DEDUCTIONS

• FILING BASICS
• AFFORDABLE CARE ACTS
• INCOME
• WITHHOLDING
• DEPENDENTS
• CREDITS
• DEDUCTIONS
• PAYMENTS
• IRS TAX CALENDAR
• TAX TIPS

Tax Deductions

Tax deductions are expenses that reduce the amount of income subject to tax.

There are two types of deductions most taxpayers will qualify for:

• Standard
• Itemized

In addition to these two types of deductions, there are also deductions available to taxpayers who take either the standard deduction or who itemize deductions.

There are over 50,000 tax deductions in tax code and regulations. Many of these deductions apply to individuals as well as businesses. The most common deductions include:

• The Standard deduction:
  • The standard deduction is a fixed dollar amount based on your filing status.
  • Itemized deductions
    • Miscellaneous itemized deductions
    • Archer medical savings accounts (MSAs)
    • Casualty and theft losses
    • Charitable contributions
    • Deductible taxes
    • Health savings account (HSAs)
    • Interest expenses
    • Medical and dental expenses
    • Mortgage points
    • Employee business expenses
    • Student loan interest

 

 

Standard Deduction

The standard deduction is a dollar amount that reduces the amount of income subject to tax. You cannot take the standard deduction if you are claiming itemized deductions.

The amount of standard deduction is based on a taxpayer’s filing status. The standard deduction amount can change from year to year depending upon inflation.

Higher Standard Deduction

There is an additional deduction amount for taxpayers age 65 or older, are blind, or both.

The additional amount for age will be allowed if you or your spouse are age 65 or older on the last day of the tax year. The IRS considers you 65 on the day before your birthday.

The additional amount for blindness will be allowed if you or your spouse are totally or partly blind on the last day of the tax year. If you are partly blind, you must get a certified statement from an optometrist or eye doctor declaring you cannot see better than 20/200 vision in one eye (even with eye glasses or contact lenses), or that your field of vision is not more than 20 degrees.

Reduced Standard Deduction

If you can be claimed as a dependent on another person’s tax return, the amount of the standard deduction is reduced. Generally, the amount of the standard deduction is limited to the greater of $950, or your earned income for the year plus $300. The amount of the standard deduction for a dependent cannot be higher than the regular standard deduction amount.

Non-Qualifying Individuals

• A married person whose filing status is married filing separately and whose spouse is itemizing deductions
• An individual who is a nonresident alien or dual-status alien during any part of the current tax year. Dual status occurs when you are considered both a nonresident and resident alien during the same year.
• An individual who changes his or her annual accounting cycle and is filing a return for a period of less than 12 months

2012 Standard Deduction Amounts

Under Age 65 on December 31

Filing Status	Deduction Amount
Single or Married filing separately	$5,950
Married filing jointly or Qualifying widow(er) with dependent child	$11,900
Head of household	$8,700

Over Age 65 or Blind

You are at least 65	True	False
You are blind	True	False
Your spouse at least 65	True	False
Your spouse is blind	True	False
Filing Status	Number of True Statements	Standard Deduction
Single	1	$7,400
	2	$8,850
Married filing jointly or Qualifying widow(er)	1	$13,050
	2	$14,200
	3	$15,350
	4	$16,500
Married filing separately	1	$7,100
	2	$8,250
	3	$9,400
	4	$10,550
Head of household	1	$10,150
	2	$11,600

 

 

Itemized Deductions

Certain expenditures qualify as a deduction for your taxes. These expenditures are referred to as itemized deductions.

In general, if your total itemized deductions exceed the standard deduction, you should itemize. This includes these situations:

• You do not qualify for the standard deduction, or the amount of the standard deduction is limited
• You have large, uninsured medical and dental expenses
• You pay interest and taxes on a home or personal property
• You have large, unreimbursed employee business expenses
• You have large, uninsured casualty or theft losses
• You make large contributions to qualified charities

Most deductions are subject to the 2% of adjusted gross income (AGI) rule. This means the sum of expenditures greater than 2% of your total AGI is deductible in the amount that exceeds the 2%. Medical and dental expenses that are greater than 7.5% of your total AGI are deductible in the amount that exceeds the 7.5%.

Qualifying Expenditures

• Medical and dental expenses
• State and local income taxes or sales tax
• Real estate and personal property taxes
• Home mortgage and investment interest
• Home mortgage points
• Charitable contributions
• Casualty and theft losses
• Job expenses
• Miscellaneous deductions

Individuals Who Must Itemize

• A married person whose filing status is married filing separately and whose spouse is itemizing deductions.
• An individual who is a nonresident alien or dual-status alien during any part of the current tax year. Dual status occurs when you are considered both a nonresident and resident alien during the same year.
• An individual who changes his or her annual accounting cycle and is filing a return for a period of less than 12 months.

For more information, see the Instructions for Schedule A.

Archer Medical Savings Account

An Archer medical savings account (MSA) is a tax-exempt trust or custodial account in which you save money exclusively for future medical expenses. It must be established with a U.S. financial institution.

Contributions to your Archer MSA qualify for a deduction on your tax return, even if you do notitemize deductions.

Contributions and distributions are reported on Form 8853 and attached to your Form 1040.

Benefits

• You can claim a tax deduction on your 1040, even if you do not itemize deductions.
• Interest and other earnings on the assets in the account are tax-free.
• Distributions are tax-free if used to pay qualified medical expenses.
• Contributions remain in your account year after year until you use them.
• Archer MSA accounts stay with you, even if you change employers or leave the work force.

Requirements

• You must have a high deductible health plan (HDHP).
• You must have no other health or Medicare coverage.
• You must be either of the following:
  • A self-employed person, or the spouse of a self-employed person, who maintains an individual or family HDHP
  • Employed by a small employer who maintains an individual or family or HDHP  for you or your spouse

Limits on Contributions

• Annual deductible limit:
  • You or your employer can contribute up to 65% (75% if family coverage) of the annual deductible of your HDHP.
  • Income limit:
    • You cannot contribute more than you earned for the entire year from the employer maintaining the HDHP.
    • If you are self-employed you cannot contribute more than your net self-employment income.

