Tax Credits for Families with Children

Child Tax Credit

Maximum credit: $1,000 per qualifying child.

Adjusted Gross Income (AGI) Phaseout

The credit is reduced by $50 for each $1,000 of modified AGI above:

•             $110,000 Married Filing Jointly.

•             $75,000 Single, Head of Household, or Qualifying Widow(er).

•             $55,000 Married Filing Separately.

The regular child tax credit is nonrefundable, but if any part of the credit is disallowed because tax is reduced to zero, the taxpayer may qualify for the additional child tax credit, which is refundable.

Additional Child Tax Credit 

Taxpayers may be able to claim the additional credit if any portion of the regular child tax credit was disallowed because tax was reduced to zero before the entire credit was used. The portion of the child tax credit phased out because of AGI cannot be used to claim the additional credit. The additional credit is refundable.

Child and Dependent Care Credit

Credit

The credit is 20% – 35% of the smallest of:

•             $3,000 ($6,000 for two or more qualifying persons).

•             Qualified expenses incurred and paid during the year.

•             Include expenses for care in 2013 that were paid before 2013. Reduce expenses by dependent care benefits excluded from income.

•             Taxpayer’s earned income.

•             Spouse’s earned income.

Exclusion

Instead of taking the credit, taxpayers may be eligible to exclude from income an amount up to $5,000 for dependent care benefits received under an employer plan.

Earned Income Credit (EIC)

The EIC is a refundable credit for low-income earners. Taxpayers with investment income of more than $3,300 do not qualify.

Requirements for Everyone

The following requirements must be met whether or not the taxpayer has qualifying children. • Valid Social Security numbers. Taxpayer and spouse (if filing jointly) must have valid Social Security numbers. Qualifying children must also have valid Social Security numbers except a child who was born and died during the year. Adoption and individual taxpayer identification numbers (ATINs and ITINs) do not qualify. A Social Security number on a card that reads “Not Valid for Employment” does not qualify. A Social Security number on a card that reads “Valid for work only with DHS (or INS) authorization” qualifies.

•             The taxpayer must be a U.S. citizen or resident alien for the entire year. A nonresident alien can claim the credit if married to a U.S. citizen or resident alien, and the nonresident alien chooses to be treated as a resident for the entire tax year by filing a joint return.

•             Filing status may not be Married Filing Separately.

•             The taxpayer may not be a qualifying child of another taxpayer.

•             The taxpayer may not file a tax form relating to foreign earned income.

•             The taxpayer’s investment income must be $3,300 or less.

Taxpayers Without Qualifying Children

Taxpayers who meet all the requirements and who do not have a qualifying child for the year, can claim EIC if the following additional requirements are met.

•             The taxpayer must be at least 25, but under age 65, at the end of 2013.

If Married Filing Jointly, either taxpayer can meet the age test.

•             The taxpayer cannot be the dependent of another person.

•             The taxpayer’s principal place of abode is in the United States for more than half the year. Residence in U.S. possessions, such as Guam and Puerto Rico, does not qualify.

Adoption Credit

Credit and Exclusion Amount

A taxpayer can claim a credit of up to $12,970 (2013) and also exclude up to $12,970 of employer-provided benefits from income for expenses of adopting an eligible child. The same qualifying expenses cannot be used for both. Limits apply to the total spent over all years for each effort to adopt an eligible child. An attempt that leads to adoption and any unsuccessful attempt to adopt a different child is treated as one effort. Unmarried persons who adopt a child can divide each limit in any way they agree.

Eligible Child

A child under age 18 or a person who is disabled physically or mentally incapable of self care.

Lifetime Learning Credit

The Lifetime Learning Credit is 20% of the first $10,000 of qualified education expenses paid for all eligible students. The maximum credit is $2,000 per return regardless of the number of eligible students. There is no limit on the number of years the credit can be claimed for each student.

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The IRS Rules on Same Sex Marriage

On June 26, 2013, the U.S. Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the principles of equal protection (Windsor, U.S. Supreme Court, June 26, 2013). The IRS has now issued guidance on the effect of the Windsor decision and how the IRS interprets the sections of the Internal Revenue Code that refer to a taxpayer’s marital status. Specifically, Revenue Ruling 2013-17 deals with the following issues for federal tax purposes as a result of the Windsor decision:

•             Whether the terms “spouse,” “husband and wife,” “husband,” and “wife” include an

individual married to a person of the same sex, if the individuals are lawfully married, and whether the term marriage includes such a marriage between individuals of the same sex. For this purpose, lawfully married means a legal marriage under any domestic or foreign jurisdiction having the legal authority to sanction marriages (such as a state that legally sanctions same-sex marriages).

