tax credits

How to Pay for College When You Didn't Get a Scholarship

Ashley Eneriz — Wed, 14 Mar 2018 09:31:15 +0000

Before I enrolled in college, I attended several seminars and read several books and articles on the magic of paying for your degree with scholarships. It seemed that there were so many success stories out there, and with around $46 billion of grant and scholarship money awarded each year in the U.S., I figured I could at least snag half off my college bill.

One year and over 100 applications later, I only won two local scholarships that totaled $2,500.

Sound familiar? If you feel like you can't win the scholarship game, don't despair. There are still other ways to afford your degree.

1. Ask your employer

Your place of employment could have more to offer than a paycheck. Many companies offer tuition reimbursement and employee scholarships, but sometimes you have to ask. If your company does not currently offer any tuition benefits, and you're preparing to apply for college, it may be time to switch jobs to an employer that does.

Once you graduate, also be sure to look for companies that offer tuition repayment as part of the benefits package. Many places, including UPS, Staples, and Aetna, offer this bonus to college students or grads. (See also: These 17 Companies Will Help You Repay Your Student Loan)

2. Don't forget about tax benefits

When it comes to tuition, every little bit helps. Tax credits shouldn't be overlooked. The American opportunity credit (AOC) offers student taxpayers or their parents a tax credit of up to $2,500 per tax year, for up to four years. Eligible students must be enrolled in a degree program or pursuing other credible secondary education. The AOC can either be claimed by a student, or a dependent student's parents — just not by both. And even better, the AOC was not affected by the new tax law.

3. Apply for financial aid

It is crucial to fill out the free application for federal student aid (FAFSA) each year, even if you think your parents make too much money. You never know what type of aid you will qualify for, and the application takes less than an hour to complete.

Also, submitting the FAFSA makes you eligible for federal student loans, which have more lenient payback options than private loans. (See also: 5 Reasons Why Every Student Should Fill Out the FAFSA)

4. Turn to your local community college

A community college can help you fill the requirements for many general education classes at a fraction of the cost of private or even in-state universities. As long as the credits are transferrable, a university will accept community college transcripts.

If you don't live near a community college, try taking online classes through one closest to you. Many times, you'll be able to complete the work of an online class flexibly, so you can turn in assignments late at night or early in the morning before physical classes are even in session. This could also give you more room in your schedule for a part-time job, which will help you stash even more dollars away for school. (See also: 6 Ways to Pay Less Money For A College Degree)

5. Don't use education loans or savings for anything else

Just because you have to take out a student loan doesn't mean the money should be used to float your every expense throughout your college career. Use the money only for tuition and other school necessities, like books and course materials. Live frugally for the rest of your needs and expenses. This may mean you don't get to experience dorm life to the fullest, or type your essays on a brand-new laptop, but it will be worth the sacrifice if it means taking out a smaller loan.

As a college student, I didn't have to take out student loans, but I also didn't have any money for anything else. I resorted to carpooling, living with my parents, eating homemade lunches, using the computer lab to type papers, working the 4 a.m. Starbucks shift, and borrowing textbooks from the library. It has been eight years since I graduated, and I don't regret going without because it means I don't have student loan debt. (See also: 8 Money-Saving Hacks Every College Student Should Try)

6. Research on-campus job opportunities

An on-campus job can help you pay for college and give you a few nice perks. For example, many schools offer residential advisers free room and board, as well as discounts on meal plans. Working on-campus means that you are able to squeeze work shifts in between classes, maximizing your time to the fullest.

I worked as a test proctor in college. My job was to sit in the room with nursing students and make sure no one cheated on their test. My advisers actually encouraged me to bring in my own course work and use the time to study while the test was going on. In a sense, I was paid to study, which I had to do anyway.

7. Pick the right student loan for you

Sometimes taking out a student loan to pay for college is unavoidable. If you have the choice, stick with federal to pay for your college degree rather than taking out private student loans. Many federal loans, like Direct Subsidized Loans, Direct Unsubsidized Loans, and the Federal Perkins loan, do not require you to start making loan payments until after graduation.

Also, federal student loan repayment comes with a fixed rate and there are several repayment plans available for those who cannot afford their payments. Private school loans are funded by private lenders, and borrowers do not have the same flexibility that federal borrowers have. (See also: 6 Questions to Ask Before Taking Out Student Loans)

There is no doubt about it; college is expensive. While winning several scholarships to pay for tuition is ideal, it is not a reality for everyone. Instead, wise financial decisions and the right student loan can help you afford your degree.

