Category: Taxes

Posted on by Jan Roberg

What Happens to Me When the Government Shuts Down?

Government shut down and debt ceiling

 

Revised January 22, 2018  (We keep seeing this issue, I keep re-running the same post!)

 

What actually does happen when the government “shuts down?”  Basically, items that are deemed “essential services” will still get funded.  Social Security and veteran’s payments will still get made.  The post office will remain open.  Medicare and VA health care will still run as usual.  And of course our military will still be there to protect us.

 

So where will we experience problems?  National parks will be closed to visitors.  Close to ¼ of all federal workers will be staying home.  Federal contractors could be furloughed and that could really hurt some folks here in St. Louis.  But, there could be an exception for jobs relating to national security so we’ll have to see how that plays out.

 

And what about the IRS?  Income processing positions will remain open.  That is; if you owe money, those folks are still working.  Refunds, on the other hand, could be delayed.  The information hotline would probably be closed as far as talking to humans.  But they’ve got a lot of electronic messages available.  If you can get your answers online that’s the best way to get information right now.    That’s right, it’s tax season you need help and they send home all the help desk people.  It makes about as much sense as taking a one week vacation when you’ve got something really important to do.

 

By the way, Congress is deemed to be essential so it will remain open during the government shutdown, as will the White House.  (Forgive me, I try not to be political, but if they shut the government, I think Congress shouldn’t get paid.  Only my opinion but to me it means they are not doing their job.)

 

 

 

 

Posted on by Jan Roberg

Tax Tips for Single People

 

Singles need tax breaks too.

Updated November 15, 2018

If you’ve skimmed through my other blog posts, you might notice that I have lots of tips for people with children, people who are old, or people with various family situations.  What you don’t see is much about people who are single and working.  This post is for you.

 

If you’re a young adult out on your own, earning wages, and living in an apartment, you’ve probably noticed that you don’t have many tax deductions to work with.  The three most likely things you might qualify for are the student loan interest deduction, the IRA deduction, and the retirement savings contribution credit.  Other than that, unless you’re ready to buy a home, you usually don’t have much to work with.   But let’s take a look at these three items.

 

Student loan interest deduction:  if you’ve finished college, or are at least temporarily out, you’re probably paying student loans.  The most you can claim per year for this deduction is $2,500—now that’s for the interest you pay, not the principal.  I often find people trying to claim everything they paid and that won’t fly.  You can only use the amount on your form 1098E that you get in the mail.

 

Now if you’re single and you make less than $65,000 per year, then you can claim the full amount of your deduction.  If you make over $80,000 you lose the deduction completely.  For those of you in between, you’re in what’s called the phaseout range.  It’s a funky equation, bottom line, the closer you are to $80,000, the less you’ll be able to claim.

 

IRA deduction:  My Dad always used to lecture me about saving for retirement.  Now that I’m older, I just recycle his lecture. (I’m sure he doesn’t mind.)  If you don’t have a retirement plan at work, you can put up to $5,500 into a traditional IRA and that money will not be subject to income tax.

So, if you put $5,500 into an IRA, then your taxable income would go down by $5,500.  By saving money for your retirement, you’d also save on your tax bill.  If you’re in the 22% tax bracket, you’d save $1,210!  That’s a pretty good bang for your buck.

 

If you do have a retirement plan at work, you can just reduce your taxable income by putting money into your 401(k) plan there.  It works a lot like the traditional IRA.  One thing to remember, if you do have a retirement plan at work and you make over $80,000 then you won’t be able to claim a deduction for an IRA contribution.  You can still claim a full deduction if you make less than $65,000, and anything in between puts you into that “phase out category”.

 

Saver’s Credit (formerly known as the Retirement Savings Contribution Credit):  Putting money away for retirement can be especially helpful tax-wise if you qualify for the Retirement Savings Contribution Credit.  You can only claim this credit if you income is $31,500 or less though and you cannot be a full time student.  So, if you graduated in May and started working in June you wouldn’t be able to claim the Saver’s credit this year.  (But then we’re looking at the Education credit so that’s usually a better deduction anyway.)

