Updates and Sources

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American Opportunity Tax Credit

 

The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.

Lifetime Learning Credit

 

 

The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

Who can claim the LLC?

To claim a LLC, you must meet all three of the following:

  1. You, your dependent or a third party pay qualified education expenses for higher education
  2. You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution
  3. The eligible student is yourself, your spouse or a dependent you listed on your tax return

Tax Deductions: Itemize or Standard

 

There are two ways you can take deductions on your federal income tax return: you can itemize deductions or use the standard deduction. Deductions reduce the amount of your taxable income.

The standard deduction amount varies depending on your income, age, whether or not you are blind, and filing status and changes each year; see How Much Is My Standard Deduction? and Topic No. 551 for more information.

Certain taxpayers can't use the standard deduction:

  • A married individual filing as married filing separately whose spouse itemizes deductions.
  • An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
  • An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction. For additional information, refer to Publication 519, U.S. Tax Guide for Aliens.
  • An estate or trust, common trust fund, or partnership; see Code Section 63(c)(6)(D).

You should itemize deductions if your allowable itemized deductions are greater than your standard deduction or if you must itemize deductions because you can't use the standard deduction.

You may be able to reduce your tax by itemizing deductions on Form 1040, Schedule A, Itemized Deductions (PDF). Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses from a Federally declared disaster. You may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing on Form 1040, Schedule A (PDF), if you:

  • Can't use the standard deduction or the amount you can claim is limited
  • Had large uninsured medical and dental expenses
  • Paid interest or taxes on your home
  • Had large "other" deductions (line 16 on Form 1040, Schedule A)
  • Had large uninsured casualty or theft losses from a Federally declared disaster, or
  • Made large contributions to qualified charities

1099 MISC, Independent Contractors and Self-employed 1

 QuestionI received a Form 1099-MISC instead of a Form W-2. I'm not self-employed and don't have a business. How do I report this income?Answer

If payment for services you provided is listed in box 7 of Form 1099-MISC, Miscellaneous Income, the payer is treating you as a self-employed worker, also referred to as an independent contractor.

  • You don't necessarily have to have a business for payments for your services to be reported on Form 1099-MISC. You may simply perform services as a non-employee.
  • The payer has determined that an employer-employee relationship doesn't exist in your case.

If you weren't an employee of the payer, where you report the income depends on whether your activity is a trade or business. You're in a self-employed trade or business if your primary purpose is to make a profit and your activity is regular and continuous.

Self Employment Tax

 

Self-employment income is income that arises from the performance of personal services, but which cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee. The Internal Revenue Code imposes the self-employment tax on the self-employment income of any U.S. citizen or resident alien who has such self-employment income.

The Internal Revenue Code does not impose the self-employment tax on the self-employment income of a nonresident alien, unless the self-employment tax liability is imposed under the terms of a Totalization Agreement. However, once an alien individual becomes a resident alien under the residency rules of the Code, he/she then becomes liable for self-employment taxes under the same conditions as a U.S. citizen or resident alien.

In certain cases, compensation for personal services is not considered wages for the purposes of Social Security and Medicare tax withholding. For U.S. citizens who are employed by a foreign government or an international organization, the income paid for such services is reportable as self-employment income and is subject to self-employment tax to the extent that such services are performed within the United States, even though an employer-employee relationship may exist between the payer and the payee of the income.

New payment plan for delinquent taxpayers

 

The Internal Revenue Service (IRS) has announced that a new payment option has been added to the private debt collection program. The payment option is intended to make it easier for those who owe to pay their tax debts, although some practitioners, like me, fear that it could lead to abuse.

Taxpayers can now choose a preauthorized direct debit to make payments toward their federal tax debt. With direct debit, the taxpayer will give their written permission to the private collection agency (PCA) to authorize payment on the taxpayer’s behalf to the Department of the Treasury. This means that taxpayers can schedule payments with the PCA.

 This option is being touted as a convenience for taxpayers and will supplement existing IRS payment options. Those other options still exist. You can find electronic payment options through IRS at IRS.gov/Paying Your Taxes. You can also pay by check: Checks should be made payable to the U.S. Treasury and sent directly to the IRS, not the PCA.


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HOW TO GET A MORTGAGE WHEN YOU ARE SELF-EMPLOYED


Have two years of tax returns on hand

Being able to prove that you have a source of stable income and a consistent work history are two of the keys to getting approved. While, traditionally, this proof would come in the form of a W-2, for those who are self-employed, it’s all about your tax returns.

Typically, lenders look for you to have two years of a stable (or growing) documented income, so you’ll want to be sure that you have your last two tax returns ready to go. If you own your own business, your lender may also ask to see additional documents such as a profit and loss statement or statements from your business accounts.

In either case, when you’re getting ready to buy a home, it may be wise to start working with an accountant who can help you organize all the necessary paperwork. That way, you can be sure that you didn’t overlook or forget anything that you may need for future documentation.

                                   

               Minimize your deductions  Typically, when lenders set about improving self-employed individuals for a loan, they look at their after-deduction - or net - income. With that in mind, for the two years you’re supplying income information, you’ll want your tax returns to be as high-net as possible                                                      


Make sure your other qualifying factors are in good shape

Truth be told, your tax returns are only one of the factors that lenders look at when deciding whether or not to approve you for a loan. Other factors include your credit score, your debt-to-income ratio, and the amount of funds that you have on hand