•             Whether the IRS recognizes a marriage of same-sex individuals validly entered into in a state (or other jurisdiction) whose laws authorize the marriage of two individuals of the same sex even if the state in which they are domiciled does not recognize the validity of same-sex marriages.

•             Whether the terms “spouse,” “husband and wife,” “husband,” and “wife” include individuals (whether of the opposite sex or same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and whether the term “marriage” includes such relationships.

Recognition of Same-Sex Marriages

There are more than 200 provisions in the Internal Revenue Code and Regulations that include the terms “spouse,” “marriage,” “husband and wife,” “husband,” and “wife.” The IRS Revenue Ruling states that such terms also apply to individuals lawfully married under state law (or other jurisdiction) to a person of the same sex, and to legal marriages under state law (or other jurisdiction) between individuals of the same sex. It does not matter if a term is gender-neutral or gender specific because the ruling in Windsor said any federal law that confers marriage benefits and burdens only on opposite-sex married couples is unconstitutional.

Marital Status Based on the Laws of the State Where a Marriage Is Initially Established

For federal tax purposes, the IRS Revenue Ruling states that individuals of the same sex are lawfully married under the Internal Revenue Code as long as they were married in a state (or other jurisdiction) whose laws authorize the marriage of two individuals of the same sex, even if they are domiciled in a state that does not recognize the validity of same-sex marriages.

Registered Domestic Partnerships, Civil Unions, or Other Similar Formal Relationships Not Denominated as Marriage

For federal tax purposes, the IRS Revenue Ruling says the term marriage does not include registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state’s law, and the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals who have entered into such a formal relationship. 

This applies regardless of whether individuals who have entered into such relationships are of the opposite sex or the same sex.

Effective Date

The IRS Revenue Ruling is effective September 16, 2013. However, affected taxpayers may also rely on this Revenue Ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from this Revenue Ruling, provided the applicable statute of limitations period has not expired. If such a return is filed based on this Revenue Ruling, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.

Taxpayers may also rely on this Revenue Ruling retroactively with respect to any employee benefit plans and arrangements for purposes of employer-provided health coverage benefits or other fringe benefits that were provided by the employer and are excludable from income under the Internal Revenue Code based on an individual’s marital status.

For example, if employees could elect to make pre-tax salary-reductions for health coverage under an IRC section 125 cafeteria plan, and the employer also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by that employer, the affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same-sex spouse on an after-tax basis as pretax salary reduction amounts.

There is nothing in the Revenue Ruling that requires an affected taxpayer to amend a previously filed return to pay additional taxes such as a marriage penalty. The election to file amended returns only applies to overpayments of tax. There is also nothing in the Revenue Ruling that says it is optional for a legally married same sex couple to be treated as married for federal tax purposes. Thus, if a married same-sex couple is subject to a marriage penalty as a result of their legal marriage, they do not have the option to file as if they were not married.

Related articles

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Rental Income and Expenses

Rental income includes any payment received for the use or occupancy of property. In addition to normal rent payments, the following items are reported as rental income.

Types of Rental Income

Advance rent:   Any amount received prior to the period that the payment covers.

Payment for cancelling a lease:  Any amount paid by a tenant to cancel a lease.

Expenses paid by tenant:             Any amount paid by a tenant on behalf of the landlord to cover maintenance or improvement expenses.

Property or services:      The fair market value (FMV) of property or services received in lieu of rent.

All of these types of rent are reported as income in the year received.

Security Deposits

A security deposit is not included in rental income when received if the property owner plans to return it to the tenant at the end of the lease. If any amount is kept during the year because the tenant did not live up to the terms of the lease, include that amount as rental income. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent and is included as income in the year received.

Note: Individual states have laws requiring payment of interest by landlords who hold security deposits.

Rental Expenses

A deductible expense is any expense that is both:

•             Ordinary. Common and accepted in the taxpayer’s line of work, and   

•             Necessary. Helpful and appropriate for work.

