Can You Use Tax Credits and Tax Deductions?

You can definitely use tax credits and tax deductions to lower the amount of federal income tax you pay. Tax credits directly reduce your tax. Deductions reduce the amount of your taxable income, the taxes you pay and may increase the amount of your refund if you have one coming. However, taking some deductions and credits will depend on which tax bracket you fall within and your personal situation.

Tax Credits and Tax Deductions

Federal income taxes can be complex, even for low-income filers. The Advance Child Tax Credit payments that began in the summer of 2021 is an example. You may have been receiving them, but the amount is half of what the total would be. You can claim the other half when you file your federal income tax return. Corona Virus Impact payments and stimulus payments will also have to be considered.

Tax Credits

There are credits for Earned Income, dependent care, adoption, and the elderly or disabled. There’s a foreign tax credit, those for undistributed capital gains, excess Social Security and RRTA withholdings and retirement savings contributions. You may have a credit if you’re a homeowner or have costs from healthcare and education. Some have limits on the amount that can be claimed.

Deductions

Work deductions are one of the most common types of deductions, enabling you to deduct expenses such as union dues and uniforms, or the use of your car and a portion of your home space if you’re working from home. If you’re part of the gig economy or use an employment app for per-day jobs, you can still take those deductions.

If you use those apps or are part of the gig economy, you should be aware that you’ll be classified as self-employed by the federal government and that means you’ll be paying higher taxes. You’ll be liable for self-employment taxes, Social Security and Medicare taxes. The good news is that you can typically claim your earnings on your regular income tax form under “Other Income.”

Tax Preparation

There are a number of good online tax preparation software programs for those that have fairly straightforward tax forms. If your taxes are more complicated, you should definitely seek the services of a professional tax preparer or CPA.

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Tax Deductions
posted by Mark Battalini
November 29, 2021

Can I Deduct Elder Care on my Tax Return?

An increasing number of individuals are caring for elderly parents and the costs can add up. Many people overlook the deduction when filing their income taxes. There is definitely an elderly care tax credit, but it represents a highly complicated set of rules. Unlike most credits, the individual doesn’t have to qualify as a dependent, but they can be.

Eligible Costs

In 2021, you could claim up to $4,000 in elderly care costs for one individual and up to $8,000 when caring for two people or more. Costs can include medications, medical care, exams, therapy, and mental health support.

Expenses can also encompass meals and household services, along with qualifying long-term care services. Dental care, transportation, recreational activities may also qualify. There are very specific rules governing whether you can claim it.

Who Qualifies?

The person being claimed must have lived with you for at least six months during the year. They must be physically or mentally unable to care for themselves. Only one sibling may claim the deduction, and the parent must be a legal resident, U.S. resident alien, U.S. national, a resident of Canada or Mexico, the Republic of Panama, or the Canal Zone. They’ll also need valid ID and Social Security number.

In-Home Care

Your parent’s gross income must be less than $4,300. You may also claim an elderly care credit if you hire an in-home caregiver. If you plan on claiming the credit, it’s best to consult with a tax accountant to determine if you’re eligible and if specific conditions and costs qualify.

Seniors and Spouses

If you’re a senior residing in an assisted living or long-term care facility, you may be able to claim a variety of deductions. IRS rules are different for individuals claiming the expenses for themselves vs. a child claiming the deductions for a parent. There are also precise rules for spouses. The rules are complicated and will also depend on who is actually paying the costs.

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Tax Deductions
posted by Mark Battalini
October 7, 2021

Deducting Medical Expenses

Everyone wants to lower their tax burden by getting every possible deduction to which they’re entitled and medical expenses is one way to accomplish that. However, individuals must itemize to claim the deduction and much will depend on an individual’s income. Claiming medical expense deductions is beneficial if the amount of the deductions exceeds the standard deduction on income taxes.

What can be Deducted?

The IRS enables taxpayers to deduct unreimbursed medical, dental, vision, and mental health expenses for themselves, a spouse and dependents, up to 7.5 percent of their adjusted gross income. Those expenses can include diagnostics, mitigation, treatment and cures, along with preventative measures. Individuals can also deduct travel expenses.