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This article is from Ashley Eneriz of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

11 Basic Questions About Retirement Saving Everyone Should Ask

Damian Davila — Tue, 13 Mar 2018 10:00:06 +0000

Saving for retirement is critically important — we all know that. But sometimes, the confusing details can throw us off course or prevent us from doing all we can to properly grow our nest egg.

Education is the best tool when it comes to most matters of personal finance. And for retirement planning, there are some facts everyone should know. It's time to ask yourself these questions and brush up on the basics of retirement savings.

1. When can I start contributing to a retirement account?

With a traditional or Roth IRA, you can generally start contributing funds as soon as the account has been set up. However, rules can vary for employer-sponsored 401(k) plans. Some 401(k) plans may have a waiting period ranging from six to 12 months to make your first contribution, while others may allow you to contribute immediately. It's a good practice to check all applicable rules for your workplace retirement plan at the time of sign-up and again during every open enrollment period. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

2. How much can I save in each type of account?

You can sock away the most money per year in a 401(k). In 2018, you can contribute up to $18,500 to a 401(k), and an additional $6,000 in catch-up contributions if you're over age 50. By comparison, you can only contribute up to $5,550 to an IRA ($6,500 if over age 50). Due to its higher contribution limits, a 401(k) is a very beneficial account for those trying to make up for low savings in previous years or those close to retirement age. However, if possible, having both types of accounts is the even better option. (See also: 401(k) or IRA? You Need Both)

3. Am I taking advantage of the company match?

If you're offered a company match, you must take advantage of it. And since 94 percent of Vanguard 401(k) plans provide employer contributions, chances are that you have access to a workplace savings plan with a matching formula.

A common formula for matching is $0.50 per dollar that you contribute up to 6 percent of your annual pay. This means that a worker making $50,000 per year could receive an extra $3,000 in employer matching contributions by contributing $6,000 of their annual salary into a 401(k). Some might say there's no such thing as a free lunch, but an employer match on your 401(k) truly is a freebie. (See also: 7 Things You Should Know About Your 401(k) Match)

4. What happens if I change jobs?

From the date that you separate from your employer, you should aim to decide what to do with your 401(k) balance within 60 days. The reason for 60 days is that this is the deadline to complete an indirect rollover into a new retirement account (if your employer were to cash out your entire balance and hand you a check) and pay back any outstanding loans on your 401(k) (if not paid, they become taxable income and may even trigger penalties).

Under most scenarios, you have six rollover options for your total vested account balance:

Keep your account.
Rollover account into a new or existing IRA.
Rollover account into a new or existing qualified plan.
Do an indirect rollover.
Request a full cash-out of your account.
Do a mix of the above five options.

5. Is it better to contribute after-tax or pretax dollars?

There is no right or wrong answer here, as either way offers a benefit. Contributing with pretax dollars (traditional IRA, 401(k)) allows you to reduce your taxable income by deferring income taxes until retirement, at which point you're more likely to be in a lower tax bracket. So, if you're expecting to be making more money now than you will be in retirement, you should contribute pretax money. This is the majority of American workers.

Workers just beginning their careers, workers in professions with a high upside income potential, and individuals expecting a large windfall, such as a family trust or inheritance, can greatly benefit from contributing after-tax dollars to a Roth IRA or Roth 401(k).

6. Can I withdraw money early from my accounts?

Early distribution rules vary per type of plan.

401(k)

Generally, you can only take money from a 401(k) plan early due to a hardship or extreme situation, such as avoiding a foreclosure, making a first-time home purchase, or an unexpected medical expense. However, rules vary per plan: Some plans may only offer you the option to take out a loan, while other plans won't allow you to withdraw money early at all. If you take a distribution from a 401(k) before age 59 ½, you become liable for applicable income taxes and penalties.

Traditional IRA

There are several instances in which you can take an early distribution from a traditional IRA without incurring a penalty. This includes unreimbursed medical expenses, health insurance premiums during unemployment, the purchase of a first home, higher education expenses, and others. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

Roth IRA

Early withdrawals on contributions from a Roth IRA can be made at any time without incurring taxes and penalties, since you have already paid taxes on the money. Withdrawing any amount that exceeds your contributions counts as earnings, and is therefore subject to tax and penalties. In order to avoid those taxes and penalties, your Roth IRA must be at least five years old and withdrawals must be used for a qualified expense, such as the purchase of a new home or a disability. Higher education costs are also exempt from penalties, but you must pay income tax on the withdrawals.