Limits of Deduction

The deduction is limited based on whether the coverage is for an individual or a family. The 2012 limits are:

Self-Only Coverage

• Annual deductible must be at least $2,100 and no more than $3,150.
• Out-of-pocket expenses can be no more than $4,200.

Family Coverage

• Annual deductible must be at least $4,200 and no more than $6,300.
• Out-of-pocket expenses can be no more than $7,650.

Qualified Medical Expenses

Qualified medical expenses are the same expenses that qualify for the Medical and Dental Deduction and are incurred by:

• You or your spouse
• All dependents whom you are claiming
• Any person you could have claimed as a dependent except that:
  • The person filed a joint return.
  • The person had more than $3,800 in gross income.
  • You could be claimed by someone else.

You cannot deduct qualified medical expenses as an itemized deduction if the expenses are paid with a tax-free distribution from your Archer MSA.

For more information, see IRS Publication 969.

 

Casualty and Theft Losses

Casualty and theft losses are the unexpected loss of property. Casualty and theft losses are deductible as an itemized deduction.

A casualty occurs when your property is damaged as the result of an identifiable event that is sudden, unexpected, and unusual.

• A sudden event is swift, not gradual or progressive.
• An unexpected event is unanticipated and unintended.
• An unusual event is not a normal day-to-day occurrence and is not typical of the types of activities in which you engage.

A theft occurs when property is taken or removed with the intent to deprive you of it.  A theft is not mislaid or lost property.

Insurance Coverage

If the property is covered by insurance, you must file a claim for reimbursement of the loss.

If the property is covered and you do not file a claim, you cannot deduct a casualty or theft loss for the property. The portion of the property not covered by insurance is eligible to be claimed for a deduction.

The amount of insurance deductible you must pay to receive reimbursement is part of the total casualty or theft loss.

Amount of Loss

To determine the amount of loss, you must know the fair market value (FMV) of the property before and after the loss and your adjusted basis in the property. Fair market value can be determined by the amount for which you could sell the property in its present condition. Adjusted basis is usually what the item cost, increased or decreased by events such as improvements, deterioration, or depreciation.

The amount of the loss is the lesser of the decrease in FMV as the result of the casualty or your adjusted basis in the property before the casualty or theft.

You must reduce the amount of loss by any reimbursement you receive, or expect to receive. Reimbursements include insurance recovery.

Once the amount of loss is determined, the loss must be further reduced by $100 if the property is personal. The $100 reduction for personal property applies to each casualty or theft during the year, regardless of how many items are involved in each incident.

After the $100 reduction, you must further reduce the amount of loss by 10% of your adjusted gross income (AGI). The balance remaining after these two reductions is the deductible amount of your loss.

For more information, please refer to IRS Topic 515 – Casualty, Disaster, and Theft Losses.

Victims of Ponzi Schemes

Beginning in 2009, the IRS allows a theft loss deduction and a net operating loss carryback for losses from Ponzi investment schemes. The special tax treatment must be claimed on Form 4684, and is available only to qualified direct investors in a fraudulent scheme.

The deduction amount is equal up to 95% of the taxpayer’s lost investment, or 75% if the taxpayer is seeking recovery. The amount of the deduction is reduced by any withdrawals the taxpayer received from the investment, and by any recovered amounts.

For more information, see the Instructions for Form 4684.

Charitable Contributions

Charitable contributions are donations made to qualified charitable organizations. The contributions can be monetary, or physical property. Qualified charitable contributions are deductible as an itemized deduction.

Qualified Organizations

Qualified organizations can be public or private foundations. Organizations will be able to tell you whether they are considered a qualified organization for tax purposes. The limit on donations is greater for public organizations. Qualified organizations include:

• Corporations, trust  funds, community chests, and foundations organized and operated for literary, religious, educational, or scientific reasons, and the prevention of cruelty to animals or children
• Fraternal orders, associations, and societies when the contribution received will be used for literary, religious, educational, or scientific reasons, and the prevention of cruelty to animals or children
• Posts and organizations of war veterans
• Non-profit hospitals and schools
• Churches, synagogues, temples, mosques, or other religious organizations

The IRS has a handy online tool to help you check whether an organization is qualified for deductible contributions.

Qualified Contributions

For a contribution of $250 or more, you must have a receipt in order to claim a deduction.

Although you cannot deduct the value of time you spent volunteering, you can deduct travel expenses you incurred while performing volunteer services away from home, as long as no significant part of the trip was spent for personal pleasure, vacation, or recreation. You can also deduct out-of-pocket expenses incurred in completing the volunteer services, including auto expenses, which are figured at 14 cents per mile.

Property donation amounts may vary depending on the type of organization and property donated:

• Generally, household and personal items may be deducted at their fair market value. A good way to get the fair market value of an item is to determine what the item would sell for at a garage sale, flea market, or thrift store.
• Clothing and household items may only be deducted if they are in good condition.
• Non-cash property may increase in value from the time you obtained it to the time you donated it, therefore you may only be able to deduct part of the property’s value. Usually you can deduct your basis in the property (what you have invested in the property out-of-pocket) or the fair market value of the property, whichever is lower.

Documenting Your Contributions

Deductions Less Than $250

• You must obtain a receipt or letter showing the organization name, location, donation date, and item description.
• You must keep a written record of:
  • The name and address of the organization to which you made your contribution
  • The date and location of the contribution
  • A reasonably detailed description of the property
  • The fair market value of the property at the time of contribution, and how you computed the fair market value
  • Your cost or basis in the property
  • Whether there were any terms to your donation

Deductions More Than $250 But Less Than $500

• You must meet all documentation requirements for donations of less than $250.
• You must get and keep a written acknowledgment of your contribution, with this information:
  • A description of the donated property
  • Whether you were compensated for your donation
  • A good faith estimate of donated goods

Deductions More Than $500 But Less Than $5,000

• You must meet all documentation requirements for donations of more than $250 but less than $500.
• You must make a record of how you acquired the property, the date of acquisition, and your basis in the property.

Deductions More Than $5,000

• You must meet all documentation requirements for donations of more than $500 but less than $5,000.
• You must get a written appraisal from a qualified appraiser.