The COVID-19 pandemic has left many individuals with astronomical medical bills. Some private insurance companies have pledged to cover all COVID-19 expenses, while others have not. Taxpayers that rely on Medicaid and Medicare for medical care may have co-pays and spend-downs that they can claim.

There are a great many expenses that taxpayers can deduct if they’re itemizing deductions, up to 7.5 percent of their adjusted gross income. They include fees to a wide range of medical and mental health professionals, including surgeons, dentists, chiropractors, psychiatrists and psychologists, and non-traditional medical practitioners.

Wide Range of Deductions

Other expenses include oral and injectable prescription medications, weight loss programs prescribed by a doctor, and in-patient costs for drug, alcohol and nicotine addiction. Nursing home costs, insurance premiums, and medical aids such as crutches, wheelchairs, dentures and even service dogs are all allowable expenses.

The range of medical-related expenses that can be deducted is extensive, but there are also restrictions on what can be claimed. For taxpayers with substantial costs, it can be beneficial to claim those deductions. The best solution for those intending to claim medical expense deductions is engaging the services of a tax professional or certified public accountant (CPA) that has the experience, knowledge and resources to help them get every deduction to which they’re qualified.

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Tax Deductions
posted by Mark Battalini
September 5, 2021

Stimulus Relief and Taxes

Various stimulus payments during the COVID-19 pandemic have been designed to provide relief for those struggling during job loss and lock downs. The coronavirus has affected every aspect of life, and that includes income taxes.

Payment Delays

The federal government has made three rounds of stimulus payments to individuals, even to those that typically don’t file or aren’t required to file. The distribution of those payments has encountered a number of problems. Individuals may have received one, but not the other payment, but that doesn’t mean that they won’t receive the second and third.

Others received less than the full amount and in many cases, the payments were confiscated for child support and similar court-ordered payments or the full amount wasn’t disbursed. For those individuals, they may be eligible to claim a Recovery Rebate Credit, but to do so they need to file a tax return.

Tax Liability

The good news is that stimulus checks aren’t taxable. Individuals must pay taxes on income, but stimulus checks aren’t really income for tax purposes. It’s classified as an advance payment on a tax credit and a tax credit isn’t taxable either. Pay careful attention to the new tax forms, as they can save taxpayers money if they:

Had a baby
Were married and one spouse doesn’t have a Social Security number
Income dropped in 2020
Are a recent college graduate
Didn’t receive a full round of stimulus checks
Didn’t file a 2018 or 2019 tax return

Delivery Difficulties

The stimulus payments were first made to people that filed tax returns by e-file. Paper checks were then dispersed to those that filed paper copies of their return. It led to delays, shorted amounts, and no check at all, since distribution was based on 2019 and 2020 tax returns. That means individuals will be able to claim the amount they missed as a tax credit on their taxes.

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Tax Deductions
posted by Mark Battalini
April 17, 2021

Common Tax Deductions you should Never Miss

Income tax time can be a dreadful season if you are not aware of all of the income tax breaks you can get through income tax deductions. It is important to understand what is tax-deductible so that you can get as large of a tax refund as possible.

Probably the most well-known income tax deduction is the Earned Income Credit. The earned income tax credit is available to those who make a minimum amount of money and can file tax as single, married, or head of household. The more money you made, the more your earned income tax credit is until you hit the peak. Once you hit that peak, the earned income tax credit goes down until you reach the maximum income allowed to receive the earned income tax credit.

The second well-known income tax deduction is the Child Tax Credit. The child tax credit is available to you if you have two or more children in the home for more than six months out of the year for which you are filing tax, and if you have a tax liability. The total amount is then applied to your tax liability, and any amount of child tax credit left over is made a part of your income tax refund.

Another income tax deduction is for child daycare, when the child daycare is needed in order for one or both parents to work outside the home. This daycare income tax credit is equal to a percentage, up to a maximum amount, of the actual daycare expenses paid for that tax year.