7. What are required minimum distributions?

Eventually, the IRS wants its money in the form of taxes on your retirement distributions. When you reach age 70 ½, you must begin taking required minimum distributions (RMDs) from your retirement plans. These rules apply to traditional and Roth 401(k) plans, as well as 403(b) plans, 457(b) plans, and traditional IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. If you fail to take your RMD, the IRS will take 50 percent of the amount you should have withdrawn as a penalty.

The exception to the RMD rule is the Roth IRA, which is funded with post-tax dollars. (See also: Which of These 9 Retirement Accounts Is Right for You?)

8. Are there any tax credits for retirement contributions?

Come tax time, eligible workers can claim the Retirement Savings Contributions Credit, better known as the Saver's Credit. Depending on your adjusted gross income (AGI), you can claim 50, 20, or 10 percent of your retirement plan contributions, up to $2,000 for single filers and $4,000 for married filing jointly. For example, a married couple with an AGI between $41,001 and $63,000 can claim 10 percent of their eligible contributions for the Saver's Credit in 2018. (See also: Dumb 401(k) Mistakes Smart People Make)

9. What is the recommended 401(k) portfolio allocation?

Here's some advice from one of the most successful investors of all time, Warren Buffett: Put 90 percent of your 401(k) balance in a very low-cost S&P 500 index fund, and the remaining 10 percent in short-term government bonds. Keeping true to his word, he has included this very same advice in his will. (See also: Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments)

10. What is an HSA?

Those with a high deductible health plan (HDHP) are eligible for a health savings account (HSA), which is a way to make pretax contributions to save for medical expenses. Many HSA providers offer the option to put money in an investment account with several fund options, including mutual funds and low-cost index funds.

The main benefit of saving for medical expenses using an HSA is that you won't have to pay any income taxes on withdrawals used for qualifying medical expenses (even before retirement age). And when you do hit age 65, your HSA will basically become a traditional IRA. You can withdraw funds for any reason penalty-free, only paying income tax on the distributions. (See also: How an HSA Could Help Your Retirement)

11. Does my plan offer financial advice services?

More and more plans are jumping on the bandwagon of offering a robo-adviser (an automated service suggesting or performing certain types of transactions on your behalf). The range of trades that a robo-adviser can perform ranges from periodically rebalancing your portfolio to selling securities.

Fees can range, too: Some robo-advisers charge about 0.15 percent of your account balance or a flat monthly fee. Some plans may also offer you a-la-carte paid options to add a standard robo-adviser service. (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What You Need to Know Before Buying a College Meal Plan

Damian Davila — Tue, 15 Aug 2017 08:30:10 +0000

Before heading off to college, you need to budget for its many expenses. On top of tuition, course materials, and room and board, many people also forget about one important line item: food! (See also: 9 College Expenses You Aren't Saving For)

The unfortunate news is you often don't have a lot of options for combating the high cost of college campus meals. But at least you can go into the situation informed, so you can make appropriate budget allowances. Here are six things every student should know about college meal plans:

1. Residential students are often required to buy one

First of all, you may think that you have the option of whether or not to buy a meal plan. Turns out that if you're a student living in university quarters, your school will likely require you to buy one. Make sure to read the fine print, because freshmen can be required to pay up for a "platinum" plan. For example, for the 2017-2018 school year, the Stevens Institute of Technology in New Jersey required its freshmen living on campus to purchase an unlimited $3,200 per semester meal plan.

Even students living in dormitories with kitchens can be required a minimum buy-in for food costs, according to The New York Times.

2. "Lighter" meal plans are often only available to upperclassmen

If you find that a top-tier meal plan is excessive and you want to downgrade, you may have to wait a few semesters (or years). It's not uncommon that lighter versions, such as a 10-meal per week plan, are only available to students with a certain number of semesters under their belts. Freshmen may be required to buy plans with 15 to 19 meals per week.

3. Rollovers may not be allowed

Some schools allow you to apply unused meals from one week to the next, and others don't. To help you make the most out of your meal plan, check the applicable rules regarding rollovers. Tight rules may make skipping meals at participating cafeterias and vendors a big financial waste. You don't want to skip a meal you've paid for, only to have to pay for off-plan food later when you're hungry.

