If you’re into an online business you can deduct business expenses or the cost of carrying on your business or trade.
Here are quick tips about tax breaks for your online business investments:
1) Web Design: Your website counts as advertising or the main method for your business so you can deduct all thecosts related to your website exposure. It includes payment for web content, SEO, back linking and other strategies to increase online visibility.
1) You started developing your website after you launched your business. You can recover the money you spent before you activated you online business. But, you can deduct a maximum of $5000 for the start up costs during the first 12 months of your business operation and spread the rest over the next 15 years.
If you operate an online shop, you can deduct the ‘prior to-activation-costs’ before or after you sell it.
2) Your website is necessary for your business: You can deduct the costs you incurred when you or a contractor developed the site.
You have two tax options:
- Deduct the costs of developing the site on the same tax year you paid for it
- Follow the accrual model. It depends on how you handle the yearly accounting for your business. You can also amortize the expenses within three tax years.
Tax rules to follow when you buy a website:
You can amortize the expenses for a period of three years beginning on the first month you used it.
The costs related to your website must be -
- legitimate business expenses
- investments in your business
- customer relationship
- sales channels
2) Software: IRS defines software as routines or programs used so that your computer will person the task you want. It includes the following:
- Documentation required to-
- maintain its programs
- Computer programs-
- application programs
- assembly routines
- executive systems
- operating systems
- utility programs
What’s not included in software definition:
Procedures external to the operations of computer-
- external control procedures
- instructions to the transcription operators
How to deduct software purchase
Two rules apply in tax deductions of software costs.
1) Purchase rules: If you buy software from a store and you use it without modifications-
You can use any of the two depreciation rules-
- three-year rule: You can deduct 1/3 of the cost in each of the three tax years
- Lump sum rule: You may deduct the acquisition costs of your software, every year in a lump sum.
2) Development rules: If you hire someone to customize or develop your software-
Depreciate the cost of the software over five tax years
3) Monthly Charges
IRS allows deductions for marketing or operational expenditures. These annual/monthly costs include-
Web hosting fees
Fees for your business domain name
4) Home Office. If you operate your online business from home, you may avail of the home office deduction.
- Dedicate a particular part of your house for business
- Document that you use the specific area in your home substantially for business
Does your online business require trips to clients, post office and other places? You may deduct mileage using the standard rate if you are using your own car. Be sure to document it for audit.
Online entrepreneurs sometimes attend continuing education seminars to keep abreast with the demands of the business. The expenses are tax-deductible and are included in the operation costs.
Depreciation: Your business equipment will depreciate overtime. You can deduct the depreciation for the following equipment:
- digital cameras
- fax machines
You can only deduct for depreciation only if-
- You bought the product from a stranger (not your relative)
- You limit the annual total depreciation to o $250,000
- You use the item solely and primarily for business purposes
Other Deductible Business Expenses
These expenses are 100% deductible-
- Trade discounts
- Small tools and equipment
- Salaries, wages, and other compensation
- Professional fees
- Professional development and training
- Print and copy
- Pension and profit-sharing plans
- Office expenses and supplies
- Maintenance and repairs
- Legal fees
- Interest paid
- Factory expenses
- Equipment rentals
- Employee benefit programs
- Dues and subscriptions
- Delivery charges
- Credit and collection fees
- Contract labor
- Continuing professional education
- Consultation expenses
- Commissions and sales expenses
- Bank charges
- Accounting fees
- Car/transportation expenses
- Gifts: Up to $25 per person.
- Home office
- Meals and entertainment
Doctors, don’t miss out on these 6 tax breaks available for you.
If you are the main owner of a business, you can get business-related tax deductions. Sole proprietors, partners, or contractors must keep careful records of their business expenses (which are considered deductible)
- Board exam fees
- CME expenses
- Communication expenses
- Licensing fees
- Medical equipment
- Office equipment and supplies
Does my business have to be medicine related to avail of tax breaks? No.
Although you cannot deduct the value for your time spent on charity work, donations to qualified charity are tax-deductible. These include the equivalent of goods, equipments you donated and the miles you used to drive to and from the charity of your choice. You can also include the expenses connected to donating your time.