 

The credit is worth between 10% and 50% of your retirement savings contribution.  The maximum contribution you can claim is $2,000—so even if you put $5,000 into your IRA, you could only claim $2,000 towards the credit.   The percentages work like this; if you made less than $16,750 you can claim 50% of your contribution.  Up to $18,000 you claim 20%, and over that you get a 10% tax credit.

 

So let’s say you made $25,000 and put $1,000 into an IRA.  You’d qualify for a $100 tax credit (1,000 times 10% is $100.)  Another cool thing about this credit is that you can mess around with it.  Let’s say that you make $28,000—oops, you can’t get a Saver’s Credit.  But wait, if you put $1,000 into an IRA now your income is only $27,000 and you do qualify.

 

You don’t get a lot of tax savings options when you’re working and single, but it’s important to know what is available to you and how to make to most out of what you’ve got.

Posted on by Jan Roberg

IRAs for Dummies

Writer

 

Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)

A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.
Posted on by Jan Roberg

Missouri Health Insurance Deduction

Missouri has a tax deduction for health insurance premiums

 

When you live in a state that has an income tax, like Missouri, you need to be aware of the state’s little deductions that aren’t automatically on your federal tax return.  One of these is the Health Insurance deduction.

 

It’s very difficult to claim any medical deductions on your federal income tax return because you have to meet the requirement that your medical expenses exceed 10% of your adjusted gross income.  In Missouri, you don’t have that.  If your health insurance isn’t already exempt from taxes, you can claim your health insurance as a deduction on your Missouri State income tax return.

 

You’ll find the deduction on line 12 of the Missouri schedule A.  For most people, its just a straight, direct entry on the form.  If you happen to have been able to claim your health insurance on your federal schedule A, or had medicare payments withheld from your Social Security, there’s a worksheet to determine just how much of a deduction you’ll get to claim on your Missouri return.  (For some people, your computer software will automatically calculate the amount of medicare insurance you can deduct, but you need to watch out if you’re adding additional insurance payments that you don’t delete the medicare payments.)

 

The health insurance deduction is especially valuable to senior citizens who may qualify for the Missouri Property Tax Credit.  It not only reduces their taxable Missouri income, but by reducing the income, it can increase the amount of property tax credit they receive.  Many seniors who qualify for the property tax credit don’t have any Missouri taxable income so the preparers don’t bother to look for deductions and that’s a mistake.

 

If you’d like to take a look at the worksheet for the qualified health insurance deduction, click on this link:

Missouri Health Insurance Worksheet

 

Also, if you happen to be self employed, be sure to check my post about the Missouri Self-Employed Health Insurance Tax Credit.  If you qualify for that, it’s even better for your taxes than the deduction.

 

 

Posted on by Jan Roberg

Missouri Tax Credit for Self-Employed Health Insurance

MO self-employed health insurance tax credit

 

One of the really fun parts of my job is finding cool tax deductions or tax credits that most people don’t know about that can really benefit people.  Here’s a cool one:  The Missouri Self-Employed Health Insurance Tax Credit.

 

The thing about Missouri Tax Credits is that most of them won’t just pop up on your computer software.  You have to actually know about them and specifically request the forms to come up.  Major things, like the Missouri Property Tax Credit will usually have a pop-up reminding you to apply for it if you meet the criteria, but most other tax credits just hide in the corner.  The Self-Employed Health Insurance Tax Credit is one of the sneaky, hide in the corner credits.

 

How sneaky is it?  To tell you the truth, I called the Missouri Department of Revenue to ask a few questions and the person on the other end of the phone had never even heard of it.  She had to go hunt down someone who knew about the Self-Employed Health Insurance tax credit before she could answer my question.  I’ve never had that happen before.  The Missouri Department of Revenue front line folks are pretty knowledgeable and quick with answers.  While I tend to stump the IRS on a regular basis (I think if they had caller ID they’d never answer my phone calls,) I’ve never stumped a Missouri DOR employee before.