4. Cost per "swipe" can be higher

Some college dining plans provide cards with a preloaded number of swipes that students can use at participating on-campus eateries. Sound good? Well, the problem is, that convenience comes at a cost: Cardholders often end up paying more "per swipe" than somebody paying for the same meal with cash.

If you're looking for variety, going the DIY route is more budget-friendly. Instead of swiping for overpriced coffee at the on-campus coffee shop, invest in a small coffee pot for your dorm room. By buying your own ground coffee and milk, you should be able to crank out two Americanos with milk per day for a total cost of about 60 cents. (See also: 8 Money-Saving Hacks Every College Student Should Try)

5. Meal plan expenses aren't eligible for tax credits

Many college students are eligible for two great tax credits:

Lifetime Learning Credit: This credit allows you to deduct up to 20 percent of your first $10,000 in qualified education expenses, up to $2,000 per taxpayer.
American Opportunity Credit: This credit enables you to cover up to $2,500 of undergraduate college costs.

Unlike expenses for course-related supplies or tuition, meal plan fees aren't eligible toward either one of these tax credits. Even when required as a condition for enrollment or attendance, meal plan fees aren't considered qualified education expenses. This is especially frustrating, because up to 40 percent of the American Opportunity Credit is refundable, even if you don't owe any federal taxes. (See also: Don't Skip These 8 Tax Breaks for Students)

6. Higher costs contribute to higher student loans

According to Student Loan Hero, the average 2016 graduate took home $37,172 in student loan debt, up 6 percent from 2015. With their average student loan burden going up, students have to look for ways to drive down costs. And increasingly expensive college meal plans aren't helping.

According to U.S. Department of Education data, the average college charged about $4,300 for a 19-meal per week contract for the 2015 academic year, or $7.50 per meal. In the same year, the Bureau of Labor Statistics found the average American spent just $4,000 eating at home for a 12-month period (that's just $4 a meal!). That means the average college student with a meal plan pays 87.5 percent more per meal.

It turns out that cutting back on that pricey college meal plan doesn't just help you ward off the extra pounds, but it also helps keep the student debt monster in check.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After You Have a Kid

Tim Lemke — Tue, 28 Mar 2017 09:30:33 +0000

There's no question that having a kid will change your life financially. Introducing a new child to your household adds a slew of new costs, but the good news is that the American tax code is written to help families with some of these expenses.

The IRS — yes, that benevolent organization — offers a variety of tax credits, deductions, and other incentives that could lead to a smaller tax bill when you have a child. But this also makes your taxes more complicated. So here's a review of what your new baby might mean as you file this year's return.

You get to claim an exemption just for having a kid

When you have a child, you can claim an exemption that will reduce your taxable income by $4,050. And for each child you have, you get to claim another exemption. (So four kids represents $16,200 deducted from your taxable income.)

You can also claim the child tax credit

Yes, you get an additional break on your taxes just by adding a member to your family. You can reduce your tax bill by $1,000 for every dependent in your household. This usually includes any family member 17 or under that lives with you, including adopted children, foster children, and even nieces and nephews if you are their primary caregiver. The benefit is reduced once you hit $110,000 gross income if filing jointly, or $75,000 if filing alone.

You can reduce your taxable income by saving for college

The second you have a child, you can begin saving for college and get some nice tax breaks for doing it. The most popular vehicle is called a 529 college savings plan, and many states allow you to deduct contributions from your taxable income. Gains on the investments in a 529 plan also are not taxed. (See also: The 9 Best State 529 College Savings Plans)

You may save money when you eventually send your child to school. As of 2016, it was possible to get a $2,000 Lifetime Learning Credit each year for qualified education expenses, or a $2,500 American Opportunity Credit. There are some subtle differences between the two credits, which you can learn more about at the IRS website.

You might take advantage of a health savings account

You and your partner might not worry about health care expenses, but they become more of an issue when you have kids. Many employers offer health savings accounts (HSAs), which allow you to divert some money into an account to pay for health care expenses you might accrue. Any money placed in an HSA is deducted from your taxable income. You may find it's worth contributing to an HSA if your child has health challenges, or if you have a health insurance plan with a high deductible. (See also: How an HSA Saves You Money)

You might save less for retirement — and thus pay more tax

Are you planning to dial back your retirement savings in order to meet the financial demands of a new child? If so, it's important to know how that impacts your tax bill. Any contributions you place in a 401(k) or traditional IRA are deducted from your taxable income, so if you are putting less aside, your tax bill may be higher. Ideally, you'll be able to save at the same rate as always, but if not, be sure to anticipate paying more in tax.