Health insurance is undoubtedly very expensive. But don’t worry because IRS allows you to pay for it with your pre-tax money. Health insurance premiums are considered as deductible business expense, as well as your contributions to your health savings account (otherwise called as the ‘stealth IRA’) which allows you to use for deductibles and co-pays.
This high-deductible health plan and stealth IRA combination may not work for all taxpayers. But, if you are healthy you can save lots of money on your premiums and taxes.
Requirements for medical, dental or long-term care insurance premiums deductions for the self-employed:
- You receive a net profit from your self-employment. Report this on any of the following-
- Schedule C (Profit or Loss from Business)
- Schedule C-EZ (Net Profit from Business)
- Schedule F (Profit or Loss from Farming)
- You receive self-employment earnings as your partner reported to you on Schedule K-1 (Form 1065).
- You received wages reported on Form W-2 (Wage and Tax Statement), as a shareholder. You must own more than 2percent of the outstanding stock of a corporation.
- You use an optional method to calculate your net earnings from your self-employment on Schedule SE. It’s also known as Self-Employment Tax.
IRS allows you to carry mortgage interest tax-friendly. Make sure that you convert loans into tax-deductible loans and loans with low rates.
- File Form 1040
- Itemize deductions on Schedule A (Form 1040)
- The mortgage is a secured debt on a qualified home
- You have an ownership interest on a qualified home
Though you cannot get a tax break for Backdoor Roth IRA this year, it will allow you to shelter your retirement investments from future taxes.
Compared to insurance related tax shelters insurance agents often push on you, it is a far better option when it comes to tax benefits. Why? You can put a maximum of $5000 into a non-deductible IRA for yourself and another $5000 for your spouse. After that, you can instantly convert them to an IRA. However, you must be careful because the pro-rata rule does not allow you to have traditional IRA or any other SEP-IRA. But you can get around with this by rolling your IRAs into your 401K.
Tax-deferred Retirement Plans
You can squirrel away huge tax benefits on retirement account options. Many doctors miss out on these tax deductions maybe because some only have few savings while others don’t realize just how much money they can save with huge tax benefits on retirement accounts.
How? The government is not going to tax every dollar you put into a tax-deferred retirement account this year. You can have marginal tax rate as much as 50% if you belong to the highest tax bracket, and you have large state and local income taxes. As a result, you can save 50 dollars on your tax bill for every 100 dollars you put into your retirement account. That’s pretty wise move.
For doctor contractors: Contractors paid on 1099s must contribute 20% of their income to a SEP-IRA, up to $50,000 limits. If you’re over 50, you should pay an additional “catch-up” contribution worth $5500. If you don’t earn $250,000, you might want to use a Solo 401K which allows you to contribute more than 20% of your income.
For employee paid on W-2s: Doctors who are employed may be limited to as low as $17,000 into their 401K. But, don’t worry. Several 401Ks will match you. If not, many 401Ks will allow you to self-match up to the $50,000 limit. If your 401K doesn’t, you should talk to your employer to solve this issue.
What about a defined benefit plan? It allows doctors to shelter additional money from taxes. In some cases, you can shelter as much as another $50,000 or more.
You are obliged to pay taxes even if you are unemployed. Even severance pay and unemployment compensation are considered taxable. The truth is-it doesn’t really matter if you are unemployed or not. You have to file a tax return if your income is above the IRS income threshold for your filing status.
Why do I have to pay taxes for my unemployment compensation?
Unemployment compensation is a replacement of your wages and not a government benefit. The following unemployment benefits are considered taxable:
- Your state unemployment insurance benefits (up to 26 weeks)
- your extended benefits (up to an additional 13 weeks)
Unemployment compensation is not considered as earned income, which would otherwise qualify you for the Earned Income Tax Credit or the portion of the child tax credit.
Do you qualify for tax credits?