Non-Qualified Contributions

• Donations made to specific individuals
• Donations made to political organizations or candidates
• Donations made from an IRA distribution
• The value of time you spent volunteering
• The cost of playing games of chance, including raffles and bingo
• Any contribution from which you receive or expect to receive a financial or economic benefit of equal value

Contribution Limitations

The overall limitation of charitable contributions is 50% of your adjusted gross income (AGI). If your contributions exceed this limit in a given tax year, you can deduct the remainder of your contributions over the next 5 tax years.

Beneficial Contributions

If you receive any type of benefit from a contribution that you make, you must reduce the contribution amount by the fair market value of the benefit you received.  For example if you pay $50 to attend a church luncheon, and the fair market value of the lunch is $15, you can only deduct $35 as a charitable contribution.

If you pay more than fair market value to obtain merchandise, goods, or services, the amount you pay in excess of the fair market value can be deducted as a charitable contribution.  You cannot deduct the amount that would normally be paid for the acquisition.

50% of AGI Limitations

Organizations qualifying for the 50% limit include churches, educational organizations that maintain a regular student body and staff, and organizations that provide medical research, education, or care.

30% of AGI Limitations

Organizations qualifying for the 30% limit include qualified organizations considered private organizations. In addition, some capital gain properties qualify for the 30% limit.

20% of AGI Limitations

Capital gain properties donated to private organizations qualify for the lesser of 20% of your AGI or 30% of your AGI minus any 30% limitation contributions made.

For more information please refer to IRS Topic 506 – Contributions.

Deductible Taxes

If you itemize deductions, you may be able to deduct your state, local and foreign income taxes, and state and local personal property taxes. You may also choose to deduct state and local sales taxes instead of state and local income taxes.

Deductible Personal Property Taxes

Personal property taxes are deductible if the tax is imposed on a yearly basis and is based on the assessed value of the property. Taxes not based on the value of the property are not deductible.

Deductible Income Taxes

State and local income taxes withheld from your wages during the year are deductible in the year they were withheld. State and local income tax estimates or prior year payments are also deductible in the year you paid them.

Foreign income taxes usually qualify as an itemized deduction or as a tax credit in the year you paid them.

Deductible Sales Tax

You have the option of deducting state and local income taxes or state and local sales tax. You cannot deduct both.

To claim the sales tax deduction you can either add up all sales tax paid for the year (if you have the receipts) or you can claim a standard amount based on your state and income level. The IRS has provided an easy-to-use calculator to help you figure the standard amount of deduction you are eligible to claim.

Non-Deductible Taxes

• Federal income tax
• Social Security tax
• Stamps
• Transfer of property tax
• Estate and inheritance tax
• Water, sewer or trash collection
• Vehicle licensing fees based on vehicle weight

For more information please refer to IRS Tax Topic 503 – Deductible Taxes.

Employee Business Expenses

If you itemize deductions and are an employee, you may be able to deduct certain work-related expenses.

Only employee business expenses that are in excess of 2% of your adjusted gross income (AGI) can be deducted.

Qualifying Business Expenses

Expenses that qualify for an itemized deduction include:

• Business travel expenses
• Business use of car
• Business entertainment expenses
• Business use of your home
• Work-related educational expenses
• Miscellaneous employee expenses

You must keep records to prove the business expenses you deduct.

If the plan under which you are reimbursed by your employer is non-accountable, you must include the expenses, but you can take a deduction for them.

If your employer gave you reimbursements under an accountable plan, you need not  include the payments in your gross income, but you cannot take a deduction for the payments you received in relation to the expenses.

An accountable plan must meet three requirements:

• You must have incurred the expenses while performing services as an employee.
• You must adequately account to your employer for these expenses in a reasonable period of time.
• You must return any excess reimbursements or allowances within a reasonable period of time.

Report employee business expenses on Form 2106 – Employee Business Expenses. This form flows to Schedule A – Itemized Deductions.

For more information see IRS Tax Topic 514 – Employee Business Expenses.

 

Health Savings Accounts

A health savings account (HSA) is a tax-exempt trust or custodial account. You establish an HSA with a qualified HSA trustee to pay or reimburse the medical expenses you incur.

Report contributions and distributions on Form 8889 and attach it to your Form 1040.

Benefits

• You can claim a tax deduction on your 1040, even if you do not itemize deductions.
• Contributions your employer makes can be excluded from your gross income.
• Interest and other earnings on the account are tax-free.
• Distributions are tax-free if used to pay for qualified medical expenses.
• Contributions remain in your account year after year until you use them.
• HSA accounts stay with you, even if you change employers or leave the workforce.

Qualifications

You must meet all of the following qualifications:

• You must have a high deductible health plan (HDHP).
• You must have no other health coverage.
• You must not be enrolled in Medicare.
• You cannot be claimed as a dependent of someone else.

Limits on Contributions

You or another qualified person can contribute to your HSA. The limit on the amount of contributions depends on the type of HDHP you have and your age.

If you are filing married filing jointly, you are treated as having family coverage if you or your spouse has family coverage.

If you are contributing to a self-only coverage HSA, you can contribute up to the amount of your health plan deductible, but not more than $3,100.

If you are contributing family coverage HSA, you can contribute up to the amount of your health plan deductible, but not more than $6,250.

If you are enrolled in Medicare you cannot contribute to your HSA.

If you are age 55 or older, your contribution limit is increased by $1,000.  If you are married filing jointly and both you and your spouse are over age 55 and are not enrolled in Medicare, the total contribution limit is increased to $8,250.

You must reduce the amount that can be contributed to your HSA by any contributions made to an Archer medical savings account. This includes any contributions your employer makes on your behalf.

Limits of Deduction

The deduction is limited based on whether the coverage is for an individual or a family.

Self-Only Coverage

• Minimum annual deductible must be at least $1,200.
• Maximum out of pocket expenses is $6,050.

Family Coverage

• Minimum annual deductible must be at least $2,400.
• Maximum out of pocket expenses is $12,100.

Qualified Medical Expenses

Qualified medical expenses are the same expenses that qualify for the medical and dental deduction and are incurred by:

• You or your spouse
• All dependents that you are claiming
• Any person you could have claimed as a dependent except that:
  • The person filed a joint return.
  • The person had more than $3,800 in gross income.
  • You could be claimed by someone else.

