's unearned income exceeds $1,900 for 2009.
For income splitting to work, the child must actually own the assets that generate the income. If you want your son to pay tax at his rate on $1,000 of interest income generated by a $25,000 savings account, you can't simply give him the $1,000. You must give him the $25,000 in the account. Only then will the income it produces be his for tax purposes.
Custodial Accounts
The easiest way to make such a gift to a minor child is to set up a custodial account under your state's Uniform Gift to Minors Act or Uniform Transfer to Minors Act. Banks, savings & loans, credit unions, mutual funds and brokerage firms offer such accounts. All you need is a social security number for the child and a custodian to manage the account until the minor comes of age. You can name yourself custodian, but if you are also the donor and you die before the child reaches maturity, the gift will be considered part of your estate for federal estate-tax purposes.
An important point about custodial accounts is that your gift is irrevocable — you can't get it back. Once the child becomes an adult under your state's law — usually at age 18 or 21 — adult supervision of the account ends and the child can do anything he or she wants with the money.
You don't need a custodial account if you invest the child's money in U.S. savings bonds. Just buy the bonds in the child's name. Don't name yourself co-owner, though, or the income will be taxed to you when the bonds are cashed.
American Opportunity Credit and Hope Credit
The American Opportunity Credit is an expanded version of the Hope Credit. Although the American Opportunity Credit generally will be larger than the Hope Credit, the Hope Credit may be larger for students who attend school in a Midwestern disaster area. You can claim the Hope Credit only if you use it for all eligible students; you may not claim both the American Opportunity Credit and the Hope Credit.
Am I eligible?
If you, your spouse, or your dependent child plans to attend college, you can claim the American Opportunity Credit or the Hope Credit if he or she is:
enrolled post-secondary education (in 1 of the first 2 years of post-secondary education — generally the freshman and sophomore years of college for the Hope Credit only; or any of the first 4 years of college for the American Opportunity Credit)
enrolled in a program that leads to a degree, certificate or other recognized educational credential
taking at least half the normal full-time workload for his or her course study during at least one 2009 academic period
free of felony convictions for the possession or sale of illegal substances at the end of 2009
didn't claim a Hope Credit in more than 1 previous tax year. (This rule doesn't apply to the American Opportunity Credit.)
A dependent can claim either of the credits only if the person who is eligible to claim the dependent does not claim an exemption for the dependent. The dependent can't claim a personal exemption on his or her return even if the parent doesn't claim it.
You can't claim either credit if you're married filing separately.
Important: The American opportunity tax credit is not refundable if claimed by an individual who is subject to the kiddie tax.
What are eligible expenses?
Eligible expenses include tuition, as well as fees and expenses for required books and equipment if the fees and expenses are required to be paid to the educational institution as a condition of enrollment or attendance. For the American Opportunity Credit only, eligible expenses include books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance
How much is my credit?
The American Opportunity Credit is equal to 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses, for a maximum credit of $2,500 for each eligible student. Forty percent of the credit is refundable, which means you get that part of the credit even if your tax is reduced to zero. Your credit amount will be reduced if your MAGI is between $80,000 and $90,000 (between $160,000 and $180,000 if Married Filing Jointly). You can't claim the American Opportunity Credit if your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if Married Filing Jointly).
The Hope Credit is equal to 100% of the first $1,200 and 50% of the next $1,200 of qualified expenses, for a maximum credit of $1,800 for each eligible student. Your credit amount will be reduced if your MAGI is between $50,000 and $60,000 (between $100,000 and $120,000 if Married Filing Jointly). You can't claim the Hope Credit if your modified adjusted gross income (MAGI) is $60,000 or more ($120,000 or more if Married Filing Jointly).
Note: For students attending school in a Midwestern disaster area, the Hope Credit is 100% of the first $2,400 and 50% of the next $2,400 of qualified expenses. The maximum credit is $3,600. The MAGI phase-out amounts for the Hope Credit apply.