Other expenses can also be tax-deductible. Interest paid on a mortgage for the primary residence can be claimed as an income tax deduction. Medical expenses can also be claimed as an income tax deduction, although this is not very helpful unless you have an excessive amount of medical expenses to deduct on your income tax return. Tax paid to another state can be used as an income tax deduction in the state that you live in. Donations and contributions to charities, fundraisers, churches, etc. can also be tax-deductible.

If you are self-employed, you can also claim business expenses as income tax deductions. This includes any expenses directly related to running your business. You can take a mileage income tax deduction for any miles you put on your vehicle for business purposes. You can also take an income tax deduction for your office space in your home if it is used only for business purposes in the form of a portion of your rent, utilities, and phone bills. You can also take an income tax deduction for your personal computer, printer supplies, and other office supplies as long as you have the receipts for the tax-deductible expenses, and usage logs for the personal computer and other equipment to show that it is used primarily for business.

As you can see, there are many income tax deductions available to you. If you have any questions about what is tax-deductible, you should contact a qualified, certified, licensed tax accountant today.

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Salary, Tax Deductions
posted by Mark Battalini
February 14, 2021

Your Tip Earnings and Taxes

The internal revenue service takes a very simple approach to tips. It views all tips you make in your job as taxable income that must be reported and for which taxes must be paid. Put another way, the IRS has a simple but brutal view towards taxes.

Now tips come in different forms. Some are received directly from customers while others are automatically added to the customer’s bill. The IRS takes the position you must report and pay taxes on both amounts. This also includes taxes you earn through any group splitting where all tips are collected together and then split amongst the employees. On top of this, the IRS also takes the view that any non-cash tips such as tickets to something are also income that should be reported and taxes paid on. Put another way, the internal revenue services gets you coming and going.

To make things a little more brutal, the internal revenue service requires you to take some steps in reporting tips. If your tips total $20 or more in any calendar month from a single job, you are supposed to report the total to the employer by the 10th day of the next month. The employer is then supposed to withhold federal income tax, social security and Medicare taxes from your paycheck. Keep in mind that the failure to do so can lead to the placement of a 50 percent penalty on your taxes. Obviously, the IRS is fairly serious about getting its money.

Tips paid to waitresses, bartenders, barbacks and so on are a hot spot with the IRS and always have. Since tips tend to be given in cash form, the potential for forgetting to report them is particularly high. The IRS seems to think so and has shown a generally aggressive attitude on the subject. If you indicate you are a waitress or bartender on your tax return, but fail to report any tip income, it could be audit time.

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Tax Deductions
posted by Mark Battalini
February 14, 2021

Bad Debt Tax Deduction

Practically every small business has receivables that it cannot obtain from clients. If your small business doesn’t have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction.

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:

The existence of a legal relationship between the small business and the debtor
The receivables are worthless
The small business suffered an actual loss

Proving there is a legal relationship between the small business and debtor is fairly simple. You must simply show that the debtor has a legal obligation to make a payment. Most businesses issue invoices or sign contracts with debtors and these documents suffice to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex. A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example of where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income, but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy.

Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The IRS does not consider the expenditure of time and effort to be a sustained economic loss.

Small businesses suffer all too often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, you should file amended tax returns to get a refund.

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Tax Deductions
posted by Mark Battalini
December 30, 2020

What Is A Dependent For Tax Purposes?

What are the qualifying characteristics of a dependent for tax purposes? Following is a general explanation on how to determine dependents, and how it relates to your tax status, liability and the credits you can claim on your tax return.

There are a few assessments that a person must pass in order to qualify as a dependent on a U.S. tax return. For starters, individual must be the taxpayer’s child, stepchild, foster child, sibling or stepsibling, or a relative of one of these, and the individual must live at the taxpayer’s residence for greater than 6 months of the tax year. There are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year.

The individual must be under the age of 19, or 24 if a full-time student. Finally, the individual must not have contributed more than one-half toward his or her own support during that year in order to qualify as a dependent. Other qualifying points include, U.S. citizenship and single status or married filing as a single person.