For more information, see IRS Publication 969.

 

Interest Expenses

Interest is the amount you pay for borrowing money. You must be legally liable for the debt of the borrowed money to be able to deduct the interest paid. Most interest is deductible if you itemize your deductions, unless the interest is on a rental or business property, or a student loan.

Home Mortgage Interest

Home mortgage interest is paid on a loan secured by your main or second home. The loan can be a loan to buy your home, a home equity loan, line of credit, or a second mortgage. Most home mortgage interest is reported on Form 1098 by the financial institution to which you make payments.

Your main home is the home where you live most of the time. The home can be a house, cooperative apartment, mobile home, condominium, mobile home, house trailer, or a houseboat with sleeping, toilet, and cooking facilities.

Your second home is any other residence you own and treat as your second home. You do not have to use the home during the year; however, if you rent it to others, you must also use it as a home for 14 days or 10% of the number of days you rent it, whichever is greater.

Qualifying Home Mortgage Interest

If your mortgages fit into one or more of these categories at all times during the year, you can deduct the interest on the loans.

• You took out the mortgages on or before October 13, 1987 (called grandfathered debt).
• You took out the mortgages after October 13, 1987 to buy, build, or improve your home. The mortgages plus any grandfathered debt must not exceed $1 million ($500,000 if your filing status is married filing separately).
• You took out the mortgages after October 13, 1987 for reasons other than to buy, build, or improve your home, but only if these mortgages total $100,000 or less ($50,000 if your filing status is married filing separately). Additionally, the total of all mortgages on the home cannot exceed the fair market value of the home.

If your mortgage doesn’t fit into one of these categories, you may be able to deduct a portion of the interest paid.

Investment Interest

Investment interest is paid on debt to purchase or carry property held as an investment. You can deduct investment interest only to the extent of your net investment income.

Investment interest includes:

• Interest allocable to portfolio income under the Passive Activity Loss (PAL) rules
• Interest derived from an activity involving trade or business in which you did not materially participate and which is not considered a passive activity
• Any deductible amount connected with personal property used in a short sale

Investment income includes:

• Non-business or non-trade income from interest, dividends, rents, royalties, and other income generated from investment properties
• Net gain on the disposition of a property held for investment
• Gross portfolio income under PAL rules
• Income from activities involving trade, or business in which you do not materially participate

Non-Deductible Interest

You cannot deduct personal interest. Personal interest is interest paid on a loan to purchase personal property such as a car, credit card, installment interest for personal expenses, and other non-business related properties.

For more information please see IRS Tax Topic 505 – Interest Expense.

Mental and Dental Expenses

If you itemize deductions, you may deduct the amounts you paid for medical and dental expenses that exceeded 7.5% of your adjusted gross income (AGI).

The deduction is allowed for expenses paid for the prevention and alleviation of a physical or mental defect or illness. Medical expenses include expenses related to diagnosis, cure, mitigation, treatment, or prevention of disease,

or treatment affecting any function or structure of the body.

Deduction Guidelines

• Expenses must be for you, your spouse or your dependent, or for anyone who would qualify as your dependent except for having a gross income of more than $3,800.
• Expenses must be paid during the current tax year, regardless of when incurred.
• Expenses must not be compensated by insurance.
• Expenses must not be paid out of a tax-free medical savings or health savings account.
• You must subtract from your deduction total any reimbursement of medical expenses, whether they were paid to you or directly to the doctor or hospital.

Qualifying Expenses

• Professional services – doctors, dentists, surgeons, chiropractors, psychiatrists, psychologist, acupuncture, Christian Science Practitioners
• Care services – hospital, qualified long-term care, nursing, laboratory, inpatient drug or alcohol treatment
• Medications – insulin, prescription drugs
• Diseases – diagnosis, mitigation, cure, treatment or prevention
• Smoking cessation – program fees, prescription drugs to alleviate nicotine withdrawal (this does not include nicotine gum or patches)
• Weight loss – program fees to attend weight loss programs for specific diseases, including obesity, diagnosed by a physician
• Transportation – primarily for and essential to medical care
  Vehicle use – actual out-of-pocket expenses or the standard mileage rate for medical expenses (23 cents per mile); expenses for parking and tolls can be included for either method
• Conferences – admission and transportation for conferences relating to the chronic diseases of you, your spouse or your dependent
• Eye care – prescription eye glasses, contact lenses or laser eye surgery
• Supplementary items – false teeth, hearing aids, crutches, wheelchairs, guide dogs for the blind or deaf
• Insurance premiums – accident, health, long-term care insurance
  Self-employed persons with a net profit might be able to deduct 100% of medical insurance premiums.

Non-Qualifying Expenses

• Non-prescription over-the-counter medicines or drugs
• Funeral / burial
• Most cosmetic surgery
• Attending a program for the improvement of your general health
• Meals and lodging while attending a qualifying conference
• Diet food
• Insurance premiums for life insurance, loss of wages or any policy that pays you a guaranteed amount each week due to sickness
• Insurance premiums paid by your employer, unless the premiums are included in box 1 of your Form W-2

For more information see IRS Publication 502.

Miscellaneous Itemized Deductions

Certain other expenses can be deducted as itemized deductions. To deduct miscellaneous expenses, the expenses must be incurred for one of the following:

• To produce or collect income that is included in your gross income
• To manage, conserve or maintain property held for producing gross income, or
• To determine, contest, pay or claim a refund of any tax

These types of expenses include:

• Appraisal fees for a casualty loss or charitable contribution
• Casualty and theft losses from property used in performing services as an employee
• Clerical help and office rent in caring for investments
• Depreciation on home computers used for investments
• Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust
• Fees to collect interest and dividends
• Hobby expenses, but generally not more than the amount of income from the hobby
• Indirect miscellaneous deductions of pass-through entities
• Investment fees and expenses
• Legal fees related to producing or collecting taxable income or getting tax advice
• Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you
• Loss on deposits in an insolvent or bankrupt financial institution
• Repayments of income
• Repayments of Social Security benefits
• Safe deposit box rental
• Service charges on dividend reinvestment plans
• Tax advice fees
• Trustee’s fees for your IRA, if separately billed and paid

 

Moving Expenses

If you move to a different location to start a new job or self-employment, you may be able to deduct part of your moving expenses. The deduction is available whether you claim standard or itemized deductions, and whether you own or rent either home. To claim your unreimbursed expenses, use Form 3903.