You may pay less tax if you stop working

Many families find that their gross income goes down after having a kid because one parent stops working full-time or altogether. Lower income means lower taxes, and you may even move into a lower tax bracket. (Moving from $80,000 to $60,000 in earned income, for example, means you pay 15 percent in tax instead of 25 percent when filing jointly.) This lower tax helps take the sting out of having less income overall, and in some cases, you may even end up with more take-home pay.

If you pay for child care, you might get a tax break

The IRS allows parents to save money on their taxes if they pay someone to care for their children. This is a great thing for working parents. The child and dependent tax credit offers up to $1,050 for one person receiving care, or $2,100 for two or more. Poorer families can get 35 percent back of any qualifying child care costs.

Many parents may save more on their taxes by instead utilizing a dependent care flexible savings account. If your employer offers such an account, you can set aside as much as $5,000 of your paycheck to cover child care costs. Contributions to this account are deducted from your taxable income, thus reducing your tax liability.

If you employ a nanny, your taxes could get complicated

In most cases like the situations above, there are tax breaks to help offset the cost of child care. But if you directly hire a nanny — as opposed to hiring one through an agency — you may be considered an employer in the eyes of the IRS. That means a boatload of paperwork, and you're on the hook for things like Social Security, unemployment, and Medicare taxes. So be sure to take all of this into account when researching child care options.

Expanding your home may have tax advantages

When you have a child, you may realize you need to expand your home with a new family room, bedrooms, or other space. The bad news here is that you can't claim the cost of home improvements on your taxes. But, any home upgrades will be added to the cost basis of your home. Thus, you may be able to reduce or even eliminate capital gains taxes when you sell.

If you do make upgrades, you can deduct the cost of things to make the home more energy-efficient, such as Energy Star rated windows and appliances.

Adopting a child comes with a big tax break

If you adopt a child, you get some significant tax breaks in addition to the ones listed above. The Federal Adoption Tax Credit gives families a maximum of $13,460 to offset qualified adoption expenses. This can include adoption fees, court fees, travel costs, and attorney fees, among other costs. Parents who adopt a child may also receive additional tax credits from their state.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After Marriage

Dan Rafter — Wed, 01 Mar 2017 10:00:18 +0000

Life tends to get more complicated after marriage. And your taxes are no exception.

Getting married will change the way you file your taxes every April 15. There is good news, though: Many of the changes will be positive ones that can help boost your deductions and save you money.

Let's look at five of the biggest tax changes you'll face after the wedding bells stop ringing.

1. Filing Jointly vs. Separately

Once married, couples have to face a big tax decision: Should they file their taxes jointly or separately? In most cases, married couples who file their taxes jointly save more money. But there can be exceptions.

Couples who file their taxes jointly in 2017 will qualify for a standard deduction of $12,700. When married couples file separately, they each can claim a standard deduction of $6,350. Note that if your spouse chooses to instead itemize their deductions, you will have to as well.

Filing jointly makes especially good financial sense for married couples in which one person earns significantly more than the other. The averaging effect of combining two incomes can bring these couples out of higher tax brackets.

When couples file jointly, they might also qualify for several tax credits and deductions that they wouldn't otherwise get if filing separately. This could include the earned income tax credit, child and dependent care tax credit, American Opportunity Act education credit, and the Lifetime Learning education tax credit. Couples who have adopted might also qualify for adoption tax credits when they file jointly. You also will not be allowed to deduct student loan interest if you and your spouse opt to file separately.

This doesn't mean that filing jointly is always the right decision for married couples. Say one spouse has significant medical expenses, casualty losses, or miscellaneous itemized deductions. Taxpayers can deduct medical expenses and casualty losses only after they pass 10% of their adjusted gross income for the year. That milestone can be easier to reach when couples file separate tax returns.

Taxpayers can deduct miscellaneous itemized deductions after they exceed 2% of their adjusted gross income. If one spouse has a significant amount of these deductions, it might make financial sense for this taxpayer to file separately because the spouse will be able to claim a greater percentage of these deductions.

2. You Might Be on the Hook for Your Spouse's Filing Mistakes

Before you got married, you were responsible for the information you provided on your own tax return. If you are married and filing your taxes jointly, you are now also responsible for any information your spouse provides on his or her tax return.

