How to make tax time easier

This information is for the each tax year, typically starts in January for individuals and most businesses.

If you own a business, keep careful records of your travel expenses and record your mileage in a logbook. If you don’t know the number of miles driven and the total amount you spent on the car, we won’t be able to determine which of the two options is more advantageous for you.

Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method for your auto deductions, you must keep receipts for  everything.

Tip: Consider using a separate credit card for business, to simplify your record keeping for you.

Tip: You can also deduct the interest you pay to finance a business-use car if you’re self-employed.

We will help you determine the best deduction method for your business-use car. Let us know if you have any questions about which records you need to keep.

8 Ways Children Lower Your Taxes

Got kids? They may have an impact on your tax situation. Here are the top 8 things to consider if you have children.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we’ll take a look at whether you can claim the child as a dependent this year.
  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
  3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 so that you can work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
  4. Earned Income Tax Credit (EITC): The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
  6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
  7. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
  8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

As you can see, children can have an impact on your tax profile. If you’re a parent, we’ll go over your situation with you to make sure you’re getting the credits and deductions you’re entitled to.

Can You Take the Child Tax Credit?

If you have a qualifying child under the age of 17, you may be able to take the Child Tax Credit. Here’s what you need to know.

1. Amount. With the Child Tax Credit, you may be able to reduce your federal income tax by up to $2,000 for each qualifying child under age 17.

2. Qualification. A qualifying child for this credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependency, joint return, citizenship and residence.

3. Age test. To qualify, a child must have been under age 17 — age 16 or younger — at the end of the calendar year.

4. Relationship test. To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

5. Support test. In order to claim a child for this credit, the child must not have provided more than half of his/her own support.

6. Dependency test. You must claim the child as a dependent on your federal tax return.

7. Joint return test. The qualifying child cannot file a joint return for the year (or files it only as a claim for refund).

8. Citizenship test. To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.

9. Residence test. The child must have lived with you for more than half of the calendar year. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.

10. Limitations. The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.

11. Additional Child Tax Credit. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Questions about the child tax credit? Give us a call today.

IRA Retirement Contributions

For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:

  • $6,000 ($7,000 if you’re age 50 or older), or
  • your taxable compensation for the year, if your compensation was less than this dollar limit.

For 2019, the limits are the same as 2020.

For 2018, 2017, 2016 and 2015, your annual total contributions to all of your traditional and Roth IRAs cannot be more than:

  • $5,500 ($6,500 if you’re age 50 or older), or
  • your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit does not apply to:

Claiming a tax deduction for your IRA contribution

Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

Roth IRA contribution limit

The same general contribution limit applies to both Roth and traditional IRAs. However, your Roth IRA contribution might be limited based on your filing status and income.

IRA contributions after age 70½

You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.

Spousal IRAs

If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A.

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

Can I contribute to an IRA if I participate in a retirement plan at work?

You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

Tax on excess IRA contributions

An excess IRA contribution occurs if you:

  • Contribute more than the contribution limit.
  • Make a regular IRA contribution to a traditional IRA at age 70½ or older.
  • Make an improper rollover contribution to an IRA.

Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.

To avoid the excess contributions tax:

  • withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
  • withdraw any income earned on the excess contribution.

See Publication 590-A for certain conditions that may allow you to avoid including withdrawals of excess contributions in your gross income.

Additional resources

Itemizers Can Deduct Certain Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? You can receive these deductions if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation.

There are four types of deductible non-business taxes:

State and Local Income or Sales Taxes: 

    You can choose to claim a state and local tax deduction for either income or sales taxes on your return. You can deduct any estimated taxes paid to state or local governments and any prior year’s state or local income tax as long as they were paid during the tax year.

If deducting sales taxes instead, you may deduct actual expenses or use the optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts.

Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate.

Real Estate Taxes: Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities.

Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

Personal Property Taxes: Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.

Foreign Income Taxes: Generally, you can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from U.S. tax.

For more information on non-business deductions for taxes, just give us a call.

The Facts: Medical & Dental Expenses and Your Taxes

If you, your spouse or dependents had significant medical or dental costs each year, you may be able to deduct those expenses when you file your tax return. Here are eight things you should know about medical and dental expenses and other benefits.

1. You must itemize. You deduct qualifying medical and dental expenses if you itemize on Schedule A on form 1040.

2. Deduction is limited. You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year.

3. Expenses must have been paid in  the current calendar year.   You can include medical and dental expenses you paid during the year, regardless of when the services were provided. Be sure to save your receipts and keep good records to substantiate your expenses.

4. You can’t deduct reimbursed expenses. Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. Whose expenses qualify? You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement, or those with a qualifying relative who is not your child.

6. Types of expenses that qualify. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses.

7. Transportation costs may qualify. You may deduct transportation costs primarily for and essential to medical care that qualifies as a medical expense, including fares for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 24 cents per mile for 2014.

8. Tax-favored saving for medical expenses. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

Please give us a call if you need help figuring out what qualifies as a medical expense.

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