What qualifies as a move

Your move must meet certain requirements to qualify for the deduction:

1. The move has to be related to starting work in the new location. In general, that means you have to start working in the new location within one year of the move, although exceptions can be made if you can show special circumstances that prevented you from moving within that time.
2. The move has to be relatively close to your new job location. The distance from your new home to your new workplace cannot be more than the distance from your old home to the new job location. In addition, the move has to meet a distance test – the new workplace must be more than 50 miles farther away than your old workplace was from your old home. For example, if you used to live 10 miles from work, your new workplace must be at least 60 miles away from your former home for the move to qualify. (If you don’t have a former workplace, as is the case with a first job, or if you’re returning to work after being unemployed or a part-time worker for a substantial period, your new workplace just has to be at least 50 miles from your former home.)
3. You must work full-time for a certain amount of time after moving to the new location. This is the time test, and for employees that means you have to work full-time for at least 39 weeks in the 12 months after you move. The 39 weeks don’t have to be consecutive or for the same employer. If you’re self-employed, you have to work a total of 78 weeks in the first 24 months after the move, including at least 39 weeks in the first 12 months after the move. You can count any work, both employment and self-employment, and in any trade or business. On joint returns, either spouse can satisfy the time test, but the work periods cannot be combined to satisfy the time test.

You can claim the moving expenses deduction even before you meet the time test, if you expect to complete the 39-week work period in the year you’re filing, or the year after that for the 78-week work period. So, for example, if you moved in late 2012, you can claim the deduction on your 2012 return that you file in 2013, even though you may not have completed the time test period.

If you fail to complete the work period, but have already claimed the deduction, you must either:

• Add the deduction as income on your next tax return, or
• Amend the return, and refile without the deduction.

The time test does not apply if you become disabled or die before completing the period, or if you’re a member of the Armed Forces and moved because of a permanent change of station. There are other exceptions for retirees and survivors moving to the U.S. See IRS Publication 521for more information.

What expenses can be deducted

Provided you meet the tests above, you can deduct reasonable expenses for:

• Costs for moving or shipping your household goods, personal effects, pets and vehicles
• Disconnecting or connecting utility services required because of moving your things
• Travel costs for yourself and your family members to your new home, including lodging along the way, but not meals. Your family members do not have to move at the same time as you.
• Use of your car, either by claiming actual expenses or by claiming the standard mileage rate, which is 23 cents per mile. For either method, you can add parking fees and tolls.
• Storing and insuring your possessions for up to 30 days after they leave your former home but before they are delivered to your new home

You may deduct expenses regardless of whether you’re moving within, to or from the U.S. For moves outside the U.S., you can only expenses for storing your things while you’re working at the workplace outside the U.S.

Expenses that cannot be deducted

You cannot deduct expenses that are not directly related to moving yourself, your family, and your household. So you cannot deduct:

• Any of the amount you paid for your new home
• Any expenses related to improving for sale or selling your former home, as well as any loss incurred on the sale
• Expenses for signing or breaking a lease
• Car registration tags or driver’s license
• Mortgage prepayment penalties
• Househunting expenses
• Real estate taxes (as a moving expense)
• Changing carpet and draperies in your new home
• Return trips to your former home – you can only deduct one trip per person
• Forfeit of membership fees or security deposits
• Expenses for furnishing or setting up your household in the new location, such as security deposits and fees for connecting utilities

What if you’re reimbursed?

Your employer may reimburse you for all or part of your moving expenses. Your employer may reimburse you for some expenses that are not deductible, and will likely treat that part of the reimbursement as wages on your W-2 form. Reimbursement for deductible expenses is not taxable, but does reduce your deduction for moving expenses on your return. So how you should treat the reimbursement on your return depends on how the reimbursement is reported on your Form W-2.

• If the reimbursement is only in box 12 with code P, and your moving expenses were more than that amount, you should file Form 3903 and claim all allowable expenses and report the reimbursement.
• If the reimbursement in box 12 is equal to your expenses, you do not need to file Form 3903 and claim the deduction, since you’ve been fully reimbursed.
• If your reimbursement is split between box 1 (wages) and box 12, and your expenses are more than what is in box 12, you should file Form 3903 with all expenses, but only report the reimbursements in box 12.
• If all of your reimbursement in box 1, you should file Form 3903 with all expenses, but do not report the reimbursements.

 

Mortgage Points

Home mortgage points are certain charges you pay to obtain a home mortgage. Points are usually charged based on a percentage of the loan amount. In some cases home mortgage points are deductible in the year you paid them, as an itemized deduction.

Deduction Guidelines

All of the following conditions must be met for your home mortgage points to be fully deductible in the year you paid them:

• Your loan must be secured by your main home.
• Paying points must be an established practice in your area.
• The points you paid were not more than what is generally paid for points in your area.
• You use the cash method of accounting; that is, you report income and deductions in the year they occurred.
• The points were not paid for items generally separated on the settlement sheet.
• You must have paid the points at or before closing with funds not from your lender or mortgage broker.
• You must have obtained a loan to buy or build your main home.
• The points were computed as a percentage of the mortgage principal.
• The points amount is shown on your settlement statement.

If you cannot meet all of the guidelines for points to be deductible in full, you may be able to deduct the points over the lifetime of your mortgage. Second home mortgage points are deductible over the lifetime of the loan, instead of only the year they were paid.

Refinancing Points

Points paid to refinance an existing mortgage are usually deducted over the life of refinance loan. However, if part of the refinanced mortgage is used to make improvements to your main home, and you meet the first six requirements in the deduction guidelines, you can fully deduct the part of the points related to the improvements in the year you paid the points.

Non-Deductible Points

• Points charged for specific services such as appraisal, inspection, title and attorney fees, and property taxes
• Points paid if you were the seller of the home
• Points paid to obtain a mortgage for a second home

For more information see IRS Tax Topic 504 – Home Mortgage Points and Publication 936.

