Top Tips on Making IRA Contributions

Top Tips on Making IRA Contributions

If you made IRA contributions or you’re thinking of making them, you may have questions about IRAs and your taxes. Here are some important tips from the IRS about saving for retirement using an IRA.

1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.

2. You must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you’re married and file a joint return, generally only one spouse needs to have compensation.

3. You can contribute to an IRA at any time during the year. To count for 2013, you must make all contributions by the due date of your tax return. This does not include extensions. That means you usually must contribute by April 15, 2014. If you contribute between Jan. 1 and April 15, make sure your plan sponsor applies it to the right year.

4. In general, the most you can contribute to your IRA for 2013 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2013, the maximum you can contribute increases to $6,500.

5. You normally won’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.

6. You may be able to deduct some or all of your contributions to your traditional IRA. Use the worksheets in the Form 1040A or Form 1040 instructions to figure the amount that you can deduct. You may claim the deduction on either form. Unlike a traditional IRA, you can’t deduct contributions to a Roth IRA.

7. If you contribute to an IRA you may also qualify for the Saver’s Credit. The credit can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. You can file Form 1040A or 1040 to claim the Saver’s Credit.

Tips on Making Estimated Tax Payments

Tips on Making Estimated Tax Payments

If you don’t have taxes withheld from your pay, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you’re self-employed you normally have to pay your taxes this way.

Here are six tips you should know about estimated taxes:

1. You should pay estimated taxes in 2014 if you expect to owe $1,000 or more when you file your federal tax return. Special rules apply to farmers and fishermen.

2. Estimate the amount of income you expect to receive for the year to determine the amount of taxes you may owe. Make sure that you take into account any tax deductions and credits that you will be eligible to claim. Life changes during the year, such as a change in marital status or the birth of a child, can affect your taxes.

3. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 16 and Sept. 15 in 2014, and Jan. 15, 2015.

4. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. If you mail your payments to the IRS, use the payment vouchers that come with Form 1040-ES, Estimated Tax for Individuals.

5. Check out the electronic payment options on IRS.gov. The Electronic Filing Tax Payment System is a free and easy way to make your payments electronically.

6. Use Form 1040-ES and its instructions to figure your estimated taxes.

Four Things to Know about Net Investment Income Tax

Four Things to Know about Net Investment Income Tax

Starting in 2013, some taxpayers may be subject to the Net Investment Income Tax. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things from the IRS that you should know about this tax:

1. Net Investment Income Tax.  The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

2. Net investment income.  This amount generally includes income such as:

  • interest
  • dividends
  • capital gains
  • rental and royalty income
  • non-qualified annuities

This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.

After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Refer to the instructions for Form 8960, Net Investment Income Tax for more on how to figure your net investment income or MAGI.

3. Income threshold amounts.  You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:

Filing Status                            Threshold Amount
Single or Head of household            $200,000
Married filing jointly                        $250,000
Married filing separately                  $125,000
Qualifying widow(er) with a child       $250,000

4. How to report.  If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.

Energy-Efficient Home Improvements Can Lower Your Taxes

Energy-Efficient Home Improvements Can Lower Your Taxes

You may be able to reduce your taxes if you made certain energy-efficient home improvements last year. Here are some key facts that you should know about home energy tax credits.

Non-Business Energy Property Credit

  • This credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This includes items such as insulation, windows, doors and roofs.
  • You may also be able to claim the credit for the actual cost of certain property. This may include items such as water heaters and heating and air conditioning systems. 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 expired at the end of 2013. You may still claim the credit on your 2013 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 and wind turbines.
  • 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.
  • This credit is available through 2016.

Eight Common Tax Mistakes to Avoid

Eight Common Tax Mistakes to Avoid

We all make mistakes. But if you make a mistake on your tax return, the IRS may need to contact you to correct it. That will delay your refund.

You can avoid most tax return errors by using IRS e-file. People who do their taxes on paper are about 20 times more likely to make an error than e-filers. IRS e-file is the most accurate way to file your tax return.

Here are eight common tax-filing errors to avoid:

1. Wrong or missing Social Security numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.

2. Wrong names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.

3. Filing status errors.  Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right one. Tax software helps e-filers choose.

4. Math mistakes.  Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.

5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.

6. Wrong bank account numbers.  You should choose to get your refund by direct deposit. But it’s important that you use the right bank and account numbers on your return. The fastest and safest way to get a tax refund is to combine e-file with direct deposit.

7. Forms not signed or dated.  An unsigned tax return is like an unsigned check – it’s not valid. Remember that both spouses must sign a joint return.

8. Electronic filing PIN  errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If not, you’ll need to enter the Adjusted Gross Income from your originally-filed 2012 federal tax return. Don’t use the AGI amount from an amended 2012 return or a 2012 return that the IRS corrected.

Ten Helpful Tips for Farm Tax Returns

Ten Helpful Tips for Farm Tax Returns

There are many tax benefits for people in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables.

Here are 10 things about farm income and expenses to help at tax time.

1.  Crop insurance proceeds.  Insurance payments from crop damage count as income. Generally, you should report these payments in the year you get them.

2. Deductible farm expenses.  Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is appropriate for that business.

3. Employees and hired help.  You can deduct reasonable wages you paid to your farm’s full and part-time workers. You must withhold Social Security, Medicare and income taxes from their wages.

