The money paid toward your mortgage interest reduces your adjusted gross income. This brings down your taxable income, in some circumstances even putting you in a lower tax bracket. To take advantage of this potential savings, you must deduct your mortgage interest from your annual tax bill.
The Child Tax Credit (CTC) is worth up to $2,000 per child or other dependent that is younger than seventeen years old. To qualify, you must earn an annual income of at least $2,500. For single filers, this credit begins to phase out at $200,000 annual revenue and $400,000 for couples filing jointly.
Full-time college students may be eligible for several tax credits that can offset the burden of paying for their education. One of the largest is the American Opportunity Tax Credit (AOTC). This credit is available for the first four years of post-graduate school and allows up to $2,500 per eligible student.
One deduction that can add up for small business owners is the home office. However, take this deduction carefully as it can trigger an IRS audit. You can qualify for this deduction if the area is used exclusively and regularly for business purposes. This area must be used as the principal location for the business, or it is a place where you regularly meet with customers.
Qualified, unreimbursed medical expenses that exceed 10% of your adjusted gross income for the calendar year can be deducted from your taxes. These deductions include preventative care, treatment, surgeries, dental and vision care. Prescription medications also fall into this deduction.
Married couples filing their taxes jointly can take advantage of a number of tax credits that aren’t available to couples filing separately including the Earned Income Tax Credit, Child and Dependent Care Credit, Student Loan Interest Deduction and Tuition and Fees Deduction. The assumption may be that filing separately will put you in a lower tax bracket, however the tax brackets have a lower income threshold when filing separately.
Estimated taxes must be paid quarterly to the IRS by anyone that is receiving an income without paying taxes. This money can come from a job, investments, alimony or contest winnings. To send in your estimated taxes, you must complete the form 1040-ES and mail this to the IRS along with your payment. The taxes for each quarter’s income must be sent by the fifteenth of the month following the close of the quarter.
If you wind up owing $1,000 or more in taxes, you may incur an IRS underpayment penalty. For the last tax season, those who paid in at least 80% of their tax bill did not incur the penalty, in the future that number will be 85%. If you wind up a significant amount in taxes, it is important to adjust your tax withholdings for the current year. This may mean having your employer take more out of your paycheck or increasing estimated payments for those that are self-employed.
Certain activity, even when legitimate can increase your risk for an IRS tax audit. Some deductions can make an audit more likely including home office, business meals and travel, unreimbursed business expenses and alimony. Errors in math on your return and not reporting taxable income, in the form of 1099s and W2s, are also all red flags.
A resident in Goffstown, NH was concerned about running the risk of an IRS audit. He contacted Merrimack Tax Associates looking for suggestions to reduce that risk.
According to the IRS, federal tax returns should be kept a minimum of three years. The IRS only has three years to assess additional taxes, and taxpayers have three years to make additional claims. Investment forms, such as retirement documents, should be kept at least seven years. Bank statements and pay stubs should be kept for two years or more.