Credits
Earned Income Credit
No Qualifying Children
The Earned Income Credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2019, the maximum credit if you do not have any qualifying children is $529
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One Qualifying Child
The Earned Income Credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2017, the maximum credit if you have one qualifying child is $3,526.
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Three or More Qualifying Children
The earned income credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2017, the maximum credit if you have three or more qualifying children $6,557.
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Combat Pay
Although, combat pay is not included in income when calculating your federal income tax, you have the option of including combat pay as earned income when calculating the Earned Income Credit (EIC). You should calculate your return both ways (including and not including combat pay as earned income for EIC purposes) to determine which way gives you the more advantageous result.
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Fraudulent or Reckless Claim
You will not be eligible for the Earned Income Credit if the IRS has determined that you have previously claimed the credit fraudulently or recklessly. A fraudulent claim results in a 10-year loss of eligibility. A reckless claim results in a two-year loss of eligibility.
Child Dependent
Additional Child Tax Credit - Refundable Credit
List if you receive less than the maximum $2,000 per qualifying child for the Child Tax Credit because it is limited to your tax liability, you may be entitled to receive all or part of your remaining Child Tax Credit as a refundable Additional Child Tax Credit.
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Adoption Credit
If you pay for adoption expenses, you may be able to take a credit for qualified adoption expenses of up to $14,080 per child. If your modified adjusted gross income is $243,540 or more, you do not qualify for the credit. The credit is one of the nonrefundable personal credits and allows taxpayers to carry over any unused credits for up to five years. Returns with the adoption credit can be e-filed.
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Child Care Expenses
If you are a working parent, or you were working and are now looking for work, you may be able to claim a credit for your child care. Expenses must be for a child under the age of 13 or a dependent that is unable to care for themselves. The credit may be as much as $1,050 for one qualifying child or $2,100 for more than one child, depending on your adjusted gross income.
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In-Home Child Care
Did you pay someone to come into your home and provide child care while you work? If you do, you may actually be an employer who is required to pay employment taxes. If the person you pay provides care in their home, you would not be considered their employer.
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Provider Identification
Are you a working parent able to claim a credit for child care expenses? If so, you must t provide the IRS with the are provider's name, address, and taxpayer identification number (TIN), which can be a Social Security number or an employer identification number (EIN).
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Types of Provider Identification
If the care provider is a daycare center, the taxpayer identification number (TIN) is their employer identification number (EIN). If the provider is an individual, the TIN is usually the Social Security number. If the provider is a church or non-profit group and has no EIN, the words "tax exempt" can be substituted for the TIN.
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Combat Pay
Earned income for active duty military in a combat zone can be calculated two different ways for the credit for Child and Dependent Care Expenses. You can elect whether or not to include combat pay as earned income. This calculation may affect how much of your dependent care expenses are eligible for the credit. You should calculate your return both ways (including and not including combat pay as earned income) to determine which gives you the more advantageous result.
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Child Support
Do you pay child support? If you do, can that child be claimed as a dependent on your tax return? Child support is neither income to the recipient, nor a deduction for the payer. The custodial parent is the parent the child lives with more than half the year. In order to claim a dependency exemption a signed Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, must be included in the noncustodial parent's tax return.
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Child Tax Credit - Combat Pay
Although combat pay is not included in income for purposes of calculating your federal income tax, combat pay is included as earned income when calculating the Additional Child Tax Credit. Because the amount of this credit is based in part on earned income, this could mean a higher credit for those with low taxable income.
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Child Tax Credit - Qualifying Dependent
You may qualify for a credit of up to $1,000 for each qualifying child under age 17 at the end of the year. A qualifying child is your child, stepchild, adopted child, eligible foster child, or descendent of such, or your sibling, stepsibling, or descendent of such. The individual must have lived with you, or the custodial parent, for more than half of the year, must not have provided more than half of their own support, and must be claimed as a dependent by you. Generally, the child must be a U.S. citizen or a U.S. national or resident for some part of the year.
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Children's Investment Credit
Does your child under age 18 have investment income? If they do, and the total amount is more than $2,100, part of the amount may be taxed at the parent's rate. The child may file a tax return, including Form 8615, Tax for Certain Children Who Have Unearned Income, or you may be able to file Form 8814, Parent's Election to Report Child's Interest and Dividends, and report your child's income on your return.
