When you filed your 1040 there are 5 different filing statuses that the IRS will accept. What filing status you choose on your tax return will make a difference for your tax rate and deductions/credits.
Tax Credits? Yes Please!
No one wants to pay more taxes than they have just have to and we agree with that sentiment! This week we will be discussing tax credits.
What is a Tax Credit?
A tax credit should not be confused with the tax deductions that we discussed last week. So, what is it then? Well, the easiest way is to think of it like a pre-paid discount card that can only be used at the IRS on your taxes. Let’s look at an example. We will say that it has been calculated that you owe $10,000 in taxes for 2017. But, when we look at the tax credits allowed, which we will discuss below, we notice that you qualify for the earned income tax credit (EITC) full tax credit amount of $6,318. This would mean that you would after your credit was applied only owe $3,682 ($10,000 – $6,318 = $3,682) in taxes. Hopefully, it is now apparent that a tax credit is used to reduce the total tax you owe after your tax amount has been determined.
What Tax Credits Are Commonly Available?
Earned Income Tax Credits (EITC) is commonly just called Earned Income in a nutshell is a credit that has been designed to help those with low to moderate income. The goal of this credit is to reward working and encourage those who have low income to continue to work. EITC increases with every dollar earned until it reaches its maximum dollar amount or the individual earns more than the EITC income cap. The rules and regulations of this credit are complicated. Only a tax professional should determine if and how much of this credit you qualify for on your taxes.
Child & Dependent Care Credit is one that may be available if you paid someone to watch your child, dependent or spouse in the last year. This credit is only available if you paid someone to watch your child so that the income earners in your house could work. This would not apply to mommy’s day out if Mom is a stay at home Mom or similarly a stay at home Dad. The one exclusion to this would be if you file your return as married filing separately you cannot claim this credit.
Adoption Credit is a tax credit that is available to adoptive parents that help encourage adoption. This credit is based on the funds paid to complete an adoption. It utilizes the costs of adoption such as adoption fees, court / attorney/legal fees and traveling expenses. The credit amount that can be used is determined by the IRS each year. It is important to note that if you adopt two children then you may double this limit. Documentation is required by the government unless you are adopting a special needs child. The IRS allows for the full deduction amount to be claimed if your child qualifies by your state as being “special needs.”
Hope Scholarship Credit is probably the most well-known of all the tax credits for many. This credit is available to individuals who have expenses that are related to the first two years of college. For a student to claim this credit they must attend school at least part-time. The IRS increased the amount which can be claimed in 2017 to $2,000. There are exclusions, such as not being convicted of a felony drug offense to be able to claim the credit or claim the Lifetime Learning Credit in the same year.
Lifetime Learning Credit is a tax credit that can be claimed if a student has incurred education expenses. This means that if you are a student with limited resources and have had to pay for tuition or other educational expenses beyond what was paid for by scholarships or student loans/subsidies then you may qualify for this credit. The credit was designed to aid low to moderate income households and the credit is determined as a percentage of the expenses that you paid out of pocket up to $10,000 in qualifying expenses. It is most commonly used after the second year of college because the Hope Scholarship Credit is no longer available. Documentation is required by the IRS.
Let’s talk about Deductions!
Each year when you do your taxes, you are interested in applying all of the tax deductions you can apply. After all, no one wants to pay more taxes than they have to. This week we will be exploring common deductions that are available to the average American. Let’s get started.
What is a tax deduction?
It is an amount allowed by the government to decrease the amount of money used in calculating the tax you will have to pay. An example of this is if you have a tax deduction of $2,000 and you have income of $5,000. The result would be that you would pay tax on: $5,000 – $2,000 = $3,000 taxable income. This should not be confused with a tax credit which we will discuss next week.
What tax deductions are commonly used?
Standard Deductions can be thought of as a coupon that is given by the government to both individuals and married couples just for filing. In 2017, the standard deductions are:
- Single – $6,350
- Married – $12,700
- Married filing separately – $6,350
- Head of Household – $9350
To illustrate what this means if you earn $20,000 and are a filing single you would pay tax on ($20,000 – $6,350 = $13,650) only $13,650 if you have no other deductions.
Itemized deductions are discounts to your income which come from a variety of monies that you have spent in a year. To itemize, you would need to have records of having spent more than 10% of your Adjusted Gross Income (the money you made this year) on deductions that the government allows. Examples would include:
- Medical Expenses
- Deductible Taxes
- Home Mortgage Points
- Interest Expense
- Charitable Contributions
- Business Expenses
- Casualty, Disaster and Theft Losses
Itemizing your deductions can be complicated with what is and is not allowed as well as the Pease limitations. It is best to have a tax professional complete your tax documents if you think you will have itemized deductions.
A Personal Exemption Amount is an amount allowed by the IRS for individuals in your household. This year the amount allowed is $4,050. This can also be thought of as another coupon given by the IRS to reduce your taxable income.
Kiddie Tax only applies to households who have claimed children under the age of 19 (not in college) and extends to the age of 24 (for college students). Why is this important? It is important because this is the amount of income that your child 16 – limitation can make in a year and you will not be taxed on it. If your claimed child makes more than the IRS limits then you will have to pay tax on that money and it will be taxed at the same rate as the money that you made this year.
BBA is dedicated to supporting our local communities.
BBA is dedicated to supporting our local communities.
It has come to our attention that IRS SCAM PHONE CALLS being made in our area. We have heard that the individuals calling are threatening and say that there are warrants out for the person who answer’s arrest. Please be aware that the IRS will NEVER call you! Do not be fooled by these calls and do NOT give out your personal information. If you have questions please call us we are always happy to help!
Today we had our ribbon cutting and open house with the Sevierville Chamber of Commerce. We would like to thank everyone that attended today for your support. We look forward to helping you with your bookkeeping needs.
Mary Brown in our Sevierville office was caught by a photographer supporting Sevierville’s own Safe Harbor in Business After Hours meet and greet!