 

Here’s how it works:  Let’s say you own your own company and you also pay for your own health insurance.  Normally, on your federal tax return, you can claim a deduction for your health insurance up to the amount of your business profit.  But what if your business didn’t have a profit?  Or if your business profit was less than what you paid for your health insurance?  That’s where the Missouri Self-Employed Health Insurance Tax Credit kicks in.  Whatever tax savings you lost on your federal income tax return because you couldn’t claim your self-employed health insurance will become a tax credit to you in Missouri.

 

I know that sounds pretty confusing so here’s an example:  Let’s say your federal taxable income on your 1040 was $100,000 (I like to use round numbers.)  But you couldn’t claim your self-employed health insurance because your business actually had a loss (we’ll assume the $100,000 is from your spouse’s wages and other income.)  Your health insurance cost you $6,000 for the year.  If you could have claimed that as a deduction, it would have saved you $1,500 on your federal tax return.  With the Missouri Self-Employed Health Insurance Tax Credit, you get to take that $1,500 as a credit against your Missouri state income tax liability.  How cool is that?

 

Now that was a pretty drastic example, but even so, claiming a dollar for dollar tax credit against what you missed out on from your federal income tax return is a great deal.  Here’s a link to take a look at the form:

Missouri Self-Employed Health Insurance Tax Credit

 

So you want to know the best part?  Many of the Missouri tax credits have limitations that, if missed, you don’t get a second chance to claim them.  But with the Self-Employed Health Insurance Tax Credit, if you happened to miss out on claiming this credit last year, you can go back and amend your prior Missouri tax return and still get the refund.

 

 

Posted on by Jan Roberg

EIC Tax Tips – Protect Your Child’s Identity

Protect yourself from identity theft. Don't let anyone have your child's social security card.

It’s hard to believe that someone would steal a child’s identity, but it happens all the time.

 

I’ve been posting a lot of last minute tax tips for people who have excess money to donate to charity or invest in retirement plans.  Somebody asked me, “What about the rest of us?  Do you have any good tax tips for people who don’t make a lot of money?”  To be honest, I don’t have as many tips there.  If you’re income is low enough that you wind up not paying income tax, you don’t need a lot of strategies for sheltering your income.   But that said, you do want to make sure that you protect what’s coming to you and I can help with that.

 

This is the time of year when I hear the question, “My son’s father wants to claim him on his tax return but he doesn’t have custody and doesn’t pay child support.  How can I stop him?”   Usually these questions are about the Earned Income Credit (EIC.)   When you combine EIC with the child tax credits, you can potentially have over $6,000 in tax refund money.  It’s no wonder that people fight over who claims the children.  Be sure to know the rules before you file.

 

In order to qualify to claim an Earned Income Credit, your child must meet three tests:

 

Relationship:  son, daughter, stepchild foster child, brother, sister, half brother, half sister, step brother, step sister or a  descendant of any of them, and

 

Age:  the child must be younger than the person claiming EIC and under age 19 (or under age 24 if a full time student) or be any age if permanently and totally disabled at any time during the year, and

 

Residency:  the child must have lived with the taxpayer in the United States for more than half of the tax year.  If you are in the military and stationed overseas, that counts as a temporary absence and you qualify as living with your child for the time that you are on active military duty.

 

The residency requirement is the one that’s going to prevent the absentee father from being allowed to claim the child.  Now that doesn’t mean he’s not going to try—there’s between $12 and $14 billion of EIC fraud every year.   But if you are the custodial parent, you should be claiming your child on your tax return.

 

Let me say something here are relationship.  “Stepchild” means that you married the child’s biological parent.  If you are just living with someone, even if you’ve been together for 10 years, you are not legally considered to be a “stepparent”.  A “foster child” means that the court placed a child in your home.  You have legal paperwork stating that you are the “foster parent”.  It does not mean someone that you care for and care about.  (At least not for IRS purposes.)

 

So how do you make sure that no one else claims your child on your return?

