2014 Tax Season: Opening Day
Today marks the beginning of the 2014 tax season for paper and electronically filed returns. There have been slight increases in personal exemptions and standard deductions for the new tax year. For instance, the personal exemption for tax year 2014 rose to $3,950, up from $3,900. This year the standard deduction rose to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively from last year. The standard deduction for heads of household rose to $9,100, up from $8,950. However, it is worth noting that for some individuals, mainly homeowners or those with high medical or other itemized expenses, taking an itemized deduction instead of the standard deduction can be proven to be more beneficial.
In addition to what is mentioned above, many credits and deductions have returned. Here is a list of some worth mentioning:
Refundable Credits: These credits provide a refund to the taxpayer regardless of whether there are no taxes owed.
Earned Income Tax Credit – The taxpayer has to have earned income and meet other requirements in order to qualify for this credit. The maximum Earned Income Credit amount, for 2014, is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, to as little as, $496 with no qualifying children.
American Opportunity Credit – This is an education credit for undergraduate college education expenses paid by the taxpayer, for the first 4 years of college, for a qualifying child, spouse or the taxpayer themselves. In some cases, the qualifying child can pay their own expenses and the taxpayer would be able to claim the credit. The American opportunity credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses, and up to 40% is refundable. This means up to $1,000 of the American Opportunity credit can be refunded to you, even if your tax liability is zero.
Additional Child Tax Credit – This credit is given if the taxpayer cannot take the full child tax credit, which is nonrefundable. The additional child tax credit may provide a refund of the excess credit over taxes owed. However, to qualify for this credit, you must have more than $3,000 in earned income and meet other qualifications.
Nonrefundable Credits: These credits do not provide a refund, but they directly reduce taxes owed.
Lifetime learning credit – This is another education credit for undergraduate & graduate education expenses paid by the taxpayer, for a qualifying child, spouse or the taxpayer themselves. The taxpayer may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students, and there is no limit on the number of years the credit can be claimed.
Retirement savings contribution credit – This credit can be taken for the taxpayer’s contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, and any voluntary after-tax employee contributions to a qualified retirement and 403(b) plan. This savings credit is usually phased out based on your AGI, but it can provide a credit of as much as 50% of the taxpayer’s contribution up to $2,000 ($4,000 if married filing jointly).
Credit for child and dependent care expenses – The taxpayer may be able to claim this credit if they pay someone to care for a dependent, who is under age 13, or for their spouse, or other dependents who are not able to care for themselves. The credit can be up to 35% of any qualifying expenses. To qualify, the taxpayer must pay these expenses so s/he can work or look for work.
Child tax credit – This credit is up to $1000 for each qualifying child, under the age of 17 for the tax year.
Deductions: These expenses do not provide a refund or directly reduce taxes owed. However, they do reduce your overall taxable income, which indirectly reduces taxes owed. Just to name a few:
Medical & Dental expenses
Mortgage interest, also qualifying mortgage insurance premiums
Taxes paid (real estate taxes, sales taxes, etc.)
Gifts/Contributions to charity
Unreimbursed employee expenses (job travel, dues, education expenses, uniforms, etc.)
Gambling losses, up to gambling winnings
Traditional IRA contributions & other qualifying retirement plan contributions
Student loan interest
Tuition & Fees deduction
(1/2) self-employment tax
Self-employment health insurance plans & other qualifying self-employment retirement plans
Business Expense Deductions: Typically any expense which is ordinary and necessary for your trade or business falls under the category of a deductible business expense.
Fully Deductible Business Expenses:
Cost of products/ inventory, including freight, storage & any installation charge
Office Expenses (supplies, insurance, advertising, software, etc.)
Salaries, wages & other compensation, including commissions & sales expenses
Professional fees (accounting fees, legal fees, etc)
Professional development and training, including continuing education
Pension and profit sharing plans
Employee benefit programs
Taxes paid (state income tax, payroll tax, etc.)
Furniture, Fixtures & Equipment
Maintenance & Repairs
Partially Deductible Business Expenses:
Home Office Deduction/Business Use of Home – Business owners who operate their business out of their home are able to deduct part of the expenses incurred for operating and maintaining their home, in addition to any fully deductible business expense. For instance, expenses include rent or mortgage interest, real estate taxes, utilities, repairs, maintenance, depreciation of their home, etc.
Auto Expenses – If the vehicle is used for both business and personal use, the business owner must split between business (deductible) and personal use (non-deductible). Only if the vehicle is used solely for business purposes are the expenses 100% deductible. The deduction include, the higher of mileage driven @ 56 cents per mile, or the total of any out of pocket expenses paid for a car lease or note payment, repairs, oil changes, even washing the vehicle, etc.
Meals & Entertainment – Only 50% of these expenses are deductible
Gifts – Up to $25 per person are deductible
Non-Deductible Expenses: These expenses are not deductible regardless of whether they were made for your trade or profession.
Penalties & Fines
Losses in excess of the limit set by the IRS
Dues & Membership fees for social clubs
Contributions to political parties
Personal Interest & other personal expenses