Taxes

Secondary Education Tax Credits

In the past, I’ve written about Arizona tax credits that support local schools and nonprofits. Such credits enable you to make charitable donations using money you would otherwise pay in Arizona income taxes. But did you know there are also a number of federal income tax credits that benefit you directly with a dollar-for-dollar reduction in your tax bill? That means a tax credit valued at $1,000 actually lowers your tax bill by $1,000. Here are details about two secondary education tax credits that are especially advantageous.

American Opportunity Credit

This allows you to claim the first $2,000 you spend on undergraduate expenses for tuition, books, equipment and fees. It also lets you claim 25 percent of the next $2,000 of expenses (for a total of $2,500). Parents can claim the credit if they paid for the student’s education expenses and that student is listed as a dependent on their tax return. Otherwise, the student can claim it. Full or reduced credit is given if your modified adjusted gross income (MAGI) was less than $80,000 or $90,000, respectively ($160,000 and $180,000 for joint filers).

This credit is especially valuable for students because it’s refundable. That means you can still receive 40 percent of its value (up to $1,000) and receive a tax refund even if you earned no income in 2019 and owe no income taxes. Because this credit is available for a maximum of four years, the largest benefit will be years when there are $2,000-to-$4,000 of expenses.

Lifetime Learning Credit

This is ideal for graduate students or anyone taking classes to develop new skills, even if you already claimed the American Opportunity Credit in the past. It’s available to undergraduate, graduate and non-degree or vocational students; and there’s no limit on the number of years it can be claimed.

Students can claim 20 percent of money paid toward tuition, fees, books and supplies needed for coursework, up to $2,000. The credit has a lower MAGI threshold ($67,000 for individuals, $134,000 if filing jointly) and is not refundable.

Read www.irs.gov/credits-deductions-for-individuals to learn more, or talk with your tax advisor about whether you qualify for these or other beneficial tax credits.

By |2019-11-20T08:34:42-07:00November 25th, 2019|Financial Planning, Taxes|

Deductions Versus Credits

tax deductions versus creditsThe last quarter of the year is upon us, and that means it’s time to think about end-of-year tax planning. Income tax deductions and credits both reduce your tax bill, but it in different ways. Knowing the difference between deductions versus credits can help you maximize your savings.

Tax deductions: These are specific expenses you’ve incurred (e.g. health insurance, business charges, charitable gifts) that you can subtract from your income before calculating your taxes. Depending on your situation, it may be more beneficial to take a standard deduction than to itemize your expenses. Talk with your financial planner or tax advisor if you’re not sure.

Tax credits: These give you a dollar-for-dollar reduction in your tax bill. That means a tax credit valued at $1,000 actually lowers your tax bill by $1,000. A few examples include education, energy and dependent care credits. Next month, we’ll go into more detail about specific tax credits that may be available to you.

Click here to read more detail on deductions and credits at the official IRS website.

To read other Perspective Financial articles on tax planning, click here.

By |2019-10-15T12:18:38-07:00November 4th, 2019|Taxes|

New Pass-Through Income Tax-Exemption

Learn about the new pass-through income tax-exemption.People who claim their business income on their individual income tax forms (often referred to as “pass-through” income) may now be able to exempt 20 percent of that income from federal taxes. This new pass-through income tax-exemption could add up to significant tax savings.

High-earning professionals like accountants, lawyers and consultants may encounter some eligibility rules; for example, they don’t qualify if income exceeds $207,500 for an individual or $405,000 for a married couple filing jointly. However, single filers with total taxable income of less than $157,000 in 2018 (or $315,000 for joint filers) can take advantage of the pass-through tax break regardless of their line of work. That includes people with side jobs and home-based businesses, too.

Read this Consumer Reports article and talk with your tax advisor if you’d like to learn more about reducing your 2018 taxes.

By |2019-08-14T13:59:47-07:00December 17th, 2018|Taxes|

529 Education Savings Plan Updates

529 Education Savings Plan UpdatesIn July, the Internal Revenue Service (IRS) and Department of the Treasury announced new regulations related to recent tax law changes that affect 529 plans. The 529 education savings plan updates have to do with k-12 education and rollovers to Achieving a Better Life Experience (ABLE) accounts.

The 2017 Tax Cuts and Jobs Act (TCJA) allows distributions from 529  plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiary’s choosing.

Another TCJA change allows funds to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, designed to enable these people and their families to save and pay for disability-related expenses. The regulations would provide that rollovers from 529 plans, together with any contributions made to the ABLE account cannot exceed the annual ABLE contribution limit ($15,000 for 2018).

To learn more about the changes, visit the IRS official website.

To learn more about 529 plans and how they can help beneficiaries, as well as those who contribute funds, click on our article below.

By |2019-08-14T13:59:48-07:00September 10th, 2018|College Planning, Current Affairs, Taxes|

New Tax Law Tempers Marriage Penalties

New tax law tempers marriage penalties.One unintended feature of U.S. income tax law is that the combined tax liability of a married couple may be higher than their combined tax burden if they had remained single. This is often referred to as the marriage penalty within the law. Congress’ new tax law tempers marriage penalties a bit.

“Marriage penalties and bonuses have a significant impact on the combined tax burden of couples,” wrote Amir El-Sibaie, an analyst with the Center for Federal Tax Policy at Tax Foundation. “Penalties affect couples at very high and very low incomes, and bonuses affect many middle-income couples with disparate incomes.”

Changes that would eliminate marriage penalties and bonuses would drastically impact the current distribution of taxes paid. This is politically difficult to accomplish. As a compromise, in the recently-passed Tax Cuts and Jobs Act, Congress opted to incrementally reduce the effects.

While our nation’s tax laws remain extremely complicated, a few simple changes should bring some relief to married couples and families in 2018.

As an example, most federal income tax brackets for joint filers will now be double those for singles, thereby eliminating or reducing the marriage penalty for many people. (Married couples in certain high-income brackets will continue to experience higher rates than singles in the same brackets, however.) The new law also doubled the child tax credit to $2,000, and all dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit (source: The Wall Street Journal).

By |2019-08-14T13:59:50-07:00March 26th, 2018|Taxes|