4. Sale of items purchased for resale.  If you sold livestock or items that you bought for resale, you must report the sale. Your profit or loss is the difference between your selling price and your basis in the item. Basis is usually the cost of the item. Your cost may also include other amounts you paid such as sales tax and freight.

5. Repayment of loans. You can only deduct the interest you paid on a loan if the loan is used for your farming business. You can’t deduct interest you paid on a loan that you used for personal expenses.

6. Weather-related sales.  Bad weather such as a drought or flood may force you to sell more livestock than you normally would in a year. If so, you may be able to delay reporting a gain from the sale of the extra animals.

7. Net operating losses.  If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years. You may also be able to lower your tax in future years.

8. Farm income averaging.  You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three years.

9. Fuel and road use.  You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes.

10. Farmers Tax Guide.  For more details on this topic see Publication 225, Farmer’s Tax Guide. You can get it on IRS.gov or call the IRS at 800-TAX-FORM (800-829-3676) to have it mailed to you.

Tips for U.S. Taxpayers with Foreign Income

Tips for U.S. Taxpayers with Foreign Income

Did you live or work abroad or receive income from foreign sources in 2013? If you are a U.S. citizen or resident, you must report income from all sources within and outside of the U.S. The rules for filing income tax returns are generally the same whether you’re living in the U.S. or abroad. Here are seven tips from the IRS that U.S. taxpayers with foreign income should know:

1. Report Worldwide Income.  By law, U.S. citizens and resident aliens must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.

3. Consider the Automatic Extension.  If you’re living abroad and can’t file your return by the April 15 deadline, you may qualify for an automatic two-month filing extension. You’ll then have until June 16, 2014 to file your U.S. income tax return. This extension also applies to those serving in the military outside the U.S. You’ll need to attach a statement to your return to explain why you qualify for the extension.

4. Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $97,600 of your wages and other foreign earned income in 2013. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.

5. Don’t Overlook Credits and Deductions.  You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce the amount of taxes you have to pay if both countries tax the same income.

6. Use IRS Free File.  Everyone can prepare and e-file their federal tax return for free by using IRS Free File. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website. Some Free File software products and fillable forms also support foreign addresses for those who live abroad.

7. Get Tax Help Outside the U.S.  The IRS has offices in Frankfurt, London, Paris and Beijing. IRS staff at these offices can help you with tax filing issues and answer your tax questions. Visit IRS.gov for more information.

Two Tax Credits Help Pay Higher Education Costs

Two Tax Credits Help Pay Higher Education Costs

Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts from the IRS about these important credits.

The American Opportunity Credit is:

  • Worth up to $2,500 per eligible student.
  • Only available for the first four years at an eligible college or vocational school.
  • Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
  • For students earning a degree or other recognized credential.
  • For students going to school at least half-time for at least one academic period that started during the tax year.
  • For the cost of tuition, books and required fees and supplies.

The Lifetime Learning Credit is:

  • Limited to $2,000 per tax return, per year, no matter how many students qualify.
  • For all years of higher education, including classes for learning or improving job skills.
  • Limited to the amount of your taxes.
  • For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.

For both credits:

  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.
  • You must file Form 8863, Education Credits, to claim these credits on your tax return.
  • 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.
  • Visit IRS.gov and use the Interactive Tax Assistant tool to see if you’re eligible to claim these credits.

Tax Rules for Children with Investment Income

Tax Rules for Children with Investment Income

You normally must pay income tax on your investment income. That is also true for a child who must file a federal tax return. If a child can’t file his or her own return, their parent or guardian is normally responsible for filing their tax return.

Special tax rules apply to certain children with investment income. Those rules may affect the tax rate and the way you report the income.

Here are four facts from the IRS that you should know about your child’s investment income:

1. Investment income normally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income is more than $2,000. Your tax rate may apply to part of that income instead of your child’s tax rate.

3. If your child’s total interest and dividend income was less than $10,000 in 2013, you may be able to include the income on your tax return. If you make this choice, the child does not file a return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends.

4. Children whose investment income was $10,000 or more in 2013 must file their own tax return. File Form 8615, Tax for Certain Children Who Have Investment Income, along with the child’s federal tax return.

Starting in 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. NIIT is a 3.8% tax on the lesser of either net investment income or the excess of the child’s modified adjusted gross income that is over a threshold amount. Use Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit IRS.gov.

Early Retirement Plan Withdrawals and Your Taxes

Early Retirement Plan Withdrawals and Your Taxes

Taking money out early from your retirement plan may trigger an additional tax. Here are seven things from the IRS that you should know about early withdrawals from retirement plans:

1. An early withdrawal normally means taking money from your plan before you reach age 59½.

2. If you made a withdrawal from a plan last year, you must report the amount you withdrew to the IRS. You may have to pay income tax as well as an additional 10 percent tax on the amount you withdrew.

3. The additional 10 percent tax does not apply to nontaxable withdrawals. Nontaxable withdrawals 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.

4. A rollover is a type of nontaxable withdrawal. Generally, a rollover is a distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. You usually have 60 days to complete a rollover to make it tax-free.

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

6. If you make an early withdrawal, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.

7. The rules for retirement plans can be complex. The fast, safe and free way to prepare and e-file your tax return is to use IRS Free File. Free File offers brand-name software or online fillable forms for free. Free File software will pick the right tax forms, do the math and help you get the tax benefits you’re due. No matter how you prepare your taxes, you should always file electronically with IRS e-file. More than 80 percent of taxpayers e-file for faster refunds or for easier electronic payment options.