Student Loan Interest

Interest payments made on a qualified student loan may be deductible, even if you do not itemize deductions.

The maximum amount of student loan interest that can be deducted is $2,500.

Qualified Student Loan

A qualified student loan is a loan you took out to pay qualified higher education expenses. The expenses must meet these conditions:

• The expenses were for you, your spouse or a person who was your dependent when the loan originated.
• You paid or incurred the expenses within a reasonable period of time before or after you took out the loan.
• The expenses were for education furnished during an academic period when the recipient was an eligible student.

Qualified Student

A qualified student must have been enrolled in a degree, certificate or other program leading to a recognized educational credential. The educational institution must be eligible and the student must have carried at least one-half of a normal full-time workload for the course being studied.

Qualified Expenses

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school:

• Tuition and fees
• An allowance for room and board
• An allowance for books, supplies, transportation and miscellaneous expenses

An eligible educational institution is a college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education.

Costs incurred for eligible expenses must be reduced by:

• Non-taxable employer-provided educational assistance
• Non-taxable distributions from a Coverdell education savings program
• Non-taxable distributions from a qualified tuition program (QTP)
• U.S. Savings Bond interest that is non-taxable
• Non-taxable portions or scholarships and fellowships
• Veterans’ education assistance
• Any other non-taxable payments received for educational expenses

Eligibility

You cannot claim the deduction if any of these are true:

• Another taxpayer claims an exemption for you as a dependent.
• Your filing status is married filing separately.
• You are not legally obligated to make payments on the loan.

Income Limitations

The amount of the student loan interest deduction is reduced or eliminated if your modified adjusted gross income (MAGI) exceeds limits based on your filing status.

If your filing status is married filing jointly the credit is reduced when your MAGI exceeds $120,000 and is eliminated when your MAGI is greater than $150,000.

If your filing status is any other qualified filing status besides married filing jointly, the credit is gradually reduced when your MAGI exceeds $60,000 and is eliminated when your MAGI is greater than $75,000.

For more information see IRS Publication 970.

Affordable Care Act

The Affordable Care Act was passed almost three years ago with the goal of extending quality health insurance coverage to more Americans. The Act’s core requirements are that most Americans must have health insurance and that all but small employers must offer insurance to full-time employees.

To encourage compliance, the Act takes a carrot-and-stick approach: for both individuals and employers, credits are offered for those who need financial help with buying insurance, and penalties are defined for those who do not get insurance. These requirements, credits and penalties become effective January 1, 2014.

Update: The U.S. Treasury Department has announced a one-year delay in the requirement for employers to offer insurance to their employers. That requirement will not go into effect until 2015, and the employer penalty will not be assessed until 2015. The January 1, 2014 deadline for taxpayers remains the same.

To help you prepare, we’ve created calculators to help you find what your projected credit (individuals only) and penalty would be. We also provide helpful FAQs to answer the very questions you likely have.

For Taxpayers:

Do I qualify for the Premium Tax Credit?
How much Premium Credit could I qualify for?
What is my penalty if I don’t have insurance?
Taxpayer FAQs

For Employers:

If I don’t offer insurance, what is the penalty?
Employer FAQs

Taxpayer FAQs

Will I have to have health insurance?

Effective January 2014, the Affordable Care Act requires you to have “minimum essential” health insurance if you are a U.S. citizen or legal resident. Your dependents must also be covered. Exemptions will be allowed for:

• Financial hardship (standards will be defined by the Secretary of Health and Human Services)
• Religious objections (applies only to certain faiths)
• Members of American Indian tribes
• Those uninsured for less than three months
• Undocumented immigrants
• Incarcerated individuals
• Those for whom the lowest cost plan option exceeds 8% of income
• Those with incomes below the tax filing threshold

What happens if I don’t have health insurance?

Starting in 2014, if you don’t have minimum essential coverage, or one of the accepted exemptions listed above, you will have to pay a penalty. The penalty starts out fairly low for 2014, but increases considerably in 2015 and again in 2016. Use our calculator to see the projected penalty for each year.

How much is the penalty?

The annual penalty will be a set amount per individual (including dependents) or a percentage of your taxable income, whichever is greater. The annual penalty is capped at an amount roughly equal to the national average premium for a qualified health plan. In other words, the penalty will be no more than it would have cost to buy insurance in the first place.

The penalty is charged for each month you (and your dependents) don’t have minimum essential coverage, and will be figured on your tax return. You can be uninsured for up to three months without penalty.

If I don’t have insurance, when is my penalty due?

The penalty is figured on your tax return and is due by the normal tax filing deadline, usually April 15.

How long can I be uninsured without penalty?

You can be uninsured for up to three months without penalty.

What if I can’t afford health insurance?

As listed above, exemptions are provided for those with low income. Also, being covered by Medicaid counts as being covered, and Medicaid will expand to cover those under age 65 who have an income of up to 138% of the federal poverty level.

Also, people in their 20s may have the option to buy a lower-cost “catastrophic” health plan.

Finally, if your income is less than 400% of the federal poverty level, a new Premium Tax Credit will be available to help you buy insurance. Use our calculators to see if you would qualify for the credit and how much credit you could receive.

What is “minimum essential coverage”?

The Affordable Care Act requires health insurance plans to provide minimum services in 10 categories, called “essential health benefits.” While nearly everyone must obtain minimum essential coverage, each state can choose from a set of plans to serve as its benchmark plan. Whatever benefits that plan covers in the 10 categories will be deemed the essential benefits in that state. The 10 categories are:

• Ambulatory patient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance use disorder services, including behavioral health treatment
• Prescription drugs
• Rehabilitative and habilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care

Where would I get insurance?

Most people who have insurance at work will continue to be insured there. If your share of the premium for the insurance is more than 8% of your income, you’ll be able to shop for insurance in a state insurance Exchange.

The Exchanges are not yet set up, so you won’t be able to find your state’s, but they must be in place by October 1, 2013.

What is a health insurance exchange?

Exchanges, or marketplaces, are new organizations that will be set up for buying health insurance. They will offer a choice of different health plans. Each state is expected to establish an Exchange, with the federal government stepping in if a state does not set one up.

