Back to School Tax Tips for Students and Parents

It’s that time of year …back to school. Heading off to college can be a stressful time for parents and students. Here are some education benefits the IRS offers to offset some of the cost of college and possibly some stress.

  • American Opportunity Tax Credit. This credit has recently been extended through the end of December, 2017. It offers up to $2,500.00 per eligible student and is available for the first four years of post-secondary education. 40% of the credit is refundable which means you can receive up to $1,000.00 of the credit as a refund even if you do not owe any taxes. Tuition and fees, course related books, supplies and equipment all count as eligible expenses.
  • Lifetime Learning Credit. You may claim up to $2,000.00 for qualified education expenses on your tax return. Unlike the AOTC there is no limit on the number of years you can claim this credit for an eligible student. The Lifetime Learning credit is not refundable, meaning the credit will only eliminate tax you owe up to $2,000.00.

You can only claim one credit per student on your federal return each year. If you pay college expenses for more than one student in the same year, you can claim the credits on a per student basis, per year basis. In other words, you can claim the AOTC for one student and the Lifetime Learning Credit for another student.

  • Student loan interest deduction. You may be able deduct interest on qualified student loans. The deduction could reduce your taxable income by up to $2,500.00 and you don’t need to itemize to claim it.

The education benefits mentioned are subject to income limitations and may be reduced or eliminated depending upon your income.

Ten Tips to Help You Choose a Tax Preparer

1)   Check the preparer’s qualifications.  All paid preparers are required to have Preparer Tax Identification Number.  In addition to having a PTIN ask if the preparer attends continuing education classes

2)   Check the preparer’s history. Check for any disciplinary actions and for the status of their licenses. For CPAs check with state board of accountancy. For Attorneys check with the state bar associations.  For Enrolled Agents check with the IRS Office of Enrollment.

3)   Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.

4)   Ask to e-file your return.  Make sure your preparer offers IRS e-file. Any paid preparer who prepares and file more than 10 returns must file electronically, unless the client opts to file a paper return.

5)   Make sure the preparer is accessible. Be sure you will be able to contact the preparer after you file your return, even after April 15th.

6)   Provide records and receipts. Reputable preparers will request to see your records and receipts.  Preparers will ask you questions to determine your total income and expenses and your qualifications for deductions, credits and other items.

7)   Never sign a blank return. Avoid preparers that ask you to sign a blank form.

8)   Review the entire return before signing. Before you sign your tax return, review it and ask questions.  You are legally responsible as to the content of the return.

9)   Make sure your preparer signs and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law.  The preparer must also give you a copy of the return.

10)   Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Forms can be downloaded at the IRS.gov.

American Tax Relief Act of 2012

Happy New Year!

On January 1, 2013 Congress passed The American Tax Relief Act of 2012 preventing us from going over the fiscal cliff.  Yes, your taxes are going up; however the increases could have been greater.

For many taxpayers, the increased withholding from the payroll tax expiration will be significant and many will view that as a legitimate tax increase. Without the deal, taxes would have jumped an average of $3,500 per household.  Middle income families would have seen an average increase of $2,000 according to the Tax Policy Center.

In summary here are some of the ways your tax bill may change in 2013:

Payroll taxes:  The most immediate impact will be the expiration of the 2% Social Security tax cut.  In 2009 you were paying 6.2% for the Social Security tax before Congress and the White House cut the tax 2% to 4.2% for 2010 and 2011. This cut has expired and you are back to paying 6.2% as you were in 2009.

Income Taxes: Yes, taxes are going up a bit. All but the wealthiest households avoided the fiscal bullet- the expiration of the Bush-era tax cut. Predictors feared if those cuts reversed all at once it would take away billions of dollars of consumer spending and send the US economy into a recession.

The new law maintains tax rates with the exception of the top tax bracket.  The top tax bracket rate has increased from 35% to 39.6%. (Couples with income greater than $450,000 and individuals with income greater than $400,000 will pay taxes at the higher rate on the amount over the threshold.)

Capital Gains, Dividends:  Money earned from capital gains and dividends will remain at the Bush-era tax cut (0% – 15%) unless your total income is greater than the top bracket mentioned above. Taxpayers in the top tax bracket pay 20%. Taxpayers in the top bracket will be subject to a 3.8% Medicare surcharge tax on investment and unearned income.

Alternative Minimum Tax: In recent years many taxpayers have avoided the Alternative Minimum Tax because Congress applied a “patch” to the problem.  However, this year the problem was permanently fixed by the new law taking inflation into account.

Estate Taxes: The fiscal cliff was set to take a chunk out of money passed from one generation to the next. In 2012 estates of up to $5,120,000 were exempt from federal tax, and any amount over the threshold was taxed at 35%.  The fiscal cliff would have cut the threshold to $1,000,000 and raised the top rate to 55%.  The new law preserved the $5,000,000 tax free threshold and raised the rate to 40%

I would be happy to clarify any questions you may still have about the changes that have taken place.  Please feel free to contact my office at 215-258-1216 to set up a tax appointment.

Twelfth Tax Tip of Christmas

Hire a professional. Now is the time to consider your tax situation to determine your needs; do you have a unique situation and need some planning or do you have a small business with special tax needs?  Or perhaps you just don’t want to mess with the ever changing tax world.

Seventh Tax Tip of Christmas

Increase the contribution to your 401k or 403b. The maximum contribution for 2012 is $17,000 with a catch up contribution of $5,500 if you are over 50.  If you have not maximized your retirement plan consider increasing the amount withheld for the remainder of the year.

Sixth Tax Tip of Christmas

Make miscellaneous payments. Costs such as union or professional dues, job related educational expenses and subscriptions to business publications are deductible as itemized expenses as long as you enough of them.  The total miscellaneous expenses must exceed 2 percent of your adjusted income before you can write them off.