If you are unemployed, you may apply for the following tax credits:
I. Federal Earned Income Tax Credit: Earned income refers to taxable income and wages you get from working or from certain disability payments. If you are unemployed, you may still qualify for EITC if you receive any of the following taxable earned income:
Taxable earned income-
- Long-term disability benefits received prior to minimum retirement age;
- Union strike benefits;
- Wages, salaries, tips, and other taxable employee pay;
- Net earnings from self-employment for those who are working as-
- Minister or member of a religious order
- Statutory employee with income
- Owner or operator of a business or a farm
However, you may not be eligible for the EITC if you receive the following income:
Income that are not Earned Income-
- Child support
- Interest and dividends
- Payment received as an inmate while working in a penal institution
- Retirement income
- Social security
- Unemployment benefits
What Form to use: You can use IRS Form 1099-G if you receive your unemployment benefits during the year. You can report the unemployment compensation you receive in the income section of your tax form.
II. Child tax credit: It is available for taxpayers with a qualifying child. You can claim it in addition to the Credit for Child and Dependent Care expenses. You may be eligible for as much as $1,000 for every qualifying child below 17 years old.
Limitations – The credit is limit depends on your modified adjusted gross income. Please check where the phase out limits begins:
- All other taxpayer: It starts at $75,000.
- Married taxpayers
Filing a joint return: $110,000
Filing a separate return: I $55,000
III. Child and Dependent Care Credit: It is available for people who paid someone to care for their child.
Maximum limits of credit: The credit can be up to 35 percent of your qualifying expenses (it depends upon your adjusted gross income).
IV. Tax deductible receipts: If you are searching for a job, you may be able to deduct certain expenses you incur during job search, even if you do not get hired.
Publication 529, Miscellaneous Deductions explains that the following expenses can be included as deductions:
- Amounts for the resume submissions (e.g. cost for typing, printing and mailing copies to potential employers)
- Employment and outplacement agency fees
- Travel cost: Ordinary and necessary travel costs in looking for work in your current occupation or attending an interview.
How can I deduct my job hunting costs? You have to file a Form 1040 and Schedule A. You can add the job hunting costs as miscellaneous itemized deduction. These items are subject to 2% Adjusted Gross Income limits.
- Moving costs: Certain moving costs are considered as deductible if you meet the following time and distance requirements:
- Your move has to be closely related in time to the start of your new job
- you must have moved at least 50 miles
Use Form 3903 to calculate moving costs.
V. Back to school deductions: You may avail of tax benefits available for going to college or taking college courses to increase your chances of employment.
What are considered as tax deductible school expenses?
According to the Treasury Regulations:
- The education must not be pursued to meet the minimum education requirement for your employment
- The education should not qualify you to be employed in a new trade or business. Example: If you’re a nurse, but you decided to take up Law, your education expenses in the college of law will not qualify as deductible education expenses.
IRS Tax Refund Facts
Tax refund season is here, and you have many different options when receiving your refund. These include the direct deposit into 1 to 3 bank accounts, inflation indexed savings bonds and debit card arranged by independent tax preparers and traditional check.
What is tax refund?
Tax Refund refers to the return of excess amounts of the taxes you paid to the government in the past year. You can also receive tax refunds if you have fully refundable credits even if you didn’t owe taxes. Contrary to what other people think, tax refund is not a bonus from the government. It is an interest-free loan that you made to the government by paying in excess of what you owe. To avoid receiving a refund, be sure that you only have enough taxes deducted from your paycheck.
What are the IRS-approved options for receiving my income tax refund?
You have the following options:
- Direct deposit the refund into 1 savings or checking account: By using direct deposit, your check will not be lost or stolen. The mail man will not return it to IRS for being undeliverable. With direct deposit, you can access your refund faster than the traditional check.
- Get the refund as a paper check in your mail: It is the traditional and slowest means of receiving tax refund. Many taxpayers prefer this method due to the following reasons-
- Ignorance of other options
- Resistance to the use of advanced refund methods
- Lack of trust on the security of distrust of the electronic payments
- Invest in U.S. Series I Savings Bonds: You can buy up to $5,000 with your refund. Simply fill out Part II of IRS form 8888. Include this form when you file your return.
- Split the refund with direct deposits. You can divide it into 2 or 3 checking/savings accounts. You can conveniently manage your money by sending a portion of your refund to an account for your current and future needs. Direct deposit is also safe and speedy.
How can I split the refund?