What’s the least amount of insurance I can buy?

The lowest cost plan would be the Bronze plan offered by an Exchange. Each state’s Exchange will offer the following coverage levels:

• Bronze = covers 60% of covered healthcare expenses
• Silver = covers 70%
• Gold = covers 80%
• Platinum = covers 90%

Also available if you’re under 30 will be a “catastrophic” plan. Such plans must still provide minimum essential coverage, but will have a lower premium because of a higher deductible and out-of-pocket costs than the other listed plans. An employer would not be allowed to use a catastrophic plan as minimum essential coverage for employees.

What is the Premium Tax Credit?

The purpose of the credit (also known as a subsidy) is to help individuals with moderate income buy health insurance through an Exchange. The credit is refundable, so it will increase your tax refund or help provide you one. If you don’t have the money needed to pay the full insurance premium upfront, you may qualify to get the credit in advance, without waiting for the refund on your tax return. Such an advance payment of the credit would not come to you, it would go directly to the insurance company. The advance credit payment will be reconciled against your actual credit amount when you file your tax return. You must be enrolled in a health insurance plan through an Exchange to be considered for the credit. The credit is effective January 2014.

Do I qualify for a Premium Tax Credit?

The credit is available only to those who buy insurance through an Exchange and meet certain requirements:

1. Your household income must be no more than 400% of the federal poverty level. For example, using the 2013 amount for a family of four (48 contiguous states), the top cutoff amount would be $94,200. See the current poverty levels
2. Your part of the insurance premium must be more than 9.5% of your household income, or the employer-offered insurance must not cover more than 60% of covered healthcare costs.

Calculate whether you qualify for the Premium Tax Credit

What will the amount of my Premium Tax Credit be?

The actual amount will be tied to the cost of premiums in the Exchange for your area and your family income. The credit will be the difference between the cost of the second-lowest, “Silver” plan and your contribution. Your contribution is limited to the following percentages of income for specific income levels:

Your Percentage of Federal Poverty Level	Your Contribution
100–133%	2% of income
133–150%	3–4% of income
150–200%	4–6.3% of income
200–250%	6.3–8.05% of income
250–300%	8.05–9.5% of income
300–400%	9.5% of income

Calculate your projected Premium Tax Credit

Do I have to take the insurance my employer offers?

No, you can join your spouse’s coverage, buy coverage through an Exchange, or buy insurance on your own, directly from an insurance company or broker. However, as of 2014, when individual responsibility requirements take effect, if you refuse your employer’s coverage and are without coverage for yourself and your dependents, you will be subject to a penalty.

If you waive coverage for any reason other than that it costs more than 9.5% of your adjusted gross income or that it does not cover at least 60% of covered healthcare expenses, you can still buy coverage through an Exchange, but will not be eligible for the Premium Tax Credit.

Employer FAQs

Update: The U.S. Treasury Department has announced a one-year delay in the requirement for employers to offer insurance to their employers. That requirement will not go into effect until 2015, and the employer penalty will not be assessed until 2015. The January 1, 2014 deadline for taxpayers remains the same.

Will I be required to offer health insurance to all my employees?

Effective January 2015, if you have 50 or more full-time equivalent employees, the Affordable Care Act requires you to offer your full-time employees “affordable minimal essential coverage” (see Taxpayer FAQs), or you may have to pay a penalty. The Affordable Care Act does not require you to offer health insurance or pay penalties for part-time employees. If you have fewer than 50 full-time equivalent employees, you would not be required to offer your full-time employees coverage, nor would you subject to a penalty.

Use our calculator to determine your number of full-time equivalent employees, whether you are a large or small employer, and any potential penalty.

Who is counted as a full-time employee?

A full-time employee (for the requirement of offering insurance) is one who works an average of at least 30 hours per week.

Will I be required to offer health insurance to part-time employees?

No, part-time employees (those working fewer than 30 hours per week on average) are only used in the calculation to determine whether you are a large or small employer. If you have 50 or more full-time equivalent employees, you’re defined as a large employer, and are required to offer insurance to full-time employees. The Act does not require employers to offer health insurance to part-time employees or pay penalties for not offering insurance to part-time employees.

Do penalties apply to part-time employees?

No, part-time employees are not counted when calculating the employer penalty. An employer will not pay a penalty for any part-time employee, even if that employee receives subsidized coverage through an Exchange. Part-time employees are used only when calculating whether the employer is a large employer and thus required to offer full-time employees coverage, not when calculating a penalty.

Do I have to offer insurance to a new full-time employee on the first day of employment?

Employers are allowed a waiting period of 90 days without incurring a penalty for non-coverage. On day 91, employers must offer coverage to new hires or pay the penalty for not doing so.

Do I have to include seasonal workers when calculating full-time equivalent employees?

Yes, but there is a “Seasonal Worker Exception.” If the sum of an employer’s full-time employees and full-time equivalent employees is 50 or more for 120 or fewer days and the employees in excess of 49 are seasonal workers, the employer is not considered to employ more than 50 full-time employees, thus it would not be considered a large employer that would be subject to penalties.

Example: The employer has 30 full-time equivalent employees, but hires 40 seasonal employees to work October 1 through December 31. The total full-time equivalent employees would appear to be 70 for October–December, but the employer is not required to include the 40 seasonal employees because they are not employed for more than 120 days. The employer is not a large employer, since it has only 30 full-time equivalent employees. Four calendar months may be treated as the equivalent of 120 days. The four calendar months or the 120 days do not have to be consecutive.

I’m a small employer, how will the Affordable Care Act affect me?

Employers with fewer than 50 full-time equivalent employees are exempt from penalties for not offering insurance to full-time employees.

The Credit for Small Employer Health Insurance Premiums is available to help offset the cost of insurance for companies that have 25 or fewer employees and a workforce with an average wage of up to $50,000.

Can I pay less payroll taxes all year long because I plan on claiming the Credit for Small Employer Health Insurance Premiums?

No, the Credit for Small Employer Health Insurance Premiums is for income tax, not payroll taxes (income, Social Security and Medicare taxes).

