Cut Taxes and Save on Energy Bills with Home Energy Credits

You can reduce your taxes and save on your energy bills with certain home improvements.  Here are some key facts that you should know about home energy tax credits:

Non-Business Energy Property Credit 

  • Part of this credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This may include items such as insulation, windows, doors and roofs.
  • The other part of the credit is not a percentage of the cost. This part of the credit is for the actual cost of certain property. This may include items such as water heaters and heating and air conditioning systems. The credit amount for each type of property has a different dollar limit.
  • This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
  • Your main home must be located in the U.S. to qualify for the credit.
  • Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.
  • This credit had expired at the end of 2013. The Tax Increase Prevention Act extended it to apply for one year, through Dec. 31, 2014. You may still claim the credit on your 2014 tax return if you didn’t reach the lifetime limit in prior years.

Residential Energy Efficient Property Credit

  • This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
  • Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property.
  • There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
  • The home must be in the U.S. It does not have to be your main home, unless the alternative energy equipment is qualified fuel cell property.
  • This credit is available through 2016.

Employers: Don’t Overlook the Small Business Health Care Tax Credit

Do you own or run a small business or tax-exempt group with fewer than 25 full-time employees? If you do, you should know that the Small Business Health Care Tax Credit can help you provide insurance to your employees. You may be able to save on your taxes if you paid for at least half of their health insurance premiums. Here are several things that you should know about this important credit:

Maximum Credit.  For tax years beginning in 2014 and after, the maximum credit is 50 percent of premiums paid by small business employers. The limit is 35 percent of premiums paid by tax-exempt small employers, such as charities.

Number of Employees.  You may qualify if you had fewer than 25 employees who work full-time, or a combination of full-time and part-time. For example, two half-time employees equal one full-time employee for purposes of the credit.

Qualified Health Plan.  You must have paid premiums for your employees enrolled in a qualified health plan offered through a Small Business Health Options Program, or SHOP, Marketplace. There are limited exceptions to this requirement.

Average Annual Wages.  To qualify for the credit, the average annual wages of your full-time equivalent employees must have been less than $51,000 in 2014. The IRS will adjust this amount for inflation each year.

Half the Premiums.  You must have paid a uniform percentage of the cost of premiums for all employees. The amount you paid must be equal to at least 50 percent of the premium cost of the insurance coverage for each employee.

Two Year Limit.  An eligible employer may claim the credit for any two-consecutive taxable years, beginning in or after 2014. This credit can be claimed for two consecutive years, even if you claimed the credit at any point from 2010 through 2013.

If you are a for-profit business and the credit is more than your tax liability for the year, you can carry the unused credit back or forward to other tax years. If you are a tax-exempt employer, you may be eligible to receive the credit as a refund. This applies so long as it does not exceed your income tax withholding and Medicare tax liability for the year.

Reduce Your Taxes with the Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit can reduce the taxes you pay. If you paid someone to care for a person in your household last year while you worked or looked for work, then read on for facts from the IRS about this important tax credit:

Child, Dependent or Spouse.  You may be able to claim the credit if you paid someone to care for your child, dependent or spouse last year.

Work-Related Expense.  The care must have been necessary so you could work or look for work. If you are married, the care also must have been necessary so your spouse could work or look for work. This rule does not apply if your spouse was disabled or a full-time student.

Qualifying Person.  The care must have been for “qualifying persons.” A qualifying person can be your child under age 13. A qualifying person can also be your spouse or dependent who lived with you for more than half the year and is physically or mentally incapable of self-care.

Earned Income.  You must have earned income for the year, such as wages from a job. If you are married and file a joint tax return, your spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.

Credit Percentage / Expense Limits.  The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income. Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person. The limit is $6,000 if you paid for the care of two or more.

Dependent Care Benefits.  If your employer gives you dependent care benefits, special rules apply.

Qualifying Person’s SSN.  You must include the Social Security Number of each qualifying person to claim the credit.

Care Provider Information.  You must include the name, address and taxpayer identification number of your care provider on your tax return.

Top Facts about Adoption Tax Benefits

If you adopted or tried to adopt a child in 2014, you may qualify for a tax credit. If your employer helped pay for the costs of an adoption, you may be able to exclude some of your income from tax. Here are ten things you should know about adoption tax benefits.