An expense need not be required in order to be considered necessary. Facts and circumstances must be considered in each case to determine whether an expense is ordinary and necessary.

Depreciation

Depreciation deductions begin when property is ready and available for rent.

Vacant Property

Expenses are deductible beginning at the time the property is available for rent regardless of when rental income is actually received.

Insurance Premiums Paid in Advance

Insurance premiums paid more than 12 months in advance are deducted in the year to which the policy applies. Premiums paid for 12 months or less are deductible in the year paid.

Local Transportation Expenses

Local transportation expenses incurred to collect rental income or to manage, conserve, or maintain rental property are deductible. The taxpayer may deduct either actual expenses or the standard mileage rate for an auto (56.5¢ per mile for 2013).

Commuting

IRS regulations for investment expenses specifically mention commuter’s expenses as being nondeductible, making the same commuting rules that apply to business expenses also apply to passive rental activities.

Travel Expenses

Expenses for traveling away from home, such as transportation and lodging, are deductible if the primary purpose of the trip is to manage, collect rental income, conserve, or maintain the rental property.

Interest

Prepaid interest is not deducted when paid. Instead, prepaid interest is deducted in the period to which it applies. Points or loan origination fees paid for rental property are deducted over the life of the loan.

Repairs and Improvements

Repairs Improvements

Costs that:

•             Keep the property in good operating condition,

•             Do not materially add value to the property, or

•             Do not substantially prolong the property’s life. Costs that:

•             Add to the value of the property,

•             Prolong the property’s useful life, or

•             Adapt the property to new uses.

Examples:

•             Repainting inside or out.

•             Fixing gutters.

•             Fixing damaged carpet.

•             Fixing leaks.

•             Plastering.

•             Replacing broken windows.       

•             Room additions.

•             Remodeling.

•             Landscaping.

•             New roof.

•             Security system.

•             Replacing gravel driveway with concrete.

The cost of repairs to a rental property may be deducted as a current expense. The cost of improvements must be recovered by taking depreciation. Whether an expenditure qualifies as a currently deductible repair, or is required to be capitalized, is a factual determination. The taxpayer bears the burden of proof and must have sufficient records to substantiate the expense as a deduction instead of a capital expenditure.

Personal Use of Rental Property— Roommates and Boarders

Renting Part of Property

If a portion of property is rented out, and a portion is used for personal purposes, any reasonable method of allocating expenses between personal and rental use is allowed. For example, dividing the cost of utilities by the number of people living in the home, or dividing expenses based on square footage of use, are reasonable methods.

Phone Expense

The cost of the first phone line into a home that is used for both personal and rental purposes is not deductible.

Direct Rental Expenses

A full deduction is allowed for expenses that belong only to the rental part of the property. Examples of fully-deductible rental expenses include painting a room that is rented out, additional liability insurance attributable to the rental, and the cost of a second phone line that is strictly for the tenant.

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Recordkeeping for Tax Purposes

Which records should you keep? You should keep information that you and the IRS need to determine your correct tax. Everyone should keep the following records.

Copies of tax returns. Keep copies of your tax returns as part of your tax records.

Your tax returns can help you prepare future returns and amended returns.

After you die, copies of your tax returns and other records can be helpful to your survivors or the executor or administrator of your estate.

Proof of income and expenses.   

Income Form(s) W-2, 1099, and K-1

Bank and brokerage statements

Business and hobby income records

Records relating to sale of business property

Expenses	Sales slips, invoices, receipts Cancelled checks or other proof of payment
Donations	Details of cash and noncash contributions Written communications from qualified charities
Your Home	Closing statements, including any refinance documents Purchase and sales invoices Receipts for improvements Insurance records
Investments	Brokerage statements Mutual fund statements Form(s) 1099 and 2439 Other basis documentation
IRAs	• Forms 1099-R, 5498, and 8606 for each year until all IRA funds have been distributed.

Records for Special Situations

Some items require specific records, in addition to the basic records of income and expenses.

Alimony. If you pay or receive alimony, keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree. If you pay alimony, you need to know your former spouse’s Social Security number.

Business use of your home. Keep records that show which part of your home is used for business and the expenses related to that use. Child care providers should also keep track of hours open for business, as well as hours spent in preparation and clean up.