This means that if your spouse provides incorrect information on deductions, charitable contributions, or income, you could also face financial penalties from the IRS. If you suspect your spouse may have been dishonest with their tax returns, intentionally or not, you may choose to protect yourself by filing separately. This will ensure you're only responsible for your own tax liabilities.

3. It's Easier to Protect Your Estate From Taxes

You might be worried that too much of your estate will be gobbled up by taxes after you die. Being married should ease these concerns. Federal laws state that you can leave any amount of money to your spouse after you die without generating estate taxes. This makes it far easier to protect the financial assets that you want to leave behind.

4. Your Tax Bracket Might Change

The rate at which your income is taxed depends on the amount of money you made during the most recent year. Filing your taxes jointly might change your tax bracket.

In 2017, married couples filing jointly who earned $18,650 to $75,900 in the previous year will fall into the 15% tax rate. This means this couple would pay $1,865 in taxes plus 15% of any money they earned over $18,650. Married couples filing jointly who earned $75,900 to $153,100 would fall into the 25% tax rate. They would pay $10,452.50 in taxes plus 25% of any dollars they earned over $75,900.

The rates go up from there. It's important to note that depending on your spouse's earnings, your tax rate might rise or fall after you get married if you decide to file jointly.

5. If You Bought a Home, You Could Enjoy Major Deductions

Owning a home comes with an important tax deduction: the home mortgage interest deduction. This deduction allows homeowners to deduct the interest they pay on their mortgage loan throughout the year. This deduction can be especially valuable during the years in which you first own your home, as a large amount of your monthly mortgage payment will be made up of interest. You can also deduct the property taxes that you pay on your home each year, as well as any mortgage points.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Can Your Spouse be a Dependent on Your Taxes?

Kat Tretina — Fri, 23 Sep 2016 10:00:07 +0000

It's a common scenario: One person in a relationship brings home a much higher salary than the other. For couples in this situation, the higher earner typically handles the majority of the expenses.

To lower their tax burden, some may want to claim their lower-earning spouse as a dependent. In other situations, the earner's spouse is disabled and unable to contribute to the family's income. However, while you might think that labeling a spouse as a dependent is a smart decision, it's actually not allowed by the IRS.

What the IRS Says About Dependent Spouses

According to the IRS Publication 17, your spouse can never be claimed as a dependent. Other people, such as siblings, children, or other relatives can be dependents, but no matter the circumstance, your spouse cannot.

In the IRS' eyes, a dependent is defined as a child or qualifying relative. The person does not have to be related by blood — they just had to live with you for the year and not have gross income.

Spousal Exemptions

While a spouse cannot be a dependent, you may be able to claim an exemption for your spouse, thereby lowering your tax burden. You can go this route if you are married, and your partner has no gross income to report.

If your spouse is physically challenged, you may be able to claim credit for expenses related to the care of your spouse. This option would be a possibility if you needed to hire help to care for your spouse so you could go to work or search for employment.

Marriage and Taxes

To minimize how much you owe on your taxes, it often makes the most sense to file jointly, rather than separately. To encourage couples to file together, the IRS gives joint filers some of the largest standard deductions, allowing them to deduct a big amount from their taxable income.

Joint filers can typically claim two exemptions and more easily qualify for other tax credits, including:

Earned Income Tax Credit
Child and Dependent Care Tax Credit
American Opportunity and Lifetime Learning Education Credit

If you file jointly, there is also a higher threshold for taxes and deductions, meaning you can qualify for more credit and tax breaks for a higher income than if you filed separately.

When It Makes Sense to File Separately

Filing separately only makes sense in very specific circumstances, such as in the case of large out-of-pocket medical expenses. Because the IRS only allows you to deduct 10% of your adjusted gross income (AGI), filing separately can help you save more money.

While you may hear some professionals recommend claiming your spouse as a dependent, it is not permissible by the IRS. Instead, you can claim your partner as a personal exemption in particular circumstances. To lower your tax burden, consult with a tax professional to make sure filing jointly makes the most financial sense for your situation and get all of the deductions and tax breaks you are entitled to.

This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Miss Out on This Easy Way to Pay for Child Care

Carrie Kirby — Wed, 06 Jul 2016 09:00:06 +0000

A lot of people are aware that they can sock money into their employer's Health Care Flexible Savings Account program to be ready for the next root canal or other medical expense. But not everyone realizes that there is another kind of FSA — the Dependent Care FSA — that can be an even better benefit to stressed families.