Credit or Exclusion.  The credit is nonrefundable. This means that the credit may reduce your tax to zero. If the credit is more than your tax, you can’t get any additional amount as a refund. If your employer helped pay for the adoption through a written qualified adoption assistance program, you may qualify to exclude that amount from tax.

Maximum Benefit.  The maximum adoption tax credit and exclusion for 2014 is $13,190 per child.

Credit Carryover.  If your credit is more than your tax, you can carry any unused credit forward. This means that if you have an unused credit in 2014, you can use it to reduce your taxes for 2015. You can do this for up to five years, or until you fully use the credit, whichever comes first.

Eligible Child.  An eligible child is under age 18. This rule does not apply to persons who are physically or mentally unable to care for themselves.

Qualified Expenses.  Adoption expenses must be directly related to the adoption of the child and be reasonable and necessary. Types of expenses that can qualify include adoption fees, court costs, attorney fees and travel.

Domestic or Foreign Adoptions.  In most cases, you can claim the credit whether the adoption is domestic or foreign. However, the timing rules for which expenses to include differ between the two types of adoption.

Special Needs Child.  If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you didn’t pay any qualified adoption expenses.

No Double Benefit.  Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you can’t claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

Income Limits.  The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on the amount of your income.

Are You Self Employed? Check Out These IRS Tax Tips

Many people who carry on a trade or business are self-employed. Sole proprietors and independent contractors are two examples of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips about income from self-employment:

SE Income.  Self-employment can include income you received for part-time work. This is in addition to income from your regular job.

Schedule C or C-EZ.  There are two forms to report self-employment income. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet other conditions.

SE Tax.  You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes.

Estimated Tax.  You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You usually pay this tax in four installments for each year. If you do not pay enough tax throughout the year, you may owe a penalty.

Allowable Deductions.  You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.

When to Deduct.  In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.

Education Tax Credits: Two Benefits to Help You Pay for College

Did you pay for college in 2014? If you did it can mean tax savings on your federal tax return. There are two education credits that can help you with the cost of higher education. The credits may reduce the amount of tax you owe on your tax return. Here are some important facts you should know about education tax credits.

American Opportunity Tax Credit:

  • You may be able to claim up to $2,500 per eligible student.
  • The credit applies to the first four years at an eligible college or vocational school.
  • It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
  • It is available for students earning a degree or other recognized credential.
  • The credit applies to students going to school at least half-time for at least one academic period that started during the tax year
  • Costs that apply to the credit include the cost of tuition, books and required fees and supplies.

Lifetime Learning Credit:

  • The credit is limited to $2,000 per tax return, per year.
  • The credit applies to all years of higher education. This includes classes for learning or improving job skills.
  • The credit is limited to the amount of your taxes.
  • Costs that apply to the credit include the cost of tuition, required fees, books, supplies and equipment that you must buy from the school.

For both credits:

  • The credits apply to an eligible student. Eligible students include yourself, your spouse or a dependent that you list on your tax return.
  • You must file Form 1040A or Form 1040 and complete Form 8863, Education Credits, to claim these credits on your tax return.
  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. This form contains helpful information needed to complete Form 8863. The amounts shown in Boxes 1 and 2 of the form may be different than what you actually paid. For example, the form may not include the cost of books that qualify for the credit.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim both credits for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.

Top 10 Tax Tips about Home Mortgage Debt Cancellation

If your lender cancels part or all of your debt, you normally must pay tax on that amount. However, the law provides for an exclusion that may apply to homeowners who had their mortgage debt cancelled in 2014. In most cases where the exclusion applies, the amount of the cancelled debt is not taxable. Here are the top 10 tax tips about mortgage debt cancellation:

1. Main Home.  If the cancelled debt was a loan on your main home, you may be able to exclude the cancelled amount from your income. You must have used the loan to buy, build or substantially improve your main home to qualify. Your main home must also secure the mortgage.

2. Loan Modification.  If your lender cancelled part of your mortgage through a loan modification or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.

3. Refinanced Mortgage.  The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. Amounts used for other purposes don’t qualify.

4. Other Cancelled Debt.  Other types of cancelled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are other rules that may allow those types of cancelled debts to be nontaxable.