Gambling. Keep an accurate diary of winnings and losses. Required information includes:

Date and type of gambling activity. Gambling establishment name and address, and names of persons present with you. – Amount you won or lost.

Tax credits. Each tax credit includes special record requirements. Examples include:

Provider’s name, address, and taxpayer ID number for the Child Tax Credit.

Physician’s certification for the Credit for the Elderly or the Disabled.

School records for the education credits.

Vehicle records. If you use your own car for business, medical transportation, or qualifying volunteer work, keep a mileage log that includes the date, destination, and purpose of each trip. You also need to know how many miles you drove for other purposes, such as commuting and personal use. Your vehicle records should include purchase or lease papers and loan records. You may receive a larger deduction if you keep records of gas purchases, maintenance costs, etc., in addition to mileage.

What is Proof of Payment?

The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. You must always keep documentation of the reason for the payment. Other documents, such as statements and receipts, will help establish that the item is allowable on your tax return.

Account statements. Account statements from your financial institution are acceptable as proof if they provide the information shown above.

Pay statements. You may have deductible expenses withheld from your wages, such as union dues, medical insurance premiums, and charitable contributions. Keep year-end or final pay statements to prove payment of these items.

Mortgage interest. Form 1098, Mortgage Interest Statement, documents interest you paid. Be sure to verify that the amount is correct.

How Long Should You Keep Tax Records?

The IRS says you must keep your records for as long as they may be needed for the administration of any provision of the Internal Revenue Code, which means you must keep records of items shown on your return until the period of limitations for that return expires. The period of limitations is the time during which you can amend your return, claim a credit, or be assessed additional tax by the IRS.

Asset Records

Keep records of acquisition date and cost basis for each business or investment asset until the period of limitations expires for the year in which you dispose of the asset. For example, suppose you sold a piece of business equipment in 2010 and you meet condition (1) above. You must then keep records of that asset until at least April 15, 2014 (three years after the due date for your 2010 tax return).

Electronic Records

Paper records take up a lot of space, and they can fade or be damaged. Many people prefer to keep electronic records instead of paper records.

All requirements that apply to hard copy records apply to electronic records, including record retention periods.

If you scan or otherwise transfer your tax records to an electronic format, you must be able to store, preserve, retrieve, and reproduce the records in a legible, readable format.

New Law Renews IRA Transfers to Charity for 2014; Owners Must Act by Dec. 31

Issue Number:    Special Edition Tax Tip 2014-26

Inside This Issue

 IRS Special Edition Tax Tip 2014-26

The Tax Increase Prevention Act extends the provision that allows certain IRA owners to make tax free distributions to charity. The extension applies for the 2014 tax year. This means if the law applies to you, the deadline to complete your transactions is Dec. 31. Here are some key points about the extension:

• If you are an IRA owner age 70½ or older you have until Dec. 31 to make a qualified charitable distribution, or QCD.
• A QCD is direct transfer of part or all of your IRA distributions to an eligible charity. You may transfer up to $100,000 per year.
• You may exclude the distributed amounts from your income. You can claim this benefit regardless of whether you itemize your deductions. If you do exclude the QCD from your income, you can’t also deduct it as a charitable contribution on Schedule A if you do itemize.
• You can count your QCDs in determining whether you meet the IRA’s required minimum distribution.
• The provision had expired at the end of 2013. The new law is retroactive for 2014. This means any eligible QCD in 2014 will qualify.



Logo of the Internal Revenue Service (Photo credit: Wikipedia)

• Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media. You can also subscribe to IRS Tax Tipsor any of our e-news subscriptions.

Additional IRS Resources:

• IR-2014-117, Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers This Month Can Still Count For 2014

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Tax Tips for Newlyweds

Updating your status from single to married may bring about some unanticipated changes, including changes relating to your taxes. While wedding planners don’t typically use an IRS checklist, here are a few things to keep in mind when filing your first tax return as a married couple.

As with any tax issue, contact your tax professional to help you navigate your own unique situation.

Notify the Social Security Administration (SSA)

If one of you has taken on a new name, report the change to the SSA. File Form SS-5, Application for a Social Security Card.

It is important that your name and Social Security number match on your tax return. The IRS will match your information with records provided by the SSA and, if the records don’t match, any electronically filed return will be rejected and any paper filed return will have the mismatched individual’s personal exemption cancelled until the error is corrected.