Credit Tips
The Hope Credit and 60% of the American Opportunity Credit are nonrefundable, so if your credit exceeds your tax, the difference isn't refunded to you.
Either credit can be claimed for eligible expenses you pay for an academic period that begins during the first 3 months of the following tax year. This feature may be especially useful for students whose tuition fees fluctuate from semester to semester.
You can claim either the American Opportunity Credit or Hope Credit for one or more students and the Lifetime Learning Credit for different students, but you can't claim more than one credit for the expenses of the same student. You can claim the Hope Credit only if you choose not to claim the American Opportunity Credit for any student.
Am I eligible?
If you, your spouse, or your dependent child plans to attend college, you can claim the American Opportunity Credit or the Hope Credit if he or she is:
enrolled post-secondary education (in 1 of the first 2 years of post-secondary education — generally the freshman and sophomore years of college for the Hope Credit only; or any of the first 4 years of college for the American Opportunity Credit)
enrolled in a program that leads to a degree, certificate or other recognized educational credential
taking at least half the normal full-time workload for his or her course study during at least one 2009 academic period
free of felony convictions for the possession or sale of illegal substances at the end of 2009
didn't claim a Hope Credit in more than 1 previous tax year. (This rule doesn't apply to the American Opportunity Credit.)
A dependent can claim either of the credits only if the person who is eligible to claim the dependent does not claim an exemption for the dependent. The dependent can't claim a personal exemption on his or her return even if the parent doesn't claim it.
You can't claim either credit if you're married filing separately.
Important: The American opportunity tax credit is not refundable if claimed by an individual who is subject to the kiddie tax.
What are eligible expenses?
Eligible expenses include tuition, as well as fees and expenses for required books and equipment if the fees and expenses are required to be paid to the educational institution as a condition of enrollment or attendance. For the American Opportunity Credit only, eligible expenses include books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance
How much is my credit?
The American Opportunity Credit is equal to 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses, for a maximum credit of $2,500 for each eligible student. Forty percent of the credit is refundable, which means you get that part of the credit even if your tax is reduced to zero. Your credit amount will be reduced if your MAGI is between $80,000 and $90,000 (between $160,000 and $180,000 if Married Filing Jointly). You can't claim the American Opportunity Credit if your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if Married Filing Jointly).
The Hope Credit is equal to 100% of the first $1,200 and 50% of the next $1,200 of qualified expenses, for a maximum credit of $1,800 for each eligible student. Your credit amount will be reduced if your MAGI is between $50,000 and $60,000 (between $100,000 and $120,000 if Married Filing Jointly). You can't claim the Hope Credit if your modified adjusted gross income (MAGI) is $60,000 or more ($120,000 or more if Married Filing Jointly).
Note: For students attending school in a Midwestern disaster area, the Hope Credit is 100% of the first $2,400 and 50% of the next $2,400 of qualified expenses. The maximum credit is $3,600. The MAGI phase-out amounts for the Hope Credit apply.
Credit Tips
The Hope Credit and 60% of the American Opportunity Credit are nonrefundable, so if your credit exceeds your tax, the difference isn't refunded to you.
Either credit can be claimed for eligible expenses you pay for an academic period that begins during the first 3 months of the following tax year. This feature may be especially useful for students whose tuition fees fluctuate from semester to semester.
You can claim either the American Opportunity Credit or Hope Credit for one or more students and the Lifetime Learning Credit for different students, but you can't claim more than one credit for the expenses of the same student. You can claim the Hope Credit only if you choose not to claim the American Opportunity Credit for any student.
Overlooked Credits & Deductions
Overview
Commonly overlooked tax deductions and tax credits include the Earned Income Credit, Child Tax Credit, Saver's Credit, medical expenses, moving expenses, state and local taxes, charitable donations, job expenses and self-employment deductions.
Nearly 4.1 million people fail to claim education tax benefits, including the Hope Credit, Lifetime Learning Credit, Tuition and Fees Deduction, Student Loan Interest Deduction, and the Exclusion for Savings Bond Interest.