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Standard Deduction- Dependent on Another's Return
The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of (a) $1,050, or (b) the individual's earned income plus $350. In no case can the deduction exceed the single standard deduction amount of $6,350 for this year.
Additional Child Tax Credit
You may qualify for a credit of up to $2,000 per qualifying child. A qualifying child is an individual who is under age 17 at the end of the year, is claimed as a dependent, and meets the definition of a child under the Uniform Definition of a Child as a son, daughter, stepchild, adopted child, grandchild or eligible foster child.
Birth of Child / Adoption
Birth of child
The addition of a child to your family whether you had a new baby or adopted a child may entitle you to several tax benefits. For a child born or adopted (the adoption must be final) during the year you will be able to claim the child as a dependent on your tax return and receive other tax benefits you maybe be entitled to are:
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Credit for Child and Dependent Care Expense
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Child Tax Credit
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Earned Income Tax Credit
For more information see Publication 503, 596 and 972 at www.irs.gov.
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Child Attended Day Care
If you are a working parent, or you were working and are now looking for work, you may be able to claim a credit for your child care expenses. Your dependent (under the rules for qualifying child) must have been under age 13 when care was provided. The credit may be as much as $1,050 for the expenses for one qualifying child or $2,100 for more than one child, depending on your adjusted gross income.
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Adopted a Child
The Credit for Qualified Adoption Expenses, or the Adoption Credit, is a nonrefundable credit based on the amount of qualified adoption expenses you paid to adopt a child. Each dollar spent on adoption, up to $14.080is included in the credit. If you claim a special needs child, you may claim the full credit regardless of your expenses. This credit is available for each child you adopt as long as the child is not your spouse's child or a child from a surrogate mother. The credit is nonrefundable so you can only zero out your income tax liability with it. Any remaining credit may be carried over for up to five years.
Education
Coverdell ESA
Education Savings Acct
Distributions From a Coverdell ESA
Distributions from a Coverdell ESA are tax free if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year.
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Opened Education Savings Account
An education savings account can be established for a child under the age of 18. Any individual (including the child) can contribute to the account during the year if they meet certain income limitations. The total annual contributions per beneficiary are limited to $2,000. Withdrawals will be tax-free when used to pay education costs (elementary school, secondary school, or a post-secondary school such as a college) for the beneficiary.
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Tax Benefits of Education Savings Account
Contributions to a Coverdell Education Savings Account are not deductible, but the deposits in the account grow tax free until distributed.
Qualified Tuition Plans
A Qualified Tuition Program allows you to prepay a student's college tuition or contribute to a higher education savings account. Contributions are not tax deductible, but distributions will be tax-free if the distributions are used to pay for qualified higher education expenses.
Received Scholarship
Scholarship Income
A scholarship is tax free only if:
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You are a candidate for a degree at an eligible educational institution, and
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You use the scholarship to pay qualified educational expenses
Qualified Education Expenses
For purposes of tax-free scholarships, the income must be used for these qualified education expenses:
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Tuition and fees required to enroll at or attend an eligible educational institution
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Course-related expenses, such as fees, books, supplies and equipment that are required for the courses at the eligible educational institution
These items must be required of all students in your course of instruction.
Received Fellowship
Fellowship Income
A fellowship is tax free only if:
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You are a candidate for a degree at an eligible educational institution, and
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You use the fellowship to pay qualified educational expenses.
Qualified Education Expenses
For purposes of tax-free fellowships, the income must be used for these qualified education expenses for:
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Tuition and fees required to enroll at or attend an eligible educational institution
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Course-related expenses, such as fees, books, supplies and equipment that are required for the courses at the eligible educational institution
These items must be required of all students in your course of instruction
Education Credits and Deductions
The education of your children, or even of yourself and your spouse, can be a major investment. Knowing if your college-age child is still a dependent, what scholarships are taxable, and which tax credits are available can be confusing. You need to consider your situation to determine which options are best for you. Tax planning is essential to make the most of these benefits. You need to know which one of the options are best for you based on your income the varying definition of allowable expenses. You should also consider issues such as the student's eligibility for financial aid and who has control over the money used for college. In certain circumstances, it might be better to have the child pay the education expenses rather than the parent.
Keep the following in mind when determining the best way to claim a tax break for education:
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Is the student a dependent?
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Does the student have any Scholarships or Grants?
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Did you pay any student loan interest?
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Does the student have a Coverdell Education Savings Account?
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Does the student have a Qualified Tuition Program?
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What are the Education Credits?