Avoid making a name change too close to tax season. While the SSA can process a name change in about two weeks, the delay in data-sharing between the SSA and the IRS can make any change near the end of the year problematic. In such situations, it may be advisable to file the tax return using your maiden name and change your name with the SSA after the return has been filed. Form SS-5 is available on the SSAs website at www.ssa. gov, by calling 800-772-1213, or by visiting a local SSA office. A copy of your marriage certificate and driver’s license is required.

Notify the IRS If You Move
The IRS will automatically update your new address upon filing your next tax return, but any notices the IRS sends in the meantime may not get to you. The U.S. Postal Service does not forward certain types of federal and certified IRS mail. IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from www.irs.gov or order it by calling 800-TAX-FORM (800-829-3676).

Notify the U.S. Postal Service
To ensure your mail, including mail from the IRS, is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.com or visit your local post office.

Most post offices will not forward refund checks so be sure the IRS has your correct address. Using electronic direct deposit for refunds can prevent them from being delayed due to address mix-ups.

Notify Your Employer
Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.

Notify Financial Institutions
Financial institutions with which you do business need to be notified to ensure that any Forms 1099 are sent to the proper address. This would include banks and brokerage firms, as well as employer-sponsored retirement plans.

Check Your Withholding
If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. The IRS Withholding Calculator, available at www.irs.gov, can help you determine whether you need to give your employer(s) a new Form W-4, Employee’s Withholding Allowance Certificate. Use the results to fill out and print Form W-4 online and give it to your employer(s).

Select the Right Tax Form
Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns, rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.

Choose the Best Filing Status
Your marital status on December 31 determines whether you are considered married for that entire year for tax purposes. The law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax.

For most married couples, filing jointly will result in a lower tax liability. This is especially true if there is a significant difference in your incomes. The so-called “marriage penalty” only applies to couples who both earn relatively high salaries.

Certain situations may make it more advisable for married taxpayers to file separately.
• If both spouses have their own itemized deductions, such as medical deductions, they may be able to claim higher overall deductions because of the percentage limitations on Schedule A.
If one spouse has past due debt with the IRS or an-other government agency, such as child support obligations or student loans, filing separately will prevent the other spouse’s share of any refund from being used to offset debts for which he or she is not liable.
• If one spouse has messy or missing records, or is thinking of taking a risky tax position, the other may want to file separately to avoid becoming liable for potential additional taxes or penalties.

Planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. More information about changing your name, address, and income tax withholding is available on www.irs.gov, or contact your tax professional.

Simple Projections
Based on your tax information from last year, it will be easy to prepare a dummy return to show what your tax situation would be if you had been married. You can print out Form 1040, other tax forms, and tax tables from www.irs.gov. On the blank forms, combine tax information from last year’s returns. For example, combine the wage amounts from both returns and enter the total on Form 1040, line 7, of the blank form. Do the same for items such as interest, other income, and include deductions if either person itemized.

Use filing status, deductions, and exemption amounts as if you had been married. The resulting tax and refund or amount due will give you an indication of whether your current withholding is sufficient to cover your tax liability when incomes are combined and will also help identify any problems that may need to be addressed when you file as married taxpayers.

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Which Moving Expenses are Deductible?

Moving expenses may be deductible on Form 1040 if a taxpayer moves to a new home because of a new principal workplace. The following tests must be met.   

Closely Related to the Start of Work Test

The move will be considered closely related to a new work location if the move is within one year of the date the taxpayer started working at the new location, and the distance from the new home to the new job location is not more than the distance from the old home to the new job location.

Distance Test

The new principal workplace must be at least 50 miles farther from the taxpayer’s old home than the old workplace was. For example, if the old workplace was three miles from the old home, the new workplace must be at least 53 miles from the old home. If the taxpayer did not have an old workplace, the new workplace must be at least 50 miles from the old home. Members of the Armed Forces do not have to meet this distance test.

Time Test

Employees must work full time in the general area of the new workplace for at least 39 weeks during the 12 months after the move. Self-employed taxpayers must work full time in the general area of the new workplace for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months after the move.

Exceptions: The time test does not apply if the job ends because of disability, the employer transfers the employee, the employee was laid off for other than willful misconduct, the taxpayer is a member of the Armed Forces, the taxpayer meets certain requirements for retirees or survivors living outside the U.S., or the taxpayer is a decedent.

