Changes to the 2015 Tax Code You Should Know

Part 2 of 2

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In addition to changes in the rules surrounding certain deductions, some popular tax breaks were extended this year beyond their initial expiration date. Here’s a look at some of them:

  • Higher education tuition deduction. You may still be able to deduct between $2,000 and $4,000 of qualified tuition expense. This deduction applies to an accredited post-secondary career school, college or university.
  • Energy credits. If you made energy-efficient changes to your home, you’re in luck. Enhancements such as improved insulation and  upgraded energy-efficient heating/cooling systems are eligible for the energy credit.
  • Educator expense deduction. If you are a K-12 teacher who dipped into your own funds for classroom supplies, you’re in luck. You could deduct up to $250.00 in unreimbursed classroom expenses. You must be a full-time teacher and work 900 hours per academic year to be eligible.
  • Commuting tax breaks. If you take mass transit to work, you could be eligible for a tax break much like those who have employer assistance to cover parking costs. The current deduction is $130.00 per month.
  • Deduction for small business equipment purchases of up to $2 million. This will come in handy if you decide to purchase/upgrade your business equipment. Eligible expenses now include computers and work stations.
  • Work Opportunity Tax Credit. If you own a business, good help can be hard to find, and expensive to hire (training and on-boarding expenses for example. However, Uncle Sam has extended the Work Opportunity Tax Credit. You’ll be eligible for a credit equal to a percentage of wages paid if you hire a permanent worker from any one of these targeted groups: TANF, SSI and SNAP clients, qualified veterans, qualified summer youth program members, vocational rehabilitation clients, to name a few.

Understanding changes to the tax code or extension for tax cuts will go a long way during tax season this year. Since each individual tax scenario is different, we recommend that you consult with a qualified tax pro. He or she will answer your questions, help you determine your eligibility for certain deductions and exemptions, and can even file on your behalf.

The start of tax season doesn’t have to mean unanswered questions and last-minute panic. As the old-school expression states, “Forewarned is forearmed.” The more you know in advance, the less likely it is you’ll be caught by surprise on tax day.

What’s The Difference Between a Tax Credit and a Tax Deduction?

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If you’re relatively new to filing taxes each year, chances are you’ve heard some terms that may seem interchangeable in the beginning. Two of the most commonly confused terms are “tax credit” and “tax deduction.” Here’s a look at both terms and how they’re different from one another.

Tax Credit

Unlike tax deductions (or “write-offs” as they’re common known), a tax credit doesn’t reduce your overall taxable income. It reduces your overall tax liability instead.

There are two types of tax credits: refundable and non-refundable. A refundable tax credit is one that will both reduce your overall tax liability and be returned to you in the form of a refund. The Earned Income Tax Credit (EITC) is an example of a refundable tax credit, and is available to you if you meet IRS income guidelines. Here’s how it works:

  • Let’s suppose you owe $2,000.00 in taxes. At the same time, you’re eligible for $3,500.00 in EITC. You’ll end up owing no tax at all once the credit is applied, and you’ll also receive the difference of $1500.00 as a refund.

On the other hand, a nonrefundable tax credit will only reduce your overall tax liability. A good example is the Child Tax Credit. If you qualify you can deduct a maximum of $2000.00 from your tax bill, but you will not receive a refund.

Tax Deductions

A tax deduction works differently in that it will reduce the taxable income you’ll need to report. Typical deductions include student loan interest, self-employment tax, child support, and moving expenses. Most people without kids will use the standard deduction, which is adjusted each year.

Tax deductions are subtracted from your gross income, which in turn lowers the income figure you’ll need to report on your tax forms. Here’s some math to demonstrate how it works:

  • Your total income: $30,000.00
  • The standard deduction: $6300.00 (if you’re single; see this chart for other filing statuses.)
  • Total taxable income: $23,700.00 ($30,000.00-$6300.00=$23,700.00)

You’ll only have to pay tax based on income of $23,300.00 instead of the original amount of $30,000.00 as seen in this example. Your outcome may vary depending on whether you choose to itemize your deductions, or take the standard deduction. You can’t do both, unfortunately.