It is very easy to split your refunds. Simply follow the steps below:
- Download IRS’ Form 8888, Allocation of Refund (plus Savings Bond Purchases)
- Read the instructions on the form and fill it up. If you don’t want to split your refund, you can use the direct deposit line on the form to let IRS know that you want to deposit your refund into just one account.
Can a tax preparer company guarantee early tax refund?
No. Many people need their refund as soon as possible to take care of the bills. So, they choose to go to tax preparer companies like HR block and agree to pay tons of interest on refund in exchange for a quick turnaround. But, many customers are disappointed because they don’t get the refund on the promised date. Others also get in on time, but they have to suffer from exorbitant interest on refund.
There are many factors that can affect the tax refund time. These include the following:
- Method of filing and refunds (paper filing and tradition check refund option is the slowest)
- Accuracy of tax returns filed. Returns that require corrections or review can take a while
If you want a faster refund processing, choose e-file with direct deposit instead of paper filing. With the recent technology upgrades, IRS will issue refunds in as short as ten days (compared to the average processing time of 21 days) for those who chose e-file with direct deposit.
How to receive your refunds early
There are things you can do to speed up the processing of your tax refund. You cancheck your return before you send it. An error in entries is the major cause of delay in the processing of your tax refund.
Here are the top tax return errors you must avoid:
- Entering data on the wrong lines of the tax form
- Miscalculating the tax you owe based on your marital status, taxable income, credits and deductions
- Not entering your Social Security numbers
- Writing incorrect Social Security numbers
What if I don’t get my tax refund?
If you didn’t get your tax refund because you lost or destroyed your check, or it didn’t reach your account, you can file an online claim at IRS.
IRS’ “Where’s my Refund” tool can give you updates for the current tax year you filed a return. You can access your refund information within the following time-frame:
- E-file: 24 hours after IRS acknowledged the receipt of your (e-file) return
- Paper return: Four weeks after you filed a paper return.
What do I need to use “Where’s my Refund” information?
You need the following-
- Exact refund amount
- Filing Status
- Social Security Number
IRS allows you to claim one exemption for each person you can claim as a dependent. What’s more, you are allowed to claim an exemption for a dependent even if your dependent files a return later on.
Who is my dependent?
The term “dependent” refers to:
A qualifying child, or
A qualifying relative
I. Five tests for qualifying child
A child has to meet the following tests to be your qualifying child:
1. Relationship: He or she must be your
a) Child. That includes your-
- Biological and adopted son and daughter
- Foster child
b) Relatives- they can be your-
- half brother
- half sister
- descendant (niece/nephew)
2. Age: To meet this test, your child must be:
a) Permanently and totally disabled anytime during the year
b) A student below 24 years old at the end of the year.
c) Below 19 years old at the end of the year.
- Child must be younger than you or your spouse
- Child must be younger than you or your spouse if he/she is not permanently and totally disabled
3. Residency: To meet this test, your child must have lived with you for more than 6 months. Exceptions for temporary absences:
a) children of divorced or separated parents
b) children was born or died during the year
c) kidnapped children
Rules on Temporary absences: Your child is considered by IRS rules to have lived with you during periods of time if your absence is due to the following:
- Military service
4. Support: To qualify, the child did not shoulder more than 50 percent of his or her own support for the year.
5. Joint return: The child did not file a joint return for the year.
Exception: If your child and his or her spouse file a joint return for the sole purpose of claiming a refund of income tax withheld or estimated tax paid.
Situation A: Married couple wants to know who their dependents are.
Spouses Paul and Glory Smith
- Tax year: 2011
- Marital status on the last day of 2011: Married
- Spouse provided more than half of support for 2011
- The couple intends to file a joint tax return for 2011
People for Whom Paul and Glory May Get Tax Benefits
- Qualifying child, or
- Relatives who lived with them during 2011, or
- For whom they provided any financial support during 2011.
Situation B: Divorced couple filing joint return wants to know who can claim their child as dependent.
- Tax year: 2012
- Marital status on the last day of 2011: Divorced Spouse provided more than half of support for 2011
- Declared dependent: 1 biological child, below 17 years old. The child is totally dependent on her parents for support.