Although the move must be closely related to the start of work in a new location, there is no requirement that a new job be in the same line of work as the old job. A taxpayer starting work for the first time qualifies provided the job is at least 50 miles from the old home.

Deductible Moving Expenses

The cost of transportation and storage (up to 30 days after the move) of household goods and personal effects.

Travel, including lodging, from the old home to the new home. Travel is limited to one trip per person. However, each member of the household can move separately and at separate times. If the taxpayer drives his or her own vehicle, expenses can be figured either using actual out-of-pocket expenses for gas and oil (but not depreciation), or the standard mileage rate for moving (for 2014, 23.5¢ per mile), plus parking fees and tolls. Not deductible. Cost of meals while traveling, temporary living expenses, or house hunting expenses before or after the move.

Employer-Reimbursed Moving Expenses

Eligible moving expenses reimbursed by an employer are excluded from taxable wages. The amount of excluded moving expenses is reported in box 12 of the employee’s Form W-2 under code “P.” Qualified expenses that are reimbursed by the employer are not eligible for a deduction. Additional moving expenses that are not reimbursed by the employer are eligible for a deduction on Form 1040 if they otherwise qualify.

Nondeductible Expenses

The following expenses are not deductible as moving expenses.

Any part of the purchase price of a new home.

Car tags or driver’s license.

Expenses of entering into or breaking a lease.

Loss on home sale.

Mortgage penalties

Pre-move househunting trips.

Real estate taxes.

Security deposits.

Miscellaneous Itemized Deductions

Miscellaneous itemized deductions are generally deductible to the extent the expenses exceed 2% of adjusted gross income (AGI). Some miscellaneous itemized deductions are not subject to this rule.

Miscellaneous Itemized Deductions Subject to the 2% AGI Limitation

Most miscellaneous itemized deductions are deductible to the extent they exceed 2% of AGI.  

Tax Preparation Fees

The cost of tax preparation and advice is deductible, including the cost of tax preparation software programs and books on tax preparation. Deductible costs also include fees paid for electronic filing.

Credit card convenience fees associated with the payment of federal tax, including the payment of estimated tax, can be included as miscellaneous itemized deductions, subject to the 2% AGI limitation.

Note: The portion of the fees to prepare tax schedules related to self-employment, rental property, and farming operation are deductible as business expenses on the tax forms used to report income and expenses for these businesses rather than as a miscellaneous itemized deduction.

Investment Expenses

Deductible investment expenses, such as separately billed IRA trustee fees, are amounts paid to produce, manage, or protect property held for earning income. Personal expenses are not deductible.

Loss on Traditional IRA or Roth IRA

Losses on traditional IRAs and Roth IRAs are not deductible unless the entire account balance of all traditional IRAs, or all Roth IRAs, are distributed and the taxpayer has unrecovered basis left in the traditional or Roth IRAs. Distribution of the entire account balance applies separately to all traditional IRAs and Roth IRAs.

Legal Expenses

Legal fees related to producing or collecting taxable income or getting tax advice is deductible.

Miscellaneous Deductions Not Subject to the 2% AGI Limitation

The following expenses are not limited by 2% of AGI.

Casualty and theft losses of income-producing property.

Deduction for federal estate tax paid on income in respect of the decedent.

Amortizable bond premium on taxable bonds acquired before October 23, 1986.

Deduction for unrecovered investment in a pension or annuity contract.

Gambling Losses

The full amount of gambling winnings for the year is reported as income. Gambling losses are deducted as an itemized deduction up to the total amount reported as income. Taxpayers claiming losses must keep an accurate diary or similar record of losses and winnings.

Impairment-Related Work Expenses

Taxpayers with physical or mental disabilities who limit employment or substantially limit one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, can claim a deduction for impairment-related work expenses. Expenses must be ordinary and necessary for the employee who is disabled to perform work satisfactorily.

Unrecovered Investment in an Annuity

A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree’s investment. If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree’s final income tax return.

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LewisCPA is seeking to hire an Auditor!!

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Gifts to Charity for Tax Deductions

Many people give to charity each year during the holiday season. Remember, if you want to claim a tax deduction for your gifts, you must itemize your deductions. There are several tax rules that you should know about before you give. Here are six tips from the IRS that you should keep in mind:

1. Qualified charities. You can only deduct gifts you give to qualified charities. Use the IRS Select Check tool to see if the group you give to is qualified. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies. This is true even if Select Check does not list them in its database.