 

Protect your child’s identity:   I cannot stress enough how important it is for you to protect your child’s social security number.  Especially this time of year, there is a lot of child identity theft.  Most of the time, if someone steals your child’s identity, it’s someone you know, but I once dealt with a case where a thief was stealing baby ID’s from the hospital.  The tax windfall from an Earned Income Credit (EIC) can be pretty large, and it makes people do bad things.  If an identity thief has your child’s social security number, date of birth, and the correct spelling of the name, they’ve got you.  The social security card has two out of three.  Keep it safe.

 

If someone does claim your child illegally, (you’ll know because your tax return will be rejected when you try to electronically file it) fight back.  If you are in the right, go ahead and file your tax return exactly the way you’re supposed to; claiming your child and all the tax credits you are entitled to.  You will have to mail the tax return in and it will make for a horrible delay in processing your refund.  But the identity thief will get audited, you will win your case and you will get your money.   If you are not in the right, do not waste your time.  You will be audited too.  You’ll get 11 (sometimes 22) pages worth of questions you have to answer to prove you really do have custody of your child.  If you’re legit it’s easy, if not it’s a nightmare.

 

Some people will electronically file their return to get whatever refund they can first and then file an amended claim to add their child.  If possible, file the return correctly in the first place.  It gives you a stronger case in the IRS’ eyes and it will actually be processed faster than if you do the amendment.

 

One piece of advice I saw on a message board about this was to “Go ahead and file your return before he does, even if it’s wrong so that you beat him to it.”  Although filing your return as soon as possible will help prevent someone else from claiming your child, you need to know that it is illegal for a professional to e-file tax returns without having the actual W2s.  You’d be amazed at how often the final check stub is a little different from the actual W2.  Don’t file until you have everything you need.

 

In an ideal world, you wouldn’t have to be afraid of people stealing your child’s identity for financial gain.   We’re not dealing with ideal though.  Protect yourself and your child by keeping his social security card and other personal information safe.

Posted on by Jan Roberg

Qualified Charitable Distributions

 

Qualified Charitable Distributions help save on taxes

If you are over 70 and 1/2, you may be able to take advantage of a Qualified Charitable Distribution.

 

UPDATED FOR 2018

 

The Qualified Charitable Distribution (also known as a Charitable IRA Rollover) is is a great strategy for seniors to reduce their taxable income under the new tax code.

 

What is a Qualified Charitable Distribution (or QCD)?  If you’re 70 and 1/2 or   older, you’re required to make required minimum distributions (RMDs) from your Individual Retirement Account (IRA.)  Even if you don’t need the money, you have to take it out of your retirement account and you have to pay tax on it.  If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest. With the new, higher standard deduction for 2018, even fewer seniors will be able to itemize their deductions.

 

The Qualified Charitable Distribution helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity.  The distribution counts towards your RMD and it’s tax free to you because it went to the charity.  That’s a win/win situation!

 

Another advantage to the QCD is that the income from the distribution never shows up as income on the face of your tax return.  This is really helpful for people who may be able to claim other deductions or benefits based on having a lower Adjusted Gross Income (or AGI.)  For example:  The taxability of your Social Security income is based upon your AGI, so for some people, a lower AGI could reduce how much of their Social Security income gets taxed.

 

Can you make a contribution for more than your RMD?  Yes you can.  You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact.  $100,000 – that wasn’t a typo.  If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.

 

Can you make a QCD if you’re less than 70 and 1/2 years old?  No, I’m afraid not.  You must be at least 70 and 1/2 at the time you make the distribution.

 

If you’re interested in making a Qualified Charitable Distribution, talk it over with your financial advisor and your charity.  You’ll want to make sure that it’s done correctly and you’ll want to keep good records in case there’s ever any question about your RMDs.

 

Can I still take a charitable deduction on my tax return for my QCD?   No, the QCD will be exempt from tax so you can’t claim it as an additional deduction.

 

The Qualified Charitable Deduction is one of the best ways for seniors to reduce their tax liability under the new tax code. If charitable donations are something you do, then definitely check out the QCD.

Posted on by Jan Roberg

How to Get an EIN Number for your Business for Free

Free EIN number

You can get an Employer Identification Number for your small business for free at the IRS website.