Who are the couples dependent?
The biological child
If Mr. and Mrs. Smith divorced on Tax year 2012, can both of them claim their biological child as dependent?
No. Only the custodial parent can claim the child as dependent for tax breaks purposes. But, the custodial parent is allowed by IRS rules to waive the right to claim the child as dependent in favor of the non-custodial parent.
What are the tax-breaks available for divorced parents?
- head of household filing status (if applicable)
- exclusion for dependent care benefits
- earned income tax credit, and
- dependent’s personal exemption
- child tax credit and additional child tax credit
- child and dependent care tax credit
Situation C: Splitting Tax benefits
Tax year: 2013.
What should Mr. and Mrs. do to split the tax benefits related to their dependent child?
According to IRS rules, they should meet the four criteria below:
a) One of them has custody of the child during the year; and
b) The custodial parent fills up Form 8332 or its equivalent to waive his or her right to claim the dependent
c) They must be divorced or lived apart at all times in the last six months of the tax year;
d) They provided more than 50 percent of their dependent child’s whole financial support;
II. Who is a qualifying relative?
1. He or she is not your qualifying child.
2. He is a member of your household:
a) He/she lives with you all throughout the year, or-
b) Related to you in any of the following ways (if they don’t live with you):
Your child: biological child (includes your legally adopted child), foster child, stepchild, or their descendant
Your biological ascendants (parents, grandparents)
Your brother/ sister (includes half brother/sister and stepbrother/sister) and their children
Your stepfather or stepmother.
3. Gross income test: Your gross income for the year must be less than $3,900.
4. Support test: You provide more than 50 percent of your qualifying relative’s total support throughout the calendar year.
We offer you this comprehensive review of popular online tax-preparation software (and company websites) for U.S. taxpayers with relatively simple income and tax deductions to report.
It has a superiorly designed user interface. Its wizard-like interview tool helps in tax preparation management. Its navigation and review process are excellent. You can also get an online support anytime through its free chat and phone support.
- Clean and sound design
- Superb deduction discovery tools
- Highly recommendable for simple and complex tax situations
- Systematic learning resources
It has a weak support system and you still have to buy extra tax applications.
H&R Block Deluxe
- Abundant upgrade paths.
- Availability of 1040s and commonly used tax forms and schedules
- Easy and effective navigation.
- Free audit support.
- Immediate help/support available
- Reliable tax-preparation tools
Poor review process. It is difficult to review complete tax return if there are erroneous entries. You can only rely on expert chat support
It is the best free tax preparation and filing tool available because of the following reasons-
- $7.99 unlimited expert help by phone.
- Clear and simple user interface with multiple navigation options.
- Free email support
- Pay $14.99 for tax preparation and e-service. This is less costly compared to its competitors.
- Supports all forms and schedules offered in Deluxe version
TaxTutor guidance inaccessible
- Easy navigation due to its small progress menu on top of your screen
- Extremely helpful tax preparation and management guide
- Specialized feature (Military edition) that offers members of the armed forces to complete their taxes free of charge
- Limited support
- Limited tax features and facilitation tools
- No user forum
Tax Software Features Comparison charts
Check this comprehensive comparison guide on Pricing and Features of four most popular tax software available today.
