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.

Top Six Things You Should Know about the Child Tax Credit

The Child Tax Credit may save you money at tax-time if you have a qualified child. Here are six things you should know about the credit.

1. Amount.  The Child Tax Credit may help reduce your federal income tax by up to $1,000 for each qualifying child that you are eligible to claim on your tax return.

2. Additional Child Tax Credit.  If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the Additional Child Tax Credit.

  1.  Qualifications.  For this credit, a qualifying child must pass several tests:
  • Age test.  The child must have been under age 17 at the end of 2014.
  • Relationship test.  The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. The child may be a descendant of any of these individuals. A qualifying child could also include your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
  • Support test.  The child must not have provided more than half of their own support for the year.
  • Dependent test.  The child must be a dependent that you claim on your federal tax return.
  • Joint return test.  The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
  • Citizenship test.  The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  • Residence test.  In most cases, the child must have lived with you for more than half of 2014.

4. Limitations.  The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate your credit depending on your filing status and income.

5. Schedule 8812.  If you qualify to claim the Child Tax Credit, make sure to check whether you must complete and attach Schedule 8812, Child Tax Credit, with your tax return.

6. IRS E-file.  Electronic filing is the best way to file your tax return. IRS E-file is the safe, accurate and easiest way to file.

Taxable or Not – What You Need to Know about Income

All income is taxable unless the law excludes it. Here are some basic rules you should know to help you file an accurate tax return:

  • Taxed income.  Taxable income includes money you earn, like wages and tips. It also includes bartering, an exchange of property or services. The fair market value of property or services received is taxable.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance.  Proceeds paid to you because of the death of the insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that you get that is more than the cost of the policy is taxable.
  • Qualified scholarship.  In most cases, income from this type of scholarship is not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. On the other hand, amounts you use for room and board are taxable.
  • State income tax refund.  If you got a state or local income tax refund, the amount may be taxable. You should have received a 2014 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

What You Should Know if You Changed Your Name

Did you change your name last year? If you did, it can affect your taxes. All the names on your tax return must match Social Security Administration records. A name mismatch can delay your refund. Here’s what you should know if you changed your name:

  • Report Name Changes.  Did you get married and are now using your new spouse’s last name or hyphenated your last name? Did you divorce and go back to using your former last name? In either case, you should notify the SSA of your name change. That way, your new name on your IRS records will match up with your SSA records.
  • Dependent Name Change.  Notify the SSA if your dependent had a name change. For example, this could apply if you adopted a child and the child’s last name changed.

If you adopted a child who does not have a SSN, you may use an Adoption Taxpayer Identification Number on your tax return. An ATIN is a temporary number. You can apply for an ATIN by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. You can visit IRS.gov to view, download, print or order the form at any time.

  • Get a New Card.  File Form SS-5, Application for a Social Security Card, to notify SSA of your name change. You can get the form on SSA.gov or call 800-772-1213 to order it. Your new card will show your new name with the same SSN you had before.
  • Report Changes in Circumstances in 2015.  If you purchase health insurance coverage through the Health Insurance Marketplace you may get advance payments of the premium tax credit in 2015. If you do, be sure to report changes in circumstances, such as a name change, a new address and a change in your income or family size to your Marketplace throughout the year. Reporting changes will help make sure that you get the proper type and amount of financial assistance and will help you avoid getting too much or too little in advance.

Stay Vigilant Against Bogus IRS Phone Calls and Emails

Tax scams take many different forms. Recently, the most common scams are phone calls and emails from thieves who pretend to be from the IRS. They use the IRS name, logo or a fake website to try to steal your money. They may try to steal your identity too. Here are several tips from the IRS to help you avoid being a victim of these tax scams:

The real IRS will not:

  • Initiate contact with you by phone, email, text or social media to ask for your personal or financial information.
  • Call you and demand immediate payment. The IRS will not call about taxes you owe without first mailing you a bill.
  • Require that you pay your taxes a certain way. For example, telling you to pay with a prepaid debit card.

Be wary if you get a phone call from someone who claims to be from the IRS and demands that you pay immediately. Here are some steps you can take to avoid and stop these scams.

If you don’t owe taxes or have no reason to think that you do:

  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” to the comments of your report.

If you think you may owe taxes:

  • Ask for a call back number and an employee badge number.
  • Call the IRS at 800-829-1040. IRS employees can help you.

In most cases, an IRS phishing scam is an unsolicited, bogus email that claims to come from the IRS. They often use fake refunds, phony tax bills, or threats of an audit. Some emails link to sham websites that look real.  The scammers’ goal is to lure victims to give up their personal and financial information. If they get what they’re after, they use it to steal a victim’s money and their identity.

If you get a ‘phishing’ email, the IRS offers this advice:

  • Don’t reply to the message.
  • Don’t give out your personal or financial information.
  • Forward the email to phishing@irs.gov. Then delete it.
  • Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.

IRS Can Help if W-2s Are Missing

In most cases you get your W-2 forms by the end of January. Form W-2, Wage and Tax Statement, shows your income and the taxes withheld from your pay for the year. You need your W-2 form to file an accurate tax return.

If you haven’t received your form by mid-February, here’s what you should do:

• Contact your employer.  Ask your employer (or former employer) for a copy. Be sure that they have your correct address.

• After Feb. 23.  If you can’t get a copy from your employer, call the IRS at 800-829-1040 after Feb. 23. The IRS will send a letter to your employer on your behalf. You’ll need the following when you call:

o Your name, address, Social Security number and phone number;

o Your employer’s name, address and phone number;

o The dates you worked for the employer; and

o An estimate of your wages and federal income tax withheld in 2014. You can use your final pay stub for these amounts.