Tax credits and tax deductions each have a different effect on your taxes. By understanding the differences between them, you’ll be better equipped to prepare your tax and understand your tax liability for a given year.

Go Green and Save Some Green

If electric vehicle and other alt-fuel vehicles aren’t on the top of your list, you might want to reconsider. Taxpayers who purchase an eligible electric or alt-fuel vehicle can receive a tax credit of up to $7500.00 through the Plug-In Electric Drive Vehicle Credit. Here’s how it works:

Background

First introduced in 2009 as part of the American Recovery and Investment Act, the credit was later expanded under the 2011 American Taxpayer Relief Act as a way to encourage taxpayers to purchase alt-fuel vehicles. If you purchase a qualified electric-drive vehicle you can claim a tax break of up to $7500.00. Your exact amount will vary, depending on the battery power of your vehicle. All qualified vehicles are eligible for a base credit of $2500.00. Taxpayers with vehicles that have at least 5 kilowatt hours will receive an additional $417.00. An additional $417.00 is applied for every additional kilowatt hour of batter power.

Qualifications

As with any IRS credit, there are qualifying standards.

  • The vehicle must be purchased for personal use and not for re-sale.
  • Vehicles must be purchased for use in the U.S.
  • The credit can’t be claimed until the title is transferred to the taxpayer in their state of residence.

Phase-Out

One of the purposes of this credit was to encourage vehicle manufacturers to develop better fuel-efficient technologies for their products. To that end, the credit phases out after a vehicle manufacturer sells at least 200,000 units of a specific model for domestic use in the U.S.

Timing is everything. During the first two quarters after the 200,000-unit threshold has been reached, the credit is reduced to 50 percent. Instead of a max of $7500.00, you would receive a max of $3750. The credit is reduced to 25 percent during the third and fourth quarter of the phase-out year. The credit is reduced to zero after the fourth quarter when you purchase the same vehicle model included in the 200,000 unit threshold.

This credit might be just the incentive you need to purchase a plug-in electric/alt.-fuel vehicle. Some models may lack the style of their gas-fueled counterparts, but the prospect of a significant tax credit could sweeten the deal in your favor.

Build Up Your Retirement Fund With The Saver’s Credit

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It might be hard to think about saving for retirement when present-day expenses threaten to derail your budget. If you are a low-to-moderate income person, you can still save for retirement without straining your existing resources. The Retirement Savings Contribution Credit AKA “The Savers Credit” is intended to help low-income taxpayers save for retirement.

What Is It?

The Saver’s Credit helps low-income taxpayers make contributions to retirement plans such as IRAs, 401(k)s or other employer-sponsored retirement plans. Although it was intended to be a temporary credit in 2002, it eventually was made permanent in 2006.This credit in unique n that it is one of the few credits offered to couples who file separate returns.

Eligibility

Eligibility for this credit is based on your tax filing status, Adjusted Gross Income (AGI) and your overall tax liability. If there is any excess credit left over, it can’t be issued to you as a refund. In addition to the income guidelines, you’ll need to be over 18, and not be considered a full-time student (if you attended college full-time for at least five months during the tax year, the IRS will consider you to be a full-time student). You also cannot be claimed as a dependent on anyone else’s tax return.

How It Works

You will need to complete and attach form 8880 to your tax return when you file your taxes. The maximum credit amount you can receive is $2000.00 (single or filing separately) or $4000.00 (filing jointly).

The Savers Credit can help take the pinch out of retirement savings for income-eligible people. If your employer offers a retirement plan, and if you meet the income guidelines established by the IRS, saving for retirement just got easier.

As with any tax matter, if you’re unsure as to whether or not you qualify for this credit, it’s always a good idea to check with a tax advisor or tax prep volunteer at tax time.