|Tax software||TurboTax||HR Block||TaxAct||Tax Slayer|
|Price||Federal Price$0 – $74.99State Price$27.99 – $36.99
|Federal Price $0 – $49.99State Price $27.99 – $36.99
|Federal Fee Edition:Federal Fee: $0
State Fee: $14.95
Federal Fee: $9.99
|Federal Price$0 – $32.95State Price$0 – $20.90
|Accuracy Guarantee – It guarantees the accuracy of your taxes||Available||Available||Available||Not Available|
|Audit Risk Identification- It indicates your audit risk. The software risk-minimizing solutions||Available||Available||Not Available||Available|
|Automatically Double-Check Returns||Available||Available||Available||Available|
|Prior year comparison. It automatically compares your previous and current taxes||Available||Not Available||Available||Available|
|Real-Time Balance Meter||Available||Available||Available||Available|
|Tax software||TurboTax||H&R Block||TaxACT||TaxSlayer|
|Charity Donation Tool – This tool allows doing the following-
|Deduction Discovery – This tool searches all the available deductions to make sure that you get maximum refund||Available||Available||Available||Available|
|Industry-Specific Tax Deductions –It gives you a walk-through of all the available industry-specific deductions.||Available||Available||Not Available||Available|
|Information Transfer – You can directly pull information from previous tax forms into your current year forms.||Available||Available||Available||Available|
|Interview Guidance – It asks you questions. The software uses your answers to automatically fill up the appropriate forms.||Available||Available||Available||Available|
|Life Events Advisor – The software helps you identify your major life events and their tax implications||Available||Available||Available||Available|
|Prior Year Returns – You can easily access your tax return from a previous tax year.||Available||Available||Available||Available|
|Reminders - You can do the following-
|Rental Property Tool – A tool exists to take care of rental properties tax by helping you do the following-
|Step-by-Step Guidance – The software guides you step by step all throughout the process of tax preparation and submission||Available||Available||Available||Available|
|Amended Tax returns-You can do the following:
print paper copies of your amended tax returns
|Costs Deducted From Return – The following can be deducted from your tax refund-Fees associated with-
|E-File Extensions – This tool allows you to e-file an IRS tax extension||Available
|E-File Federal Returns – Use this software to e-file your federal tax return.||Available||Available||Available||Available|
|E-File State Returns Use this software e-file your state tax return.||Available||Available||Available||Available|
|Free Federal Edition - Use this software e-file your federal tax return for free.||Available||Available||Available||Available|
|IRS Confirmation – You will receive confirmation that IRS has already received your e-filed tax forms.||Available||Available||Available||Available|
|Prior Year Filing - You can do the following-
|Available||Available||Not Available||Not Available|
|Retail Locations – get in-person support at the company’s local retail locations.||Not Available||Available||Not Available||Not Available|
|Not available||Available||Not Available||Not Available|
It is costly to raise kids especially if you still have other dependents to support. But, there are benefits and tax credits available for you. We outline the three available tax deductions and credits that may help keep you on track.
I. Child and dependent care tax credit
Who can claim the child and dependent care credit? Parents who paid someone to care for their child, spouse, or dependent last year, may be able to claim the Child and Dependent Care Credit on their federal income tax return.
IRS rules in claiming this kind of credit
1. Qualified child and dependent:The care must have been provided for one or more qualifying persons. You must identify each of them in your tax return.
Who is a qualifying person?
- Your dependent child age 12 or younger when the care was provided
- Your spouse or other individuals who are physically or mentally incapable of self-care
- A person who was not physically or mentally able to care for himself or herself, provided that he or she-
- lived with you for more than half the year and –
- Was your dependent, or
- Would have been your dependent except that:
- That person’s gross income is $3,900 or more,
- He or she filed a joint return
- He or she could claim you (or your spouse if filing jointly), as a dependent on another person’s 2013 return.
Purpose of providing care: You paid someone to care for your dependents so that you or your spouse (if you are married and filing jointly) can-
- Continue work
- Look for a job
3. Income qualifications: You – and your spouse if you file jointly – must have earned income from the following:
- Net earnings from self-employment
- Other taxable employee compensation
How can my spouse be considered as having earned income? Your spouse is considered to have earned income if he or she is-
- a full-time student
- physically or mentally unable to care for herself/himself
4. Qualified care providers: Please identify the care provider(s) on your tax return.
Can my payments for care be paid to the dependents I stated on my return? No. The payments for care cannot be paid to any of the following-
- your spouse
- your child who will not be age 19 or older at the end of the year (even if he/she is not your dependent)
- someone you can claim as your dependent on your return
- parent of your qualifying person
What is the tax implication if I pay someone to come to my home and care for my dependent or spouse?
You can be considered as a household employer. Thus, you may be required by law to do the following:
- withhold and pay social security and Medicare tax
- pay federal unemployment tax
Figure 1. Worksheet A. Worksheet For 2012 Expenses Paid in 2013. Publication 503 (2013)
Figure 2. Worksheet A. Filled-in Worksheet for 2012 Expenses paid in 2013. Publication 503 (2013)
II.The Earned Income Tax Credit (EITC):This is a refundable tax credit- meaning, the qualified taxpayers may get money back, even if they have no tax withheld.It is available to the following-
- Self-employed individuals
Earning limits: You must earn $51,567 or less in 2013.