Note: Important New Health Insurance Form. If you bought health insurance through the Health Insurance Marketplace, you should have received a Form 1095-A, Health Insurance Marketplace Statement, by early February. You will need the new form to help you complete an accurate federal tax return. You will use the information from the Form 1095-A to calculate the amount of your premium tax credit. The form is also used to reconcile advance payments of the premium tax credit made on your behalf with the amount of premium tax credit that you are eligible to claim.

If you did not receive your Form 1095-A, you should contact the Marketplace from which you received coverage to get a copy.

IRS to Parents: Don’t Miss Out on These Tax Savers

Children may help reduce the amount of taxes owed for the year. If you’re a parent, here are several tax benefits you should look for when you file your federal tax return:

• Dependents.  In most cases, you can claim your child as a dependent. You can deduct $3,950 for each dependent you are entitled to claim. You must reduce this amount if your income is above certain limits.

• Child Tax Credit.  You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit.

• Child and Dependent Care Credit.  You may be able to claim this credit if you paid for the care of one or more qualifying persons. Dependent children under age 13 are among those who qualify. You must have paid for care so that you could work or could look for work.

• Earned Income Tax Credit.  You may qualify for EITC if you worked but earned less than $52,427 last year. You can get up to $6,143 in EITC. You may qualify with or without children.

• Adoption Credit.  You may be able to claim a tax credit for certain costs you paid to adopt a child.

• Education tax credits.  An education credit can help you with the cost of higher education.  There are two credits that are available. The American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the credit reduces your tax to less than zero, you may get a refund. Even if you don’t owe any taxes, you still may qualify.

• Student loan interest.  You may be able to deduct interest you paid on a qualified student loan. You can claim this benefit even if you do not itemize your deductions.

• Self-employed health insurance deduction.  If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid during the year. This may include the cost to cover your children under age 27, even if they are not your dependent.

What You Should Know if You Get Tipped at Work

If you get tips on the job, you should know some things about tips and taxes. Here are a few tips from the IRS to help you file and report your tip income correctly:

• Show all tips on your return.  You must report all tips you receive on your federal tax return. This includes the value of tips that are not in cash. Examples include items such as tickets, passes or other items.

• All tips are taxable.  You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. It also includes your share of tips received under a tip-splitting agreement with other employees. 

• Report tips to your employer.  If you receive $20 or more in tips in any one month, you must report your tips for that month to your employer. You should only include cash, check and credit card tips you received. Do not report the value of any noncash tips on this report. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips. 

Taxpayers Will Use New Information Statement to claim Premium Tax Credit

The Affordable Care Act is bringing several changes to the tax filing season this year, including a new form some taxpayers will receive. If you or anyone in your household enrolled in a health plan through the Health Insurance Marketplace in 2014, you’ll get Form 1095-A, Health Insurance Marketplace Statement.

 

You will receive Form 1095-A from the Marketplace where you purchased your coverage, not the IRS. This form should arrive in the mail from your Marketplace by early February. You should wait to receive your Form 1095-A before filing your taxes.

 

Form 1095-A will tell you the dates of coverage, total amount of the monthly premiums for your insurance plan, information you may use to determine the amount of your premium tax credit, and any amounts of advance payments of the premium tax credit.

 

You will use the information to calculate the amount of your premium tax credit and reconcile advance payments of the premium tax credit made on your behalf to your insurance provider with the premium tax credit you are claiming on your tax return. 

 

If you do not receive your Form 1095-A by early February, you should contact the state or federal Marketplace from which you received coverage. If you believe any information on your Form 1095-A is incorrect, you should contact the state or federal Marketplace from which you received coverage. The Marketplace may need to send you a corrected Form 1095-A.

 

You may receive more than one Form 1095-A if different members of your household had different health plans, you updated your coverage information during the year, or you switched plans during the year.

If You Work, The Earned Income Tax Credit Can Work For You!

Since 1975, the Earned Income Tax Credit has helped workers with low and moderate incomes get a tax break each year. Four out of five eligible workers claim EITC, but the IRS wants everyone who is eligible to claim this credit. Here are some things you should know about this valuable credit:

Review your eligibility.  If you worked and earned under $52,427, you may qualify for EITC. If your financial or family situation has changed, you should review the EITC eligibility rules. You might qualify for EITC this year even if you didn’t in the past. If you qualify for EITC you must file a federal income tax return and claim the credit to get it. This is true even if you are not otherwise required to file a tax return. Don’t guess about your EITC eligibility. Use the EITC Assistant tool on IRS.gov. The tool helps you find out if you qualify and estimates the amount of your EITC.

Know the rules.  You need to understand the rules before you claim the EITC, to be sure you qualify. It’s important that you get this right. Here are some factors you should consider:

  • Your filing status can’t be Married Filing Separately.
  • You must have a Social Security number that is valid for employment for yourself, your spouse if married, and any qualifying child listed on your tax return.
  • You must have earned income. Earned income includes earnings from working for someone else or working for yourself.
  • You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules. If you have a child who lived with you for more than six months of 2014, the child must meet age, residency, relationship and the joint return rules to qualify.
  • If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Lower your tax or get a refund.  The EITC reduces your federal tax and could result in a refund. If you qualify, the credit could be worth up to $6,143. The average credit was $2,407 last year.