File an amended tax return to claim missed deductions and credits within 3 years.
Earned Income Credit (EIC)
The EIC is designed to offset the burden of Social Security taxes for low-income workers. You can claim this tax credit even if you have no tax liability. You may qualify for the EIC if your earned income and adjusted gross income are less than:
$13,440 ($18,440 if Married Filing Jointly) with no qualifying children.
$35,463 ($40,463 if Married Filing Jointly) with 1 qualifying child.
$40,295 ($45,295 if Married Filing Jointly) with 2 qualifying children
$43,279 ($48,279 if Married Filing Jointly) with more than 2 qualifying children.
Child Tax Credit
You can claim $1,000 for each child. The 2009 Child Tax Credit begins to phase out when your AGI is more than these limits:
$75,000 if Single, Head of Household or Qualifying Widow(er)
$110,000 if Married Filing Jointly
$55,000 if Married Filing Separately If your income tax is reduced to zero and your earned income is more than $3,000 (for 2009), you may be eligible to claim the additional Child Tax Credit.
Saver's Credit
If you qualify, you could get a tax credit for up to half of what you contribute to a qualified retirement plan or IRA. Claim the Saver's Credit if you meet all the qualifications:
You're age 18 or older.
You aren't a full-time student.
You aren't claimed as a dependent on someone else's return.
Your AGI doesn't exceed $27,750 ($55,500 if Married Filing Jointly, or $41,625 for Head of Household).
Education Tax Benefits
Even if you don't itemize your tax deductions, you could save money with these education credits and deductions.
American Opportunity Credit or Hope Credit — You can claim either the American Opportunity Credit or the Hope Credit. The American Opportunity Credit is equal to 100% of the first $2,000 and 25% of the next $2,000 per student for tuition and related fees, with a credit maximum of $2,500 per student. It's restricted to the first 4 years of college and can be claimed only 4 times per student. Up to $1,000 of the credit may be refundable. It generally will be advantageous to claim the Hope Credit only if a student is attending an education institution in a Midwestern disaster area. The credit for these students is equal to 100% of the first $2,400 and 50% of the next $2,400 per student for tuition and related fees, with a credit maximum of $3,600 per student. However, if you choose to claim the Hope credit, you must use it for all students and the credit for students not attending a school in a Midwestern disaster area is only 100% of the first $1,200 and 50% of the next $1,200 per student for tuition and related fees, with a credit maximum of $1,800 per student. In addition, the Hope credit can't be used for a student if you've already claimed it for that student more than once.
Lifetime Learning Credit — A credit of 20% of your annual tuition and related fees, with a credit maximum of $2,000 per return. The tax credit may be claimed for an unlimited number of years.
Tuition and Fees Deduction — You can deduct up to $4,000 per student for tuition and fees.
Student Loan Interest Deduction — Deduct up to $2,500 per return for interest paid on student loans.
Exclusion for Savings Bond Interest — Some or all of the interest received from eligible bonds issued after 1989 may be excludable if qualified higher education expenses for the year are at least as much as the proceeds of the redeemed bonds. Note: You can't use the same expenses to claim more than 1 of the above benefits, and other restrictions apply.
Medical Expenses
If you spend more than 7.5% of your adjusted gross income on medical expenses, such as insurance (but not your pre-tax premiums), prescriptions, other out-of-pocket expenses, and mileage to and from medical facilities, then you may deduct the amount that exceeds that figure.
Keep in mind, you must itemize income tax deductions to claim medical deductions.
Moving Expenses
Even if you don't itemize income tax deductions, you could deduct moving-related expenses. Your move must meet the following qualifications:
Your move must be job-related.
Your new job would have increased your commute by more than 50 miles if you hadn't moved.
You must be employed full time for at least 39 weeks during the 12 months after you move. If you're self-employed, the applicable figures are 78 weeks and 24 months, respectively, and at least 39 of the weeks must be in the first 12 months.