2. Monetary donations.  Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union and credit card statements. If you give by payroll deductions, you should retain a pay stub, a Form W-2 wage statement or other document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.

3. Household goods.  Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item it doesn’t have to meet this standard if you include a qualified appraisal of the item with your tax return.

4. Records required.  You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.

5. Year-end gifts.  You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2014. This is true even if you don’t pay the credit card bill until 2015. Also, a check will count for 2014 as long as you mail it in 2014.

6. Special rules.  Special rules apply if you give a car, boat or airplane to charity. For more information visit IRS.gov.

Related articles

• How to Donate Items for Tax Deductions (fullofknowledge.com)

Tax Cutting Time

There’s not much time left to take steps to cut 2014 taxes for your business. Here are a few last-minute possibilities for you to consider :

1.       Set up a retirement plan. It’s not too late to create a retirement plan for yourself and your employees if you have them. The plans can be simple to set up and administer, such as a Simplified Employee Pension (SEP) plan. With a SEP, you can wait until the due date of your tax return, including

extensions, to make the actual contribution and still claim a deduction in 2014.

2.       Buy needed equipment before year-end. To benefit from Section 179 expensing for 2014, assets you purchase must actually be placed in service by year-end.   

3.       Review your business inventory. Remove obsolete, unsalable, or damaged items to reduce your year-end inventory balance.

4.       Check your S corporation basis. You cannot deduct a 2014 loss in excess of your basis. Injecting capital or making a direct loan to your business before year-end can help increase your basis.

5.       Buy now; pay later. If you need equipment or business supplies before the end of the year but have cash flow concerns, consider making needed purchases with your credit card. You can deduct the purchase this year even though you won’t pay the credit card bill until next year. 

Related articles

• TurboTax - Little-Known Tax Tips For Small-Business Owners (turbotax.intuit.com)

About the Kiddie Tax

“Kiddie Tax” is the term used for the tax on certain unearned income of children taxed at the parent’s rate instead of the child’s rate. Children typically are in a lower tax bracket than their parents and the Kiddie Tax was developed to prevent parents from lowering their tax liability by shifting investment income assets to their children. 

Kiddie Tax General Rules  

The Kiddie Tax rules apply when a child’s unearned income (investment income) is over $2,000.

•    If the child’s interest, dividends, and other unearned income total more than $2,000, the amount over $2,000 is taxed at the parent’s marginal tax rate if that rate is higher than the child’s.

•    If the child’s interest and dividend income (including capital gain distributions) total less than $10,000, the child’s parent may be able to elect to include that income on the parent’s return rather than file a return for the child.

For either rule to apply, the child must be required to Unearned income. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, taxable Social Security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

Earned income. Earned income includes wages, tips, and other payments for personal services performed. Earned income also includes taxable distributions from a qualified disability trust.

Support. A child’s support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

Child’s income taxed at parent’s rate. Part of a child’s unearned income may be taxed at the parent’s tax rate the qualifications are met. The child’s tax is figured on a separate form (Form 8615) that must be attached to the tax return.

Beginning January 1, 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of the child’s modified adjusted gross income (MAGI) over a threshold amount.

Parent includes child’s income on parent return. A parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. A parent can elect to do this if all of the following conditions are met.

•    At the end of the tax year the child was under age 19 or under age 24, if a full-time student,

•    The child’s interest and dividend income was less than $10,000 for the tax year,

•    The child had income only from interest and divi-dends, which includes Alaska Permanent Fund dividends and capital gain distributions,

•    No estimated tax payments were made for the tax year, and no prior tax year’s tax overpayment was applied to the current tax year, under the child’s name and Social Security number,

•    No federal income tax was withheld from the child’s income under backup withholding,

•    The child is required to file a return unless the parent makes this election,

•    The child does not file a joint return for the tax year, and

•    The parent is the parent qualified to make the election or files a joint return with the child’s other parent.

The parent’s election to include child’s income on the parent return is figure on a separate form (Form 8814) that must be attached to the tax return. Beginning January 1, 2013, a parent who elects to report a child’s unearned income on his or her return may be subject to the NIIT. The parent must include the child’s income in figuring MAGI and add the child’s income to the parent’s net investment income.