If the individual fulfills all of these requirements, then any of the applicable deductions, exemptions, and credits can be used for them. Some of these include dependent daycare expenses, child tax credits, medical expenses, earned income credit, and various itemized deductions. Determining eligibility often means the difference between owing money to the government and receiving a refund from them.

The child and dependent care expenses cover things like daycare, after school programs, private childcare services, etc. Any qualifying children the child and dependent care expenses must be under the age of 13.

The child tax credit is similar to the earned income credit because it is a straight credit. Taxpayers with a qualifying dependent that is under 17 years old may only take the child tax credit.

Determining if you have any dependents that you can claim on your annual tax return might take a little work, but it can be well worth it in the long run. You could be rewarded with a nice tax refund, thanks to the credits, exemptions, and deductions that your dependent(s) will give you the opportunity to claim.

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Tax Deductions
posted by Mark Battalini
October 31, 2020

How Retirement Contributions Affect your Taxes

The COVID-19 pandemic underscored the need to save for retirement and highlighted how many individuals are living paycheck to paycheck. Many individuals were unable to continue their contributions, while others were forced to withdraw funds due to pandemic-related situations. The following are some of the ways in which retirement contributions will affect your taxes.

Filing Status

Navigating tax-deductible amounts can be highly complicated and depends on your filing status, age, and the type of retirement plan you have. The best option to ensure accuracy on your income tax return is to seek the services of a professional accountant or tax preparer that will be knowledgeable in the tax laws governing multiple types of retirement accounts.

Roth IRA

Contributions to a Roth IRA are not deductible. You’ll pay the full amount of taxes on any money placed in the account. The trade-off is that you won’t pay taxes on contributions or investment returns after you retire and begin drawing money from the account.

Traditional IRA

Contributions to a traditional IRA reduces taxable income in direct proportion to the amount contributed. There’s a limit of $6,000 that can be contributed to the retirement plan. However, if you’re aged 50 or over, you can contribute up to $7,000.

Retirement & the CARES Act

The CARES Act in response to the COVID-19 pandemic added some changes to retirement funds and how they’ll affect your tax liability. The Act removed the 10 percent penalty on withdrawals if you’re under 59.5 years old. The tax liability can be spread over three years and an amended tax return can help regain money paid on the distribution if you’re paying back the account.

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Tax Deductions
posted by Mark Battalini
September 30, 2020

Tax Credits for Single Parents

Tax time can be extremely stressful, particularly for single parents that need every tax credit they can take. There are a number of ways that single parents can take advantage of credits on their federal income taxes to reduce the tax burden of which they may not be aware.

Head of Household

Claim head of household to receive a higher standard deduction. Individuals will also pay fewer taxes overall. Generally, the filer can claim this if they were single on the last day of the year, the child(ren) lived with them the majority of the year, and they provided more than 50 percent of the child’s financial support.

Earned Income Credit

This is one of the most often claimed credits by single parents and couples. It’s designed for working families of low- and moderate-income, even if they don’t owe taxes. However, the IRS is required to hold the entire amount of any refund until mid-February if they claim this.

Child Care Credit

A single parent is eligible for this credit if they paid someone to care for their child so they could work. The child and the one caring for them must meet certain requirements. The credit is available when children are cared for by a licensed childcare center. Parents that pay someone to care for a child in their own home may be subject to the “Nanny Tax” as an employer.

Child Tax Credit

The child tax credit shouldn’t be confused with the child care credit. Up to $2,000 can be deducted from tax liabilities for each child under the age of 17 on Dec. 31, provided the parent has earned at least $2,500. The amount that can be refunded begins to diminish once individuals reach the $200,000 mark for income.

Medical Expenses

Extensive medical expenses that exceed 7.5 percent of an individual’s adjusted gross income can be deducted. It will require an itemized return and itemized returns are more likely to be audited.

Adoptions

The federal government gives individuals a tax credit when they adopt a child. Adopting a spouse’s child doesn’t count for the credit.

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