5. Form 1099-C.  If your lender reduced or cancelled at least $600 of your debt, you should receive Form 1099-C, Cancellation of Debt, in January of the next year. This form shows the amount of cancelled debt and other information.

6. Form 982.  If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the form with your federal income tax return.

7.  IRS Free File.  IRS e-file is fastest, safest, and easiest way to file.

8. IRS.gov tool.  The IRS has several free tools on its website to help you file your tax return. Use the Interactive Tax Assistant tool on IRS.gov to find out if your cancelled mortgage debt is taxable.

9. Exclusion extended.  The law that authorized this exclusion had expired at the end of 2013. The Tax Increase Prevention Act extended it to apply for one year, through Dec. 31, 2014.

10. More Information.  For more on this topic see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.

Claiming a Tax Deduction for Medical and Dental Expenses

Your medical expenses may save you money at tax time, but a few key rules apply. Here are some tax tips to help you determine if you can claim a tax deduction:

  • You must itemize.  You can only claim your medical expenses that you paid for in 2014 if you itemize deductions on your federal tax return. If you take the standard deduction, you can’t claim these expenses.
  • AGI threshold.  You include all the qualified medical costs that you paid for during the year. However, you can only deduct the amount that is more than 10 percent of your adjusted gross income.
  • Temporary threshold for age 65.  If you or your spouse is age 65 or older, the AGI threshold is 7.5 percent of your AGI. This exception applies through Dec. 31, 2016.
  • Costs to include.  You can include most medical and dental costs that you paid for yourself, your spouse and your dependents. Exceptions and special rules apply. Costs reimbursed by insurance or other sources do not qualify for a deduction.
  • Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The costs you pay for prescription drugs and insulin qualify. The costs you pay for insurance premiums for policies that cover medical care qualify. Some long-term care insurance costs also qualify.
  • Travel costs count.  You may be able to claim travel costs you pay for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 23.5 cents per mile for 2014.
  • No double benefit.  You can’t claim a tax deduction for medical expenses you paid for with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free. This rule prevents two tax benefits for the same expense.

Five Key Facts about Unemployment Benefits

If you lose your job, you may qualify for unemployment benefits. The payments may serve as much needed relief. But did you know unemployment benefits are taxable? Here are five key facts about unemployment compensation:

1. Unemployment is taxable.  You must include all unemployment compensation as income for the year. You should receive a Form 1099-G, Certain Government Payments by Jan. 31 of the following year. This form will show the amount paid to you and the amount of any federal income tax withheld.

2. Paid under U.S. or state law.  There are various types of unemployment compensation. Unemployment includes amounts paid under U.S. or state unemployment compensation laws.

3. Union benefits may be taxable.  You must include benefits paid to you from regular union dues in your income. Other rules may apply if you contributed to a special union fund and those contributions are not deductible. In that case, you only include as income any amount that you got that was more than the contributions you made.

4. You may have tax withheld.  You can choose to have federal income tax withheld from your unemployment. You can have this done using Form W-4V, Voluntary Withholding Request. If you choose not to have tax withheld, you may need to make estimated tax payments during the year.

5. Visit IRS.gov for help.  If you’re facing financial difficulties, you should visit the IRS.gov page: “What Ifs” for Struggling Taxpayers. This page explains the tax effect of events such as job loss. For example, if your income decreased, you may be eligible for certain tax credits, like the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS. In many cases, the IRS can take steps to help ease your financial burden.

Key Points to Know about Early Retirement Distributions

Some people take an early withdrawal from their IRA or retirement plan. Doing so in many cases triggers an added tax on top of the income tax you may have to pay. Here are some key points you should know about taking an early distribution:

1. Early Withdrawals.  An early withdrawal normally means taking the money out of your retirement plan before you reach age 59½.

2. Additional Tax.  If you took an early withdrawal from a plan last year, you must report it to the IRS. You may have to pay income tax on the amount you took out. If it was an early withdrawal, you may have to pay an added 10 percent tax.

3. Nontaxable Withdrawals.  The added 10 percent tax does not apply to nontaxable withdrawals. They include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

  • A rollover is a type of nontaxable withdrawal. A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.

4. Check Exceptions.  There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

5. File Form 5329.  If you made an early withdrawal last year, you may need to file a form with your federal tax return.