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Does the student have eligible savings bonds?
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Dependents
Whether a student is claimed as a dependent on your tax return may affect yours, or the student's eligibility, for the different tax benefits available for education expenses.
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A student is someone enrolled in school full-time for at least five months out of the calendar year. A full-time student under age 24 who has a job may still be claimed as a dependent on their parents' return.
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Scholarships and Grants
If a student is a candidate for a degree, they can exclude from income the amount of scholarship or grant used for tuition, books, and fees. The amount of the scholarship or grant that is used for room and board or for teaching or research is considered taxable income even if the teaching or research is a condition for receiving the scholarship or grant.
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Students who win a scholarship prize in a contest must include the amount as prize winnings on their tax return unless the prize is designated to be used for educational purposes only.
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Payments, or scholarships received from the Department of Veterans Affairs, National Health Services Corps Scholarship Programs or by the Armed Forces Health Professions Scholarship and Financial Assistance Program are not included in income.
Student Loan Interest Deduction
You may be able to deduct up to $2,500 of interest you paid on a qualified student loan to attend an accredited, higher educational institution. The loan must have been for you, your spouse, or someone you claimed as your dependent when you took out the loan. This deduction is an adjustment to income so you can claim it even if you do not itemize deductions on Schedule A, Itemized Deductions. Your modified adjusted gross income must be less than $75,000 ($150,000 if Married Filing Jointly). If you are filing Married Filing Separately, you cannot take this deduction.
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Qualified expenses used to claim the tuition and fees deduction must be reduced by any tax-free benefits received, such as distribution of earnings from a Qualified Tuition Program (QTP) or tax-free savings bond interest. Qualified expenses must also be reduced by the full amount of a Coverdell Education Savings Account (Coverdell ESA) distribution.
Coverdell Education Savings Account (ESA)
The Coverdell Education Savings Account (Coverdell ESA) is an account for the sole purpose of paying for the qualified education expenses of the designated beneficiary of the account. the beneficiary can use the funds in the Coverdell ESA to pay for their qualified expenses of attending a public, private, or religious school at the elementary, secondary or higher education levels. Qualified expenses include books, tutoring, computer equipment, software and services, room and board, uniforms, extended-day program costs, and the expenses of an individual with special needs that are necessary for that person's enrollment or attendance at an eligible educational institution.
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Anyone, including the beneficiary, can establish and contribute to this account but contributions can not exceed $2,000 per year, per beneficiary. You can make a contribution to a Coverdell ESA if your modified adjusted gross income for the year is less than $110,000 ($220,000 if Married Filing Jointly). If your modified adjusted gross income is above the limit, it is possible for you to provide the beneficiary with the money as a gift and have the beneficiary make the contribution on their own behalf, as long as the beneficiary's income is not over the limit. No contributions can be made to the account once the beneficiary turns age 18, unless the beneficiary is an individual with special needs.
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The contributions are not tax deductible but earnings are tax free to the beneficiary if they are used to pay for qualified education expenses. A 10% penalty may apply to a distribution that is not applied to qualified education expenses. Money remaining in the account after a beneficiary is no longer in school can be rolled into another family member's Coverdell ESA account tax free if certain conditions are met.
Contributions to a Coverdell ESA are considered a gift from the contributor to the beneficiary and are eligible for the annual gift tax exclusion.
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Qualified Tuition Program (QTP)
A Qualified Tuition Program (QTP or Section 529 plan) is a program that allows you to prepay a student's college tuition or contribute to a higher education savings account for payment of qualified higher education expenses. Qualified expenses include books, supplies, equipment, and room and board if the student is attending at least half-time. Half-time attendance is defined by the institution. Plans can be established by a state agency or by a qualified educational institution. You are not restricted to investing in your state's plan, but contributions to your own state's plan may qualify you for certain additional tax benefits on your state tax return.
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Contributions to a QTP are not tax deductible. If not used for qualified educational expenses, distributions may be subject to a 10% additional tax. Money remaining in the account after paying for a beneficiary's qualified expenses can be rolled into another family member's QTP account tax free if certain conditions are met.
Contributions to a QTP are also considered a gift from the contributor to the beneficiary and are eligible for the annual gift tax exclusion.
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You can contribute to both a QTP and a Coverdell education savings account in the same year for the same beneficiary.