Families who make the most of their employer's Dependent Care FSA can save $1,500 or more, says Jody Dietel, Chief Compliance Officer at WageWorks, one of the companies that administrates FSAs. This is based on the annual $5,000 contribution limit, and her estimate that most families save 30% to 40% in taxes by participating.

"You could pay for your family's summer vacation by participating in a Dependent Care Flex Spending Account," Dietel says.

Like Health Care FSAs, Dependent Care FSAs are offered as part of employer benefit packages. Both kinds of FSA allow workers to set aside a certain amount of their pay, free of state, federal, and Social Security taxes, to apply to qualifying expenses. For the dependent care FSA, qualifying expenses are for day care for your dependents while you work or look for work.

Sounds good, right? And yet, Dietel says, many workers whose employers offer these plans never sign up for them. Here's why you should not let this opportunity pass you by:

1. Day Care Is Expensive, But Predictable

While you may put aside a lot of money for medical expenses and then not end up needing it, most families with young kids will easily spend the $5,000 contribution limit. In fact, sending an infant to a child care center costs between $10,000 and $20,000 a year. And unlike a root canal, you typically know at the beginning of the year that you're going to need day care.

2. If Your Needs Change, You Can Change Your Contribution

Although child care expenses are relatively predictable, things happen. You may change providers, or change the number of hours you work. Such things are qualifying events that allow you to change the amount you contribute to the FSA or stop contributing altogether, Dietel says.

"Let's say your mother comes to spend three months with you during the summer (to care for your children). You could stop your day care flexible spending contributions," she explains.

3. It's Not Just for Kids

Most people only think of these plans for child care, but they can actually be used to pay for the care of any dependent or household member who can't care for themselves. For example, if your spouse becomes disabled, or you become responsible for your parents' care, you can use FSA funds to pay for that.

"More people now are taking care of elderly parents," Dietel says.

4. You Can Use It to Pay for Classes and Day Camps

Dependent care FSAs are not just for day care centers or baby sitters. You can also use it send your kid to an after-school gymnastics class or a summer day camp — as long as the primary purpose of the camp or class is to provide supervision while you work or look for a job. This provision can be a lifesaver for the summer months, when paying for activities while kids are out of school strains family budgets.

The only caveats: You can't pay for sleep-away camp with FSA funds, and the primary purpose of the day camp should be care, not learning a skill.

5. Even If You Don't Spend Every Dime, You May Still Come Out Ahead

Some workers are scared away from FSAs by the use-it-or-lose-it aspect — if you have unspent funds left at the end of the year, you forfeit them. But you shouldn't let that fear keep you from taking advantage of this benefit. First of all, Dietel points out, even when the calendar year ends, many employers now offer grace periods in which to spend any unused funds. And even when the time has truly run out, many families are able to claim any remaining funds by looking through their records and submitting receipts that they had overlooked.

But even if you have a few bucks you can't claim, don't despair. As Dietel puts it, if you saved $1,500 over the course of the year, leaving $25 or $50 unclaimed is not a net loss.

6. FSAs Are Usually a Better Deal Than the Dependent Care Tax Credit

When filing your taxes, you have the option to deduct some of your annual child care expenses. You can't double dip — that is, you can't take a tax credit on care you paid for through your FSA. The FSA is usually the better deal, Dietel says, because it exempts you from state taxes and Social Security, not just federal taxes.

Although you can't double dip, you may not have to choose. Dietel points out that if you have enough child care expenses to satisfy the IRS requirements for the Dependent Care Tax Credit and use up your FSA separately, you can use both, applying each to different expenses. Consult an accountant or the IRS for more details on how to do that legally.

7. It's Easier to Use Than You Think

In the past, workers had to fax or scan in and upload paper receipts to get reimbursed from FSAs. But if you haven't had one for a while, you might not know that a lot of administrators now offer more convenient options, like mobile apps that allow your care provider to sign right on your phone.

Are you using an FSA to help pay for child care?

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Tax Mistakes New Parents Make

Dan Rafter — Mon, 14 Mar 2016 11:00:13 +0000

Raising a child in America isn't cheap. CNNMoney and FutureAdvisor reported that it would cost $245,340 to raise a child born in 2013 from birth through age 18.

That's a lot of money. But your children can actually save you dollars one time each year: When you're preparing your income taxes. Kids come with some valuable tax deductions and credits. The problem? Many new parents, understandably overwhelmed with the burdens of taking care of a baby, fail to claim these savings.

