Winter 1999
- Maximizing
Your Deductions
Year-end strategies to save tax dollars - Education
Incentives
Don't miss out on new credits and deductions for higher education expenses - Qualifying
for EIC
Don't let the tricky rules prevent you ftom taking this credit - Compensation
for IRA Contributions
Know the definition of "compensation"for rnaking IRA contributions - Can't
Pay Your FuII Tax LiabiIity?
Several options exist when you find your short of cash on April - Paying
Your Taxes With Your Credit Card
Payingyour taxes justgot easier - Is
a Roth IRA for You?
Contributing to a Roth IRA may costyou some tax breaks - Advantages
of Electronic Filing
Why shouldyoufileyour return electronically?
Maximizing Your
Deductions
Year-end strategies to save tax dollars
As the tax year draws to a close, many of you are thinking of ways to reduce your taxable income. Generally this is accomplished by increasing your expenses for the year. Although this strategy won't work for all expenses, it will work for some. For example, making a charitable contribution by check on December 31, 1999 will create a deduction on your 1999 tax return if you are able to itemize your deductions. Another strategy is to "bunch" your deductions. Miscellaneous itemized deductions and medical expenses are limited to a percentage of your adjusted gross income. If it's feasible to pay some of these expenses before year-end, it may be enough to push you over the limit. If you know you will need new glasses or contact lenses, buy them before the end of the year. If you can, pay all unpaid medical and dental bills by December 31. Once totaled, you may have enough to exceed the 7.5% adjusted gross income limitation. Employees can also take advantage of the bunching strategy to exceed the 2% adjusted gross income limit on miscellaneous itemized deductions. This can be accomplished by extending subscriptions to professional journals, paying union or professional dues, and enrolling in and paying tuition for job related education, all before the end of the tax year.
Education Incentives
Don't miss out on new credits and deductions for higher education expenses
A nonrefundable HOPE Scholarship tax credit of up to $1,500 per year is available for college tuition and certain fees incurred by you, your spouse, or your dependent. For each student, the HOPE credit covers the first $1,000 and 50 percent of the next $1,000 in education expenses incurred in the first and second years of college. The expenses are reduced by scholarship or fellowship grants already excluded from income. The student must be enrolled on at least a half-time basis and be attending an accredited college, university, or vocational school leading to a bachelor's degree, an associate's degree, or another recognized post-secondary credential. If someone else claims you as a dependent, they can get this credit. Phaseouts of the credit begin when modified AGI reaches $80,000 for married taxpayers filing jointly and $40,000 for other taxpayers. The credit is completely phased out when modified AGI reaches $100,000 Ooint filers) and $50,000 (others). Married taxpayers must file joint returns or they are not eligible to claim the credit. For those not qualifying for the HOPE Scholarship credit, a Lifetime Learning credit is available. This credit equals 20 percent of the first $5,000 in education expenses resulting in a maximum credit of $1,000. The credit increases to 20 percent of the first $1 0,000 in expenses (or $2,000) after 2002. You are allowed to take the credit in the year the expenses are paid. The corresponding education must begin during that year or the first three months of the following year. The credit is phased out when modified AGI is between $40,000 and $50,000 ($80,000 to $100,000 for joint filers).
If you are finished with your education and are now paying off a student loan, a $1,500 above-the-line deduction is available for interest paid on qualified education loans. The deduction is allowed for interest paid during the first 60 months in which interest payments are required. You cannot take the deduction if you are claimed as a dependent on another taxpayer's return. The limit on the deduction increases to $2,000 in 2000, and $2,500 in 2001 and thereafter. The deduction will be phased out when modified AGI is between $40,000 and $55,000 ($60,000 to $75,000 for joint filers).
The deduction applies to interest on loans incurred to pay expenses for undergraduate- and graduate-level tuition, room and board, and one catch. related expenses (reduced by scholarships or fellowship grants). The student must have been enrolled on at least a half-time basis and attended an accredited college, university, or vocational school, or an institution conducting internship or residency programs leading to a degree or certificate from an institution of higher education, a hospital, or health care facility conducting postgraduate training. If such a student loan already exists, interest payments qualify, provided the 60-month period has not expired.