How can I get the credit? You have to file a return and claim the EITC, even if you are not required to file.
What are the Credit Limits for Tax-Year 2013?
The EITC depends on the following:
- Your income
- Your family size
- For taxpayers with no qualifying children: up to $487
- For taxpayers with three or more qualifying children: maximum of $6,044
Eligibility to claim EITC
To claim EITC you must do the following-
1. File a tax return
2. Receive earned income, like-
- income from running a farm or business
Other types of income not considered as earned income? Retirement pensions- though they are taxable, they are not considered as earned income.
3. Get a Social Security number that is valid for employment
4. Filing status:
- Head of household
- Married filing jointly
- Qualifying widower or widow
5. U.S. citizen or resident alien
6. Income must be below certain amounts.
For tax year 2013: earned income and adjusted gross income should be less than the following amounts-
- For a couple with one qualifying child-$$37,870
- $43,210 for married taxpayers who are filing jointly
- For taxpayers with three or more qualifying children: $46,227
-$51,567 (married filing jointly)
How to Claim EITC
What forms should I use to claim EITC?
- Form 1040
- 1040A or
What if I am claiming the EITC with a qualifying child?
Fill up the Schedule EIC. Attach it to the tax return.
III. Child tax credit. It is intended for people who have a qualifying child. You can claim it in addition to the Credit for Child and Dependent Care expenses. To claim this credit, you have to file Form 8812.
Amount of credit: You can reduce your income tax by up to $1,000 per qualifying child below 17 years old.
Is there an additional Child Tax Credit? Yes. You can claim the Additional Child Tax Credit if the amount of your Child Tax Credit is bigger than the income tax you owe.
Want to file your tax return? There are only two ways to submit your tax return to the IRS- mail it on paper or submit by e-file.
Paper filing is generally cheaper. But, it may take a while before you receive your refunds. E-file is generally the safest, fastest and most convenient way to file your tax return. Bear in mind that the deadline for filing and paying your taxes or requesting an extension is only up to April 15, 2014. So, please review these two filing options and their features to help you get started.
If you want to save money you can use IRS Free File Software. Free File provides the following though online fallible forms or brand-name software:
- free federal tax preparation
- e-file for taxpayers
Who can use Free File?Anyone with an Adjusted Gross Income (AGI) of $58,000 or below in the preceding year 2013 can use Free File.
Can I use free brand-name software? Yes. You can use the “Help Me Find Free File Software” tool to find the company which best meets your needs.
What if my income is over $58,000? You can use the Free File Fillable Forms.
Can I file my tax return for free? Yes. Some Free File companies offer the following-
- free state tax prep
If you want to know if these free services are available in a Free File company you can check their Free File home page.
Should I file a tax return to report my W2 wage income?
It depends on your location. The following states do not require you to file a state income tax return for W2 wage income:
- New Hampshire
- South Dakota
Tennessee and Tennessee still require taxpayers to file returns for the following:
- individual interest
- dividend income
What should I do to use Free File?
- Simply visit IRS.gov/freefile. You can use it anytime.
- Review the best match for your needs from IRS Free File partners. You may also use the ‘help me’ tool to narrow down your options.
- You may click the “Leave IRS site” button to continue to check the website of an IRS Free File partner. You can get down to your return in a safe and secure way.
Things you need to get started on Free File
- 1 copy of previous year’s tax return
- Adjusted Gross Income (AGI) or Personal Identification Number for the previous year.
- Valid email address –You need a valid email address to receive notification from the Free File software company that IRS accepted your return.
- Valid Social Security Numbers for-
- Forms 1099-INT that show the interest paid to you during the year
- Forms W-2 from your employers
- Form 1099-G that shows the following-
- offset of state/local taxes
- Forms 1099-DIV and Forms 1099-R
- All receipts related to your small business (if applicable)
- Income receipts from the following-
- S corporation
- real estate
- Social Security benefits
- Unemployment compensation
- Other income
If you want to file your taxes for free, you can download the appropriate tax form from the IRS website. Do your math by using a pen and calculator. Then, file a paper return to the appropriate IRS office in your State. You can also use IRS software to calculate the forms, deductions and other calculations you need to complete your tax return.
