Many
of us dread this time of year – TAX TIME. Although I am no tax expert, I do have experience and even more importantly, I have access to my dad – the Master of
Taxation! Our office is starting to get busy now with our tax clients
anxiously awaiting the verdict of just how much they will owe Uncle Sam, or how
much he’ll have to give them!
So
in celebration of this annual anxiety causing ritual, I’m starting a ‘Tax Tips’
series, where I will post some timely and useful tax information every week until
the dreaded April 15th. Although this inaugural tax tip post is a bit long, I will keep the following ones to the point. It's just that I wanted to start it off with a bang by giving you the big important ones first. And with that said, here’s the first bit of
info…
1. There’s a difference between a DEDUCTION and a CREDIT? A
CREDIT lowers your tax bill dollar for dollar. A DEDUCTION reduces your taxable
income, and the value of the deduction depends on the tax bracket. For example,
if you’re in the 25% tax bracket, a $1,000 deduction lowers your tax bill by
approximately $250 (depending on your circumstances). But a $1,000 credit lowers
the bill by the full $1,000 - no matter what tax bracket.
2. The
Mortgage Forgiveness Debt Relief Act and Debt Cancellation of 2007
gives those taxpayers who’ve gone through foreclosure a break. Usually when one
has a cancellation of debt, or a foreclosure of their principle residence, the
amount that’s still owed is considered income, and therefore taxable. This Act
lets taxpayers exclude the ” income” from the discharged debt (again, on their
principal residence), debt reduced through mortgage restructuring, as well as
mortgage debt forgiven in connection with a foreclosure, qualifies for the
relief.
This
provision applies to debt forgiven in calendar years 2007 through 2012 and up
to $2 million of forgiven debt is eligible for this exclusion ($1 million if
married filing separately). The exclusion does not apply if the discharge is
due to services performed for the lender or any other reason not directly
related to a decline in the home’s value or the taxpayer’s financial condition.
Here’s
a real basic example: You borrow $10,000 and default on the loan
after paying back $2,000. If the lender is unable to collect the remaining debt
from you, then there is a cancellation of debt for the amount of $8,000, which
generally is taxable income to you.
2. Like
many working parents, you have childcare expenses so you can work. If so, then
you can qualify for a tax credit worth between 20% and 35% of what you pay for
child care while you work. But if your boss offers a child care reimbursement
account -- which allows you to pay for the child care with pre-tax dollars --
that might be an even better deal. If you qualify for a 20% credit but are in
the 25% tax bracket, for example, the reimbursement plan is the way to go. (In
any case, only amounts paid for the care of children under age 13 count.)
But you can't double dip. Expenses paid through a plan can't also be used to
generate the tax credit. But get this: Although only $5,000 in expenses can be
paid through a tax-favored reimbursement account, up to $6,000 for the care of
two or more children can qualify for the credit. So, if you run the maximum
through a plan at work but spend even more for work-related child care, you can
claim the credit on as much as $1,000 of additional expenses. That would cut
your tax bill by at least $200.
3. Did
you purchase or refinance your home last year? When you buy a house, remember
that you get to deduct all the points paid to get your mortgage in one fell
swoop. But when you refinance, you have to
deduct the points on the new loan over the life of that loan. That means
you can deduct 1/30th of the points a year if it's a 30-year mortgage. That's
$33 a year for each $1,000 of points you paid -- not much, maybe, but don't
throw it away.
Even more important, in the year you pay off the loan -- because you sell the
house or refinance again -- you get to deduct all the as-yet-undeducted points. There's one exception to this sweet rule:
If you refinance a refinanced loan with the same lender, you add the points
paid on the latest deal to the leftovers from the previous refinancing -- and
deduct that amount gradually over the life of the new loan. A pain? Yes, but at
least you'll be compensated for the hassle.
4. Unlike
the Hope Credit that this one has temporarily replaced, the American
Opportunity Credit is good for all four years of college, not just the first
two. Don't shortchange yourself by missing this critical difference. This tax
credit is based on 100% of the first $2,000 spent on qualifying college
expenses and 25% of the next $2,000 ... for a maximum annual credit per student
of $2,500. The full credit is available to individuals whose modified adjusted
gross income is $80,000 or less ($160,000 or less for married couples filing a
joint return). The credit is phased out for taxpayers with incomes above those
levels. If the credit exceeds your tax liability, it can trigger a refund.
(Most credits can reduce your tax to $0, but not get you a check from the IRS.)
I hope this bit of information helps you all.
Again, I am not a tax ‘expert’, most of this information is available to you
via the IRS
website, however my firm and I do do taxes, and I have a tax expert on staff
as a resource. So look for more tax tips next week!
Be well!
~ Angela