Qualifying for
EIC
Don't let the tricky rules prevent you ftom taking this credit
The earned income credit is perhaps the most confusing when it comes to determining eligibility That, accompanied with the IRS'strict compliance rules, often deters qualifying taxpayers from claiming the . If your earned income is $26,928 or less and you have one credit qualifying child, you may be entitled to an earned income credit of up to $2,312. If you have two qualifying children and your earned income is $30,580 or less, your credit could be as much as $3,816. Taxpayers with no children and who are between the ages of 25 and 65 can qualify for a credit of up to $347 if they have earned income of less than $10,200. In addition to these rules, you cannot have investment income in excess of $2,350 and you cannot file a separate return if you are married.
A qualifying child is one who lives in your home, located in the United States, for more than half the tax year, but does not have to be claimed as a dependent on your tax return. If the child is a foster child, he or she must live in your home for the entire year. The child must be under the age of 19 (under age 24 if the child is a full-time student); however, he or she can be any age if totally and permanently disabled.
You must have earned income to be eligible for the credit. Earned income includes all the income and wages you get from working - even if it is not taxable. There are two ways to get earned income: 1) you work for someone who pays you; or 2) you work in a business you own. Taxable earned income includes: wages, salaries, and tips; union strike benefits; long-term disability benefits received prior to minimum retirement age; and net earnings from self-employment.
Nontaxable earned income includes: salary deferrals [example: 401 (k) plan]; military combat zone pay; basic housing and subsistence allowances and in-kind housing and subsistence for the U.S. Military; value of meals or lodging provided for the convenience of your employer; 4 housing allowance or rental value of a parsonage for the clergy; 1. and excludable benefits provided by the employer such as dependent 4 care, educational benefits, adoption benefits, and salary reductions, 1. such as under a cafeteria plan.
You must have a Social Security number (not an individual taxpayer identification number) for each qualifying child, yourself and your spouse (if filing a joint return) to claim the earned income credit.
Compensation for
IRA Contributions
Know the definition
of "compensation"for rnaking IRA contributions
The term "compensation" can have many different meanings under IRS rules. It's important to know what compensation means when you are frying to determine whether you are eligible to make an IRA contribution. You are allowed to make an IRA contribution of $2,000 per year, but the contribution is limited to your compensation.
Compensation for purposes of an IRA contribution means wages, salaries, tips, bonuses, professional fees, and other amounts you receive for personal services actually rendered. Compensation also includes earned income of a self-employed individual, but only with respect to a business in which the personal services of the individual are a material income-producing factor.
If you are divorced and collecting alimony from an ex-spouse, you can treat the alimony as compensation for purposes of making an IRA contribution.
Can't Pay Your
FuII Tax LiabiIity?
Several options
exist when you find your short of cash on April
The IRS is making it easier for you to meet your federal tax obligations if you find yourself short of cash when tax time arrives. It you owe less than $25,000 and can pay off your tax debt within five years, the IRS is more willing to accept an installment agreement. Instead of waiting for a contact from an IRS collector, you may ask for an installment plan by attaching Form 9465 to your tax return. There is a $43 fee for setting up the installment agreement and you will also pay interest, currently figured at 8% per year plus a monthly late payment charge of .05% of the balance due.
Paying Your Taxes With Your Credit Card Payingyour taxes justgot easier
The IRS has implemented a program by forming a partnership with private industry processors that allows you to pay balance due returns using MasterCard', American ExpressO, NOVUS/Discover" cards, and other NOVUS brand cards. It is possible that the IRS will accept other credit cards in the future and expand the option to the payment of other types of taxes. For now, the option is limited to federal income taxes reported on Form 1040. If you send in your return on paper or electronically file your tax return, this payment option is available to you.
Once the return is completed and you have been notified that the IRS accepted your return, you call 1-888-2PAY-TAX (1 -888-272-9829). The voice response system will prompt you to enter your Social Security number. This enables the IRS to properly credit your tax payment to your account. Your Social Security number is re-entered as a confirmation. You then enter your credit card number, the expiration date, and the balance due on your return. A convenience fee will be announced and you are asked to confirm their approval of the amount. During this time you can decline payment using this option by simply hanging up the phone. If the approval is given, you will be given a confirmation number. You should retain this number for your records in case questions arise later. The IRS has indicated that the date of authorization will be the date the tax is considered paid. Therefore, you must authorize payment by April 15, for it to be considered timely made.