If your business needs an EIN (that’s an employer identification number), it takes about 5 minutes on the IRS website and you can get one for free.  I mention this because I found a company online that will do it for you for $75.  For an extra $75, they’ll put a rush on it.   So you can pay $150 for the rush job, or you can do it yourself for free in less time than it takes to fill out their online payment agreement.

The first step is to go to the IRS website. This link will take you right to the EIN page.

IRS EIN link

This page has links to a lot of information so it’s pretty useful.  It also has the link to go to the EIN application.  The online application has limited working hours, you’re not going to be able to file the application at 3 in the morning.  They’re basically open from 6 am until a little after midnight Monday through Friday with limited weekend service.

Before you actually apply for an EIN, think–do you really need one?  If you’re a corporation or a partnership, the answer is yes.  If you are an LLC, that means you are a limited liability company-that does not make you a corporation, so just because you are an LLC doesn’t mean you need to have an EIN.   Other reasons for needing an EIN include if you have employees, need to pay excise taxes, are a non-profit organization,  trust or estate.

You might not need an EIN per IRS standards, but it may be beneficial to your business anyway.  For example:  if you work as an independent contractor and do not want to give your social security number out or you are setting up a bank account in your business name.  Some vendors won’t give you business discount rates unless you have an EIN number, and I had one client who needed one because a vendor wouldn’t work with her at all because she didn’t have an EIN and she really needed the account.

Generally,iIf you are working as a contract laborer and filing your return as a sole proprietor, it’s most likely that you do not need to have an EIN number.

Applying for the actual EIN:  I recommend using the online application.  The application is presented in an interview style format.  It asks questions, you answer them and when you get to the end. voila’ you have an EIN number.  It sort of has a dummy proof mode too that let’s you tab back if you’ve answered a question incorrectly.  I recommend having access to a printer when you do it so that you can print out your new EIN when you’re done.  You don’t want to lose that number once you’ve got it.

Before you do the online application, you might want to check out the written application form so that you have all of your information handy before you apply:  http://www.irs.gov/pub/irs-pdf/fss4.pdf

To go straight to the online application, click this link:

https://sa2.www4.irs.gov/modiein/individual/system-unavailable.jsp

On little glicth, for some reason, if you  need an EIN because you receive home health care services, you can’t apply for your EIN online, you have to use another application method.  I suggest calling on the toll free number:  1 (800) 829-4933.  That’s the toll free number for the tax and business specialty hot line.    You will have to wait on hold for awhile, but it’s still faster than using the mail.

Posted on by Jan Roberg

Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.

 

I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes  from his wages.  While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault.  But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly?  Fortunately, there is help.

 

First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you.  If everything is fine, why change?  But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track.  It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.

 

What you need to do is have a copy of your latest pay stub and your last tax return handy.  You’ll need both to answer the questions in the calculator.  Then you’re going to click on the link to the IRS withholding calculator.

 

Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?”  But seriously, it’s the best program for figuring out where you stand with your taxes.  For most situations, I like it better than some of the fancy professional tax projection programs I’ve used.  Most importantly, you don’t need any special training to use it.  Just answer all the questions.  Sometimes you may have to guess, but do your best.  You really do need to have your latest pay stub and last tax return to do this though.  If you’re just estimating, it’s not going to be helpful.

 

The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be.  And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.

 

So let’s say you ran the program and it does recommend that you change your withholding.  What next?  That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form.  Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.

 

So about that guy who wants to sue his employer?  I’ll leave that up to the courts.   As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.

Posted on by Jan Roberg

College Tax Credit

Students heading back to school may qualify for up to $2500 in tax credits.

The American Opportunity Tax Credit can be worth up to $2,500 to help pay for tuition.

Updated August 2019

 

I’ve written in the past about saving for college, but what about if you’ve got that tuition payment coming due this fall? Here are a few tips to help you maximize your tax benefits.


The biggest tax advantage for tuition payers is the American Opportunity Credit which will still be available for 2019. It’s worth up to $2,500 in tax credits.  I said tax credit, not a tax deduction! That means that $2500 is written off of your taxes!  And for some people, up to $1000 of that is a refundable tax.