Can I count the Credit for Small Employer Health Insurance Premiums when I’m figuring estimated tax payments for the year?

Yes, you may include the credit when determining estimated tax payments for the year in which the credit applies, following regular estimated tax rules.

Does the Affordable Care Act have requirements that are subject to all employers, large and small?

Yes, all employers will serve as a source of information for their employees. As of March 1, 2013, employers must inform employees about the Exchange in their state and how to access it. Guidance is expected soon to help employers with what information should be provided and how to provide it.

Can I still purchase coverage through my agent or do I have to buy insurance through an Exchange?

You are not required to buy insurance through the Exchange. If you prefer, you may purchase insurance through an insurance agent or broker.

Should I offer health insurance to my employees (and their dependents) or pay the penalty?

Beginning in 2015, a large employer who has at least one full-time employee receiving the Premium Tax Credit will be subject to a penalty of $2,000 times the total number of full-time employees minus the first 30.

Example: if there are 50 full-time employees and one of them receives a Premium Tax Credit, the calculation would be 50–30 = 20 full-time employees, times $2,000, for a penalty of $40,000 (assumes coverage is not offered for the full year).

Keep in mind, the insurance offered to employees must be affordable, or a large employer who offers insurance could also incur a penalty if at least one full-time employee receives the Premium Tax Credit. The employer would be subject to a penalty of the lesser of $3,000 for each employee receiving the Premium Tax Credit or $2,000 for each full-time employee, excluding the first 30 employees. Employers with fewer than 50 employees are exempt from penalties.

Calculate the employer’s projected penalty

If I offer health insurance to employees (and their dependents), does that mean I won’t incur any penalties?

Not necessarily. If the insurance is not affordable and at least one full-time employee receives the Premium Tax Credit, you would be subject to a penalty. The penalty is the lesser of $3,000 for each employee receiving the Premium Tax Credit, or $2,000 for each full-time employee, excluding the first 30 employees.

Example: A large employer with 50 full-time employees offers insurance that is not affordable to all of its employees (their wages are lower). Three employees receive the Premium Tax Credit. The penalty would be $9,000, calculated as $3,000 times 3 employees, because that is less than 50–30 = 20, times $2,000 = $40,000.

How can I figure whether the insurance I offer is affordable for my employees?

The rule is that if the employee’s share of the premium is more than 9.5% of the employee’s annual household income, the coverage is not affordable. The Affordable Care Act allows you to use the amount in box 1 on the employee’s Form W-2 as a safe-harbor way to figure affordability for the employee.

The safe harbor would not affect an employee’s eligibility for the Premium Tax Credit. Using a safe harbor method is optional. An employer may choose to use a safe harbor for all its employees or for any reasonable category of employees, provided it does so uniformly and consistently for all employees in a category.

If you offer more than one insurance plan, the affordability calculation would apply to the lowest-cost plan available to the employee that also provides the minimum value (covers at least 60% of covered healthcare expenses).

How can I tell whether my plan provides minimum value?

The IRS and the Department of Health and Human Services will provide a calculator to help you determine. You’ll be able to enter information about your plan, such as deductibles, co-pays, percentages covered and so forth. If the calculation shows that your plan covers at least 60% of covered healthcare expenses, it provides minimum value.

Are there penalties for large employers who offer required coverage that is unaffordable to their employees?

Yes, in certain circumstances. If the insurance does not cover at least 60% of covered healthcare expenses, or if the employee share of the premium is more than 9.5% of an employee’s income, then the employee can get insurance in an Exchange and be eligible for the Premium Tax Credit. If a full-time employee receives the credit, the employer will incur a penalty.

I heard that some health plans are considered “grandfathered,” what does that mean?

Grandfathered plans are those what were in existence on March 23, 2010, when the Affordable Care Act was signed into law. Rules were issued effective July 12, 2010, regarding what changes can be made to plans and maintain grandfathered status. The rules also specify changes that will trigger a loss of status. Read more about grandfathered plans

If I have three separate restaurant companies, are they each considered separate employers under the Affordable Care Act?

Not necessarily. A single employer is defined by the “Common Control” clause in the tax code [IRC Sections 414 (b), (c), (m), (o)]. If considered a single employer, all the employees must be combined together for purposes of calculating whether an employer has 50 full-time equivalent employees.

Refunds

Overwithholding and Your W-4

If you find yourself expecting a large refund, you may be withholding too much on your Form W-4. Remember that a refund of taxes means you are getting back money that you could have used, deposited or put into your 401(k) for the entire year. It’s poor money management if you consistently receive large refunds year after year.

If your large refund is a result of overwitholding on your W-4, learn more about your W-4allowance and how it affects your tax refund.

Direct Deposit

Gone are the days when taxpayers eagerly checked their mailboxes for their income tax refunds. Direct deposit lets you receive your tax refund quickly and safely. Direct deposit is available whether you file electronically or with paper forms. You can direct deposit to any United States financial institution, so long as you provide a valid routing number and account number. Some financial institutions do not allow joint refunds to be deposited into individual accounts. Check with your financial institution to ensure that your direct deposit will be accepted.

If you wish to direct deposit into only one account or financial institution, use the appropriate line on your Form 1040.

Split-Refund Program

You can select up to three different accounts or financial institutions to receive the direct deposit. Use Form 8888, Direct Deposit of Refund to More Than One Account, to divide your refund.

For more information, see Frequently Asked Questions about Splitting Federal Income Tax Refunds.

Paper Check

It is still possible to receive your income tax refund by paper check. It is the slowest way to receive your refund, and is less secure than direct deposit.

Checking on Your Refund

You can check on the status of your refund with the IRS’s Where’s My Refund? tool. You must know your SSN, filing status and the exact amount of the refund.

For more information see IRS Publication 17.

Where’s My Refund?

The IRS provides a secure web site, Where’s My Refund?, to help you track the progress of your income tax refund. Whether you filed electronically or on paper, chose direct deposit, split refund, or paper check, you can find out what’s happening with your refund.

In order to use this tool, you must know:

• Your SSN or ITIN
• Filing status
• Exact amount of refund

At this site, in addition to tracking your refund, you can:

• Start a refund trace
• Change your address if the IRS was unable to deliver your refund