To curtail potential fraud, you will only be allowed to call and use this method of payment twice. This limits the convenience fees and prevents numerous unwanted charges to your card. Allowing the use of this method of payment twice also enables parents to charge their child's, or another dependent's tax liability using their card.
Is a Roth IRA for
You?
Contributing to a Roth IRA may costyou some tax breaks
Many of the rules regarding Roth IRAs almost seem too good to be true. It's for this reason that you must have all the facts before you can determine if making a contribution, or converting a traditional IRA to a Roth IRA, is for you. Roth IRA contributions are not tax deductible and, as a result, there is no immediate tax benefit for making contributions. On the other hand, withdrawals of the contributions, plus the earnings, are tax-free if you take a qualifying distribution. Generally, this means you do not touch the money until it has been in the account for five years and you reach age 59'/2, die, or become disabled.
When making Roth IRA conversions, that is converting your existing traditional IRA to a Roth IRA, you must consider how the conversion will affect your total taxable income for that year. There are limitations on the amount of income you can have to be able to make the conversion. Also, if you are within the prescribed income limits, adding the amount of the distribution from your traditional IRA to your total income might cause other tax benefits to disappear. The conversion may increase income to the point that it disqualifies you from some or all of the new tax breaks. For example, child tax credits, education IRAs, the Hope Scholarship and Lifetime Learning tax credits, and deductions for student loan interest are some of the tax benefits that are subject to income limitations. The Roth IRA conversion income could cause you to lose some of these breaks.
Advantages of Electronic
Filing
Why shouldyoufileyour return electronically?
IRS e-file is a way to file your tax return electronically. Upon receipt of the return information, IRS computers quickly and automatically check for math errors or missing information. The error rate for electronic returns is less than one percent as opposed to the error rate for paper returns, which remains steady between 20 and 21 percent. Within 48 hours of electronic transmission, IRS acknowledges acceptance of the return. Only IRS e-file options provide this assurance. It's simple, secure, and fast. IRS e-file options allow for more accurate processing and offer the safety and security of Direct Deposit so that you get your refund in half the time compared to filing on paper. Refunds should be in your savings or checking account within three weeks. The option of filing your Federal and state returns at the same time is also available. IRS e-file options allow you to file early and pay any tax due by April 15th. You may even pay your baldue electronically.
Quik Tip$
An age to remember... Knowing key tax birthdays can help you cut your annual tax bills. Here are some birthdates worth noting.
0
If your child is born during the year, even as late as December 31, you get an exemption for your child as a dependent. This comes with. You need to file for the child's Social Security number and include it on your tax return. If you don't, the dependency exemption is denied.
0-12
The good news is you gain tax advantages by contributing to your employer's flexible spending account to cover child care expenses, or you may qualify for a child care credit on your tax return. The bad news is that any investment income over $1,400 in your child's name is taxed at your rate.
13
Once your child reaches age 13, you no longer qualify to take the child care credit. Expenses incurred up until your child's 13th birthday remain eligible for the credit.
14
At this age, children are taxed at their own rates on investment income.
0-18
If you own your own sole proprietorship, you can pay your child to work for you and avoid paying Social Security and Medicare taxes on their wages. Once they reach age 18, you are required to withhold payroll taxes like you do for any other employee.
591/2
This is the magic age when you may take money from IRAs and retirement plans without incurring the additional 10% penalty for early distributions. There are exceptions to this rule, but this is the age when you may take distributions for any reason.
65
Once you reach age 65, you qualify for an additional standard deduction and, if certain conditions exist, a tax credit. For tax purposes, you are considered age 65 on the day before your 65th birthday.
70 1/2
At this age, you are required to begin distributions from you traditional IRA. If you have a Roth IRA, this rule doesn't apply. If you have a returement plan with your employer, you are still working, and you do not own more thant 5% of the company, you can delay distributions from the employee's plan even if you are 701/2.
Spring 2000