Your moving expenses can't be reimbursed by your employer.
State & Local Taxes
If you itemize income tax deductions, you have the option of claiming your state and local sales tax or state and local income tax for the year. Be sure to determine which amount will be larger, because you can't claim both. If you choose to deduct income tax, include your withholding and estimated tax payments for the current year as well as any balance due from a prior year.
If you credited an overpayment from last year's tax return to his year's estimated tax payment, be sure to include that amount too. You can deduct the state or local sales or excise tax on a new motor vehicle purchased after Feb. 16, 2009 and before Jan. 1, 2010.
If you are not itemizing deductions, add this amount to your standard deduction. If you are itemizing deductions and are claiming the deduction for state and local income tax, enter the deduction on Schedule A, line 7. If your adjusted gross income (AGI) is $135,000 or more ($260,000 or more if you are Married Filing Jointly), you can't claim the deduction.
If the purchase price of the motor vehicle is more than $49,500, you can deduct only the tax attributable to the first $49,500 of the purchase price. If you're subject to Alternative Minimum Tax (AMT) and have a state tax refund, it may be better for you to claim the sales tax deduction even if it's smaller than the income tax deduction. If you choose to deduct sales tax, you can deduct either the actual amount you paid or the amount from the table in the Schedule A instructions. You can add to the amount in the table the sales tax you pay on a car as well as other items specified in the instructions.
Charitable Donations
If you itemize income tax deductions, you may deduct your charitable donations. You'll want to keep good records or all your donations.
Money Donations — Receipts are required for all money donations.
Item Donations — Give new or used goods to charity and deduct their fair market value. Special rules apply to donations of vehicles and to donations of appreciated property (property that is worth more than you paid for it).
Volunteering — Deduct 14¢ per mile while driving for charity. You can also deduct other out-of-pocket expenses.
Out-of-pocket Job Expenses
Keep track of job expenses not reimbursed by your employer. You could deduct these costs:
Driving expenses (the non-commuting kind)
Travel expenses
Uniforms
Union dues
Continuing education expenses
Self-employment Tax Deductions
If you're self-employed, you could qualify for additional income tax deductions. If you work out of your home, there are even more opportunities to claim your expenses. Here are a few examples:
Deduct half of your self-employment tax.
The Section 179 Deduction generally allows you to write off up to $250,000 of business property other than real estate purchased in 2009. Higher limits may apply.
If you use a part of your home exclusively and regularly for business, you can deduct the business portion of rent, mortgage interest, real estate taxes, utilities, insurance and repairs.
You can establish a retirement plan that may allow you to make contributions that exceed the amount you can contribute to a traditional IRA or Roth IRA. This deduction is not allowed for self-employment tax purposes.
AMT Credit
If you were subject to the AMT in a prior year and you're not subject to the AMT this year, you may be eligible to claim the minimum tax credit. Up to 50% of the amount carried to 2009 from years before 2007 may be refundable.
Claiming Overpaid Taxes
If you're eligible for any of the above tax credits, the IRS allows you to reclaim your lost money by filing an amended tax return for prior years. However, you generally can file an amended return only for up to the past 3 years.
Commonly overlooked tax deductions and tax credits include the Earned Income Credit, Child Tax Credit, Saver's Credit, medical expenses, moving expenses, state and local taxes, charitable donations, job expenses and self-employment deductions.
Nearly 4.1 million people fail to claim education tax benefits, including the Hope Credit, Lifetime Learning Credit, Tuition and Fees Deduction, Student Loan Interest Deduction, and the Exclusion for Savings Bond Interest.
File an amended tax return to claim missed deductions and credits within 3 years.
Earned Income Credit (EIC)
The EIC is designed to offset the burden of Social Security taxes for low-income workers. You can claim this tax credit even if you have no tax liability. You may qualify for the EIC if your earned income and adjusted gross income are less than:
$13,440 ($18,440 if Married Filing Jointly) with no qualifying children.