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Higher Education Credits
The following two tax credits are available to taxpayers who pay higher education costs:
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The American Opportunity Credit
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The Lifetime Learning Credit
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The American Opportunity Credit is a credit of up to $2,500 for the qualified tuition and related expenses paid for each eligible student. The credit is 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses paid per student. It can be claimed for the first four years of postsecondary education for each student. The student must be enrolled at least half time in a qualified program and must not have been convicted of a felony drug offense. Eligible expenses include tuition, required fees, and the cost of required books and software for courses.
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You do not qualify for the credit if your modified adjusted gross income is greater than $90,000 or $180,000 if married filing jointly.
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The American Opportunity Credit is unique in the fact that it combines both a nonrefundable and a refundable credit in one. The first 40% of the credit up to $1,000 is refundable with the balance of the credit treated as a nonrefundable credit. This unique feature allows you to receive the refundable portion of the credit as a refund if you have no remaining taxes.
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You may be able to claim a Lifetime Learning Credit of up to $2,000 each year for the total qualified tuition and related expenses paid during the tax year for all eligible students who are enrolled in eligible educational institutions. This credit is 20% of the first $10,000 of qualified expenses paid per tax return. Unlike the American Opportunity Credit, the Lifetime Learning Credit is not based on the student's workload and is not limited to the first two years of postsecondary education. Expenses for graduate-level degree work are eligible. You do not qualify for the credit if your income is greater than $66,000 ($132,000 if Married Filing Jointly). The Lifetime Learning Credit is a nonrefundable credit. This means that if your taxes are less than your credit, then you will lose any remaining credit amount left after you reduce your income taxes to zero.
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You do not qualify for either credit if your filing status is Married Filing Separately. In addition, you cannot claim both the American Opportunity Credit or the Lifetime Learning Credit for a student in the same year. You must claim the student as a dependent to receive either education credit. If you do not claim the student as a dependent, or if someone else is eligible to claim the student as a dependent but elects not to, only the student may claim the credit. A student claimed as a dependent on another person's tax return cannot claim the credit. Claiming the American Opportunity Credit may be more beneficial than claiming the Lifetime Learning Credit, if you are eligible for both.
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For example, Brad's filing status is Single, and he has wages of $31,000. After allowing for the standard deduction and personal exemption amount, his tax is just over $2,500. He is a sophomore in college and paid $10,000 in qualified tuition expenses during the year as part of a degree program. He has no other income or deductions. Brad has the choice of taking the American Opportunity Credit or the Lifetime Learning Credit. He should choose whichever option gives him the biggest tax savings:
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If Brad takes the Lifetime Learning Credit instead, he would save $2,000 in taxes (the maximum credit amount) because his income is below the limits.
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If Brad takes the American Opportunity Credit instead, he would save $2,500 in taxes (the maximum credit allowed) because his income is below the limits.
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The American Opportunity credit gives him $500 more in tax savings than the Lifetime Learning credit would.
Brad should claim the American Opportunity Credit for the best bottom line on his tax return.
Education Savings Bond Program
You may exclude interest on qualified U. S. savings bonds from your gross income if you have paid qualified higher educational expenses during the redemption year. When calculating the amount of higher education expenses paid during the year, you may include any contribution of the bond proceeds to a QTP and any contribution to a Coverdell ESA as a qualified expense. You do not qualify for the exclusion if your filing status is Married Filing Separately or if your modified adjusted gross income is $93,150 or more ($147,250 if Married Filing Jointly) in the year the bond is redeemed.
Contact The Mobile Tax Man office for more information or assistance. 214-317-9927
Retirement Contributions
IRA Contribution
Traditional IRA Contribution
You can contribute up to $6,000to your IRA if you have earned income from a job or self-employment and you are under age 70 1/2. If you are age 50 or older, you may contribute up to $7,000. Traditional IRA contributions may be deductible on your tax return. File IRS Form 8606, Nondeductible IRAs, if you are not deducting all of your traditional IRA contribution.
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Retirement Savings Credit
If you contribute to an IRA or an employer-provided retirement account, such as a 401(k), you may be eligible for a credit. The credit is based on up to $2,000 of your contribution for the year. You must be age 18 or older to claim the credit and you cannot be a student or claimed as a dependent on another's return. The credit is in addition to any deduction or exclusion from income for the contribution.
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Roth Contributions and Conversions
Contributions to a Roth IRA or 401(k) are not tax deductible. Conversion amounts from a traditional IRA or 401(k) to a Roth IRA or Roth 401(k) are taxable in full in the year of the conversion.