When you file a paper return, you have to manually input the figures from your receipts, payroll and other applicable documents. Next, you calculate the following-
- your income
- tax liability
Then, mail the following to the IRS office:
- income statements
- tax return
When filing a paper return, you have to submit proper documentation to the IRS. Hold on to your tax documents because IRS may choose to review your file.
When to choose Paper filing:
Filing on paper is your best option in the following situations:
- you are not eligible for e-filing
- you have a simple tax return
The following are the most commonly used tax forms and publications:
- Form 1040 (For Annual income tax return filed by citizens or residents of the United States)
- Form 1040A ( U.S. Individual Income Tax Return)
- Form 1040-ES (Estimated Tax for Individuals)
- Form 1040EZ (Income Tax Return for Single and Joint Filers With No Dependents)
- Form W-4
- Form W-9
- Publication 15
- Publication 17
Check the IRS website for a complete list of downloadable Paper Tax Forms and instructions.
Reduce your taxes this tax season by taking advantage of tax credits, deductions and savings plans that can help you with your expenses for higher education. Here are three tax benefits available for you:
I. The American Opportunity Tax Credit: The credit is up to $2,500 per student for the following-
tuition and fees
Requisites to claim the American opportunity credit:
You must pay for qualified education expenses of higher education
You must pay for an ‘eligible’ student
The eligible student is-
your spouse, or
a dependent for whom you claim an exemption on your tax return
Features (Qualifications and Limitations):
Felony drug conviction: The student must not be convicted of a felony for possessing or distributing illicit drugs within the taxable year.
Modified adjusted gross income
$90,000 for the following-
head of household
$180,000 for married couples filing jointly
Number of tax years credit available: Available for four tax years per eligible student
Number of years of postsecondary education: Available only if the student did not finish the first four years of postsecondary education.
required enrollment fees
The student must use them for a course of study.
Refundable or nonrefundable: 40% of credit may be refundable; the remainder is nonrefundable
Type of program required: Student must pursue a program that leads to a degree or other State-recognized education credential
Maximum credit: Up to $2,500 credit per eligible student
Figure 1. Form 8863.
II. Lifetime Learning Credit: Claim up to $2,000 per tax return for the following expenses which you paid directly to the school:
To whom is LLC available?
It is available for a taxpayer who paid for the education cost-
For higher education
For an eligible student
An eligible student is-
your spouse, or
a dependent you claim an exemption on your tax return
Features (Qualifications and Limitations):
Felony drug conviction: The student is eligible regardless of felony drug convictions
Limit on modified adjusted gross income:
$63,000 for the following-
head of household
$127,000 ( for married taxpayers who are filing jointly)
Number of courses: 1 or more courses
Number of tax years credit available: Available for all years of-
for courses to obtain or improve job skills
Number of years of postsecondary education: Available for all years of-
postsecondary education and
for courses to acquire or develop job skills
Payments for academic periods: Payments made in-
2013 for academic periods beginning in the taxable year, or
beginning in the first 3 months of the next taxable year
Qualified expenses: Tuition and fees required for enrollment or attendance. It includes the following expenses:
Refundable or nonrefundable: Nonrefundable.
Maximum credit: Up to $2,000 credit per return
III.Tuition and fees deduction: It is an education benefit that allows you to deduct up to $4,000 from your taxable income for your college expenses.
Features (Qualifications and Limitations):
Who is the eligible student?
Any of the following individuals who are enrolled in a recognized school-
Limit on modified adjusted gross income:
$80,000 for the following-
head of household or
$160,000 (taxpayers who are married and filing a joint return)
Maximum benefit: Up to $4,000.
Tuition and fees considered deductible: Only the amount required to attend or enroll in an eligible postsecondary educational institution.
Where is the tax deduction taken? It comes as an adjustment to income on Form 1040/ 1040A.