$35,463 ($40,463 if Married Filing Jointly) with 1 qualifying child.
$40,295 ($45,295 if Married Filing Jointly) with 2 qualifying children
$43,279 ($48,279 if Married Filing Jointly) with more than 2 qualifying children.
Child Tax Credit
You can claim $1,000 for each child. The 2009 Child Tax Credit begins to phase out when your AGI is more than these limits:
$75,000 if Single, Head of Household or Qualifying Widow(er)
$110,000 if Married Filing Jointly
$55,000 if Married Filing Separately If your income tax is reduced to zero and your earned income is more than $3,000 (for 2009), you may be eligible to claim the additional Child Tax Credit.
Saver's Credit
If you qualify, you could get a tax credit for up to half of what you contribute to a qualified retirement plan or IRA. Claim the Saver's Credit if you meet all the qualifications:
You're age 18 or older.
You aren't a full-time student.
You aren't claimed as a dependent on someone else's return.
Your AGI doesn't exceed $27,750 ($55,500 if Married Filing Jointly, or $41,625 for Head of Household).
Education Tax Benefits
Even if you don't itemize your tax deductions, you could save money with these education credits and deductions.
American Opportunity Credit or Hope Credit — You can claim either the American Opportunity Credit or the Hope Credit. The American Opportunity Credit is equal to 100% of the first $2,000 and 25% of the next $2,000 per student for tuition and related fees, with a credit maximum of $2,500 per student. It's restricted to the first 4 years of college and can be claimed only 4 times per student. Up to $1,000 of the credit may be refundable. It generally will be advantageous to claim the Hope Credit only if a student is attending an education institution in a Midwestern disaster area. The credit for these students is equal to 100% of the first $2,400 and 50% of the next $2,400 per student for tuition and related fees, with a credit maximum of $3,600 per student. However, if you choose to claim the Hope credit, you must use it for all students and the credit for students not attending a school in a Midwestern disaster area is only 100% of the first $1,200 and 50% of the next $1,200 per student for tuition and related fees, with a credit maximum of $1,800 per student. In addition, the Hope credit can't be used for a student if you've already claimed it for that student more than once.
Lifetime Learning Credit — A credit of 20% of your annual tuition and related fees, with a credit maximum of $2,000 per return. The tax credit may be claimed for an unlimited number of years.
Tuition and Fees Deduction — You can deduct up to $4,000 per student for tuition and fees.
Student Loan Interest Deduction — Deduct up to $2,500 per return for interest paid on student loans.
Exclusion for Savings Bond Interest — Some or all of the interest received from eligible bonds issued after 1989 may be excludable if qualified higher education expenses for the year are at least as much as the proceeds of the redeemed bonds. Note: You can't use the same expenses to claim more than 1 of the above benefits, and other restrictions apply.
Medical Expenses
If you spend more than 7.5% of your adjusted gross income on medical expenses, such as insurance (but not your pre-tax premiums), prescriptions, other out-of-pocket expenses, and mileage to and from medical facilities, then you may deduct the amount that exceeds that figure.
Keep in mind, you must itemize income tax deductions to claim medical deductions.
Moving Expenses
Even if you don't itemize income tax deductions, you could deduct moving-related expenses. Your move must meet the following qualifications:
Your move must be job-related.
Your new job would have increased your commute by more than 50 miles if you hadn't moved.
You must be employed full time for at least 39 weeks during the 12 months after you move. If you're self-employed, the applicable figures are 78 weeks and 24 months, respectively, and at least 39 of the weeks must be in the first 12 months.
Your moving expenses can't be reimbursed by your employer.
State & Local Taxes
If you itemize income tax deductions, you have the option of claiming your state and local sales tax or state and local income tax for the year. Be sure to determine which amount will be larger, because you can't claim both. If you choose to deduct income tax, include your withholding and estimated tax payments for the current year as well as any balance due from a prior year.