 

What’s a refundable tax?  That means,  even if you didn’t owe $2500 in taxes, you can still get up to $1000 back from the IRS.  How cool is that?

 

Now the American Opportunity Tax Credit starts to phase out if your Modified Adjusted Gross Income (MAGI) is $80,000 ($160K if married filing jointly) and is completely erased by the time your income reaches $90,000 ($180K for MFJ.)  If your income is near, or slightly over, the phaseout limit there are some things you can do now to keep your income in line.  (MAGI for most people is their regular income.)

 

First, the easy thing is to reduce your taxable income by contributing (or increasing the contribution)  to your company’s 401(k).   Many companies have their benefit sign ups in November so you may have already missed the boat.  But some companies are more flexible so it’s  worth checking out. The maximum you can contribute to your 401K plan in 2019 is $19,000 (or $25,000 if you’re over 50.) Of course, you’re also trying to pay tuition and perhaps eat once in awhile, so reducing you income by $25,000 might not be an option.

 

In addition to 401(k) plans, some companies have exempt cafeteria plans for health care or day care.  If you can take advantage of those programs it could be helpful in reducing your MAGI.  If you know you’ll spend the dollars anyway, why not remove that money from your taxable income?  (Frankly, that’s a good idea whether you’re tying to qualify for the college tax credit or not!)

 

If your income is clearly too high to qualify for the American Opportunity Tax Credit, it may make sense to not claim your student as a dependent and have her put the credit onto her taxes.  You’ll need to play with it.  The credit isn’t as good when a dependent student claims it herself – she’ll lose the refundable part – so if she doesn’t have enough income for a tax liability, it’s not going to be worth it.

 

So when paying tuition, how do you get the biggest bang for the buck?  If  you have a student whose tuition will easily exceed the $4000 required to take full advantage of the tax credit, you don’t really need to think about strategy here.  The form you get from the college will show you paid $X dollars for tuition and you won’t have to think about qualifying expenses for tax credits. The form is called a 1098T form.  For 2019, you absolutely must have that form to qualify for the American Opportunity Tax Credit.  Here’s the thing – your college aged student is over 18, the school is going to give the form to her.  You have to get it from your student to file your taxes.

 

If you’re lucky enough to get good scholarships or an inexpensive school,  you’re going to need to be able to prove you spent money on qualified expenses.  Tuition, fees, and books count.  If your tuition is only $1500, it’s important to keep those receipts for books and campus fees as well to add to your tuition expense.  Room and board won’t count.

{A note about books:  if you have an older student and couldn’t claim books in the past because of the restrictive rules, it’s changed for this credit.  Now, your student can buy books from a used bookstore, Amazon.com or any other place where student texts are sold, and still use the receipt towards this credit.}

 

On the flip side, if you’ve got a student at an expensive school and you’re well over the $4,000 threshold, you might not want to pay the second semester tuition before January, especially if you have a student thinking about taking a year off.  Pay that next year’s tuition in January so you can spread out the tax credit.

 

With the American Opportunity Credit, you get a 100% tax credit on the first $2000 of tuition paid.  That’s a dollar for dollar tax credit.  After that, you get a credit of 25% of the next $2000 of tuition paid.  The first $2000 worth of tuition is more valuable than the next.  Still, a 25% tax credit is nothing to sneeze at either.  Also, if you pay tuition in 2019 for classes that will be taken within the first three months of 2020, that counts towards the credit too.  Come December, if you haven’t already exceeded the $4,000 tuition expense amount, it may make sense to pay your next semester a little early.

 

Which students qualify for this credit?  It’s available to students who are in their first four years of college, they must be at least a half time student, they have to be at a qualified institution, and they cannot have a felony drug conviction.

 

If you’d like more information on the American Opportunity Credit, or other education credits, IRS publication 970 has  answers.  (It’s 83 pages long, but it does have almost everything in there.)  You can access it here:  IRS College Tax Credit

 

One final thing, because everybody asks me this:  if you pay for tuition with a loan, it still counts as you paying tuition.  You can still claim the credit.