Types of Tax Deductions
“Oh, you can deduct that!”
Chances are you’ve heard this around the office water cooler, but what does it really mean? A tax deduction, or tax write-off, is used to decrease taxable income, thereby decreasing the amount of tax owed. There are different types of tax deductions available.
- Above-the-Line Deductions. Adjustments to gross income, or deductions found above the adjusted gross income line on page 1 of the Form 1040, are generally more advantageous to the taxpayer as they are directly affecting taxable income. Examples of above-the-line deductions include contributions to a traditional IRA, alimony payments and interest on student loans.
- Standard Deduction. The standard deduction is a set amount that ensures all taxpayers have at least some income that is not subject to federal tax (i.e., tax-free). In general, the standard deduction is adjusted each year for inflation and varies according to your filing status. You will not take the standard deduction if you itemize deductions.
- Itemized Deductions. Like above-the-line deductions, itemized deductions are items deemed by Congress that help reduce your income, but are subject to limitations. These are claimed on Schedule A and include such items as medical expenses, state, local and property taxes, home mortgage interest, gifts made to charity and certain other expenses. If all these things add up, after limitations, to an amount greater than your standard deduction, you will report your itemized deductions.
Of course, as your tax professional, we’re here to help you sort out what items are reported where and when; however, now you are more informed when a discussion about deductions occur around the water cooler.
Boost Your Retirement Savings with a Tax Credit
Are you reporting yours?
If you contribute to a retirement plan, like a 401(k) or an IRA, you may be eligible for the Saver’s Credit. The Saver’s Credit can help you save for retirement and reduce the tax you owe. Here are five facts from the IRS that you should know about this credit:
- The Saver’s Credit is the short name for the Retirement Savings Contribution Credit. It can be worth up to $2,000 for married couples filing a joint return. The credit is worth up to $1,000 for single taxpayers.
- Eligibility depends on your filing status and the amount of your yearly income. You may be eligible for the credit on your 2013 tax return if you’re:
- Married filing separately or a single taxpayer with income up to $29,500
- Head of household with income up to $44,250
- Married filing jointly with income up to $59,000
- Other special rules that apply to the credit include:
- You must be at least 18 years of age
- You can’t have been a full-time student in 2013
- You can’t be claimed as a dependent on another person’s tax return
- You must have contributed to a 401(k) plan or similar workplace plan by the end of the year to claim this credit. However, you can contribute to an IRA by the due date of your tax return and still have it count for 2013. The due date for most people is April 15, 2014.
- File Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. Tax software will do this for you if you e-file.
The Saver’s Credit is in addition to other tax savings you can get if you set aside money for retirement. For example, you may also be able to deduct your contributions to a traditional IRA.
10 Facts about Capital Gains and Losses
Learn how to determine if you should…
When you sell a ’capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:
- Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.
- A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
- You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. For details see IRS.gov/aca.
- You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.
- Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
- If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’
- The tax rates that apply to net capital gains will usually depend on your income. Although the maximum net capital gain tax rate rose from 15 to 20 percent in 2013, a 0 or 15 percent rate continues to apply to most taxpayers. A 25 or 28 percent tax rate can also apply to special types of net capital gains.
- If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
- If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.
- You often need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.
5 Facts about Unemployment Benefits
You may be able to get unemployment benefits…
If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.
Here are five important facts from the IRS about unemployment compensation:
- You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.
- There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.
- You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.
- You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.
- If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.
Small Business Corner
4 Things You Should Know if You Barter
Bartering is the trading of one product or service for another. Often there is no exchange of cash. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services.
If you own a business, to simplify the bartering process and ensure fair trading, you could join the James River Trade Exchange (JRTE) located right here in Richmond. As a JRTE member you can trade goods and services with any of the many other members and JRTE handle all of the required reporting to IRS. More information is available at the JRTE website.
If you barter, you should know that the value of products or services from bartering is taxable income.
Here are four facts about bartering:
- Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
- Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
- Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
- Reporting rules. How you report bartering on a tax return varies. If you are a sole proprietor in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
For more information, see the Bartering Tax Center in the business section on IRS.gov.