If you credited an overpayment from last year's tax return to his year's estimated tax payment, be sure to include that amount too. You can deduct the state or local sales or excise tax on a new motor vehicle purchased after Feb. 16, 2009 and before Jan. 1, 2010.
If you are not itemizing deductions, add this amount to your standard deduction. If you are itemizing deductions and are claiming the deduction for state and local income tax, enter the deduction on Schedule A, line 7. If your adjusted gross income (AGI) is $135,000 or more ($260,000 or more if you are Married Filing Jointly), you can't claim the deduction.
If the purchase price of the motor vehicle is more than $49,500, you can deduct only the tax attributable to the first $49,500 of the purchase price. If you're subject to Alternative Minimum Tax (AMT) and have a state tax refund, it may be better for you to claim the sales tax deduction even if it's smaller than the income tax deduction. If you choose to deduct sales tax, you can deduct either the actual amount you paid or the amount from the table in the Schedule A instructions. You can add to the amount in the table the sales tax you pay on a car as well as other items specified in the instructions.
Charitable Donations
If you itemize income tax deductions, you may deduct your charitable donations. You'll want to keep good records or all your donations.
Money Donations — Receipts are required for all money donations.
Item Donations — Give new or used goods to charity and deduct their fair market value. Special rules apply to donations of vehicles and to donations of appreciated property (property that is worth more than you paid for it).
Volunteering — Deduct 14¢ per mile while driving for charity. You can also deduct other out-of-pocket expenses.
Out-of-pocket Job Expenses
Keep track of job expenses not reimbursed by your employer. You could deduct these costs:
Driving expenses (the non-commuting kind)
Travel expenses
Uniforms
Union dues
Continuing education expenses
Self-employment Tax Deductions
If you're self-employed, you could qualify for additional income tax deductions. If you work out of your home, there are even more opportunities to claim your expenses. Here are a few examples:
Deduct half of your self-employment tax.
The Section 179 Deduction generally allows you to write off up to $250,000 of business property other than real estate purchased in 2009. Higher limits may apply.
If you use a part of your home exclusively and regularly for business, you can deduct the business portion of rent, mortgage interest, real estate taxes, utilities, insurance and repairs.
You can establish a retirement plan that may allow you to make contributions that exceed the amount you can contribute to a traditional IRA or Roth IRA. This deduction is not allowed for self-employment tax purposes.
AMT Credit
If you were subject to the AMT in a prior year and you're not subject to the AMT this year, you may be eligible to claim the minimum tax credit. Up to 50% of the amount carried to 2009 from years before 2007 may be refundable.
Claiming Overpaid Taxes
If you're eligible for any of the above tax credits, the IRS allows you to reclaim your lost money by filing an amended tax return for prior years. However, you generally can file an amended return only for up to the past 3 years.
Sales Tax on New Vehicle Purchases
Sales and Excise Tax on a New Motor Vehicle
You can deduct the state and local sales and excise tax on a new motor vehicle purchased after Feb. 16, 2009, and before Jan. 1, 2010.
If you are not itemizing deductions, add this amount to your standard deduction. If you are itemizing deductions and are claiming the deduction for state and local income tax, enter the deduction on Schedule A, line 7. If your adjusted gross income (AGI) is $135,000 or more ($260,000 or more if you are Married Filing Jointly), you can't claim the deduction.
If the purchase price of the motor vehicle is more than $49,500, you can deduct only the tax attributable to the first $49,500 of the purchase price.
You can deduct the state and local sales and excise tax on a new motor vehicle purchased after Feb. 16, 2009, and before Jan. 1, 2010.
If you are not itemizing deductions, add this amount to your standard deduction. If you are itemizing deductions and are claiming the deduction for state and local income tax, enter the deduction on Schedule A, line 7. If your adjusted gross income (AGI) is $135,000 or more ($260,000 or more if you are Married Filing Jointly), you can't claim the deduction.
If the purchase price of the motor vehicle is more than $49,500, you can deduct only the tax attributable to the first $49,500 of the purchase price.
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