And that can cost them thousands of dollars. If you are a new parent, don't pass on these key tax savings.

1. Skipping the Child Tax Credit

The child tax credit shouldn’t be overlooked. If you had a new baby in 2015, whether through birth, adoption, or the foster care system, you can claim this additional $1,000 tax credit. It doesn't matter, either, on what day of the year you became a new parent. You can claim the credit even if you had your child on Dec. 31. Your child just needs to be younger than 17 at the end of the tax year in which you are claiming the credit.

"Having a baby gives you access to a tax bonus, and will help you reduce your taxable income," said David Hyrck, partner with New York City's Reed Smith. "I see way too many new parents who overlook this child tax credit. Everyone needs to be doing this."

There is one downside to the tax credit: It is nonrefundable if the credit is higher than your tax liability. Say you owe the government $500. Your $1,000 child tax credit will erase the money you owe the government. But you will lose the extra $500 that you could have claimed if you owed more than $1,000 on your tax bill.

2. Forgetting to Adjust Withholdings

Michael Eckstein, owner of Michael Eckstein Tax Services in Huntington, New York, says that new parents need to adjust the amount of money that their employers withhold from each of their paychecks for taxes.

To do this, ask your employer for a new W-4 form. Once you have that form, indicate that you have a new child.

Eckstein says that it's important to do this because children bring with them new deductions and credits. You should also tell your employer to reduce the amount of money you’re withholding to account for these new tax benefits.

If you don't, you will receive a larger tax refund. But remember: Getting a big refund isn't the goal. You'd rather have that extra money in your own hands with each paycheck. You can then use that money for important purchases, or you can invest it and watch it grow. That's a better alternative than giving it to the U.S. government for a full year.

3. Missing Out on Adoption Credits

If you became a new parent this year through an adoption, you're eligible for a significant federal tax credit of as much as $13,400. That's a big help with the high costs that can come with adopting.

You don't have to use this tax credit in just one year, either. Say your bill for the 2015 tax year is $5,000. You can use $5,000 of the $13,400 tax credit and then save up the rest of the credit for future years. You can carry over any unused portion of the adoption tax credit for up to five years or until you use up all of the entirety of the credit, whichever comes first.

To take this credit, your adopted child must be under 18 at the end of the tax year.

4. Skipping the Child and Dependent Care Credit

New parents should also investigate the child and dependent care credit. This tax credit benefits parents who are working and must pay others to care for their children. To qualify for this credit, both you and your spouse must have earned money during the year from a job and must have paid someone to care for your child while you were working.

Calculating how much you can claim for child care expenses is complicated, and depends on how much you spend on childcare, as well as your income. The maximum amount of expenses that you can claim for one child is $3,000, and for two or more children, $6,000.

Are you making any of these parenting and tax mistakes?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Clever Tax Shelters Anyone Can Use

Qiana Chavaia — Wed, 05 Aug 2015 13:00:14 +0000

For the middle-class, building wealth for your family can be like constructing a house — the biggest challenge is setting the foundation. And it starts with keeping your taxes as low as possible. This can sometimes result in relocating to an area where the cost of living and taxes are more affordable, trading high-cost districts in areas like New York City and San Francisco for a more sustainable lifestyle in an area where the job market is strong, like in Houston or Dallas.

But there are other smart, easy ways to reduce your tax burden, too. Read on to familiarize yourself with a few.

1. Avoid Personal and Business Income Tax

You won't have to worry about paying personal state income tax if you live in one of these nine U.S. states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. And you will avoid corporate income tax if you do business in the states of Nevada, South Dakota, Texas, or Wyoming.

2. Take Advantage of Retirement Plans

Most people start saving for retirement once they land their first "real" job by contributing to employer-sponsored plans. Some employers will match as much as 100% of your 401(k) contributions up to 3% of your salary. That's a guaranteed 100% return of your investment! So, let's say you've contributed $3,500 — your employer will put in another $3,500. There isn't another investment that can guarantee this type of return. Plus, if historical average stock market returns are any indication, your money will likely grow an average 8%–12% per year tax-free or tax-deferred. Meanwhile, investing in your 401(k) will reduce your annual income and possibly your tax bracket, further reducing your tax burden.

3. Contribute to a 529 College Savings Plan

Qualified Tuition Programs (QTPs), often referred to as 529 Plans, are tax shelters that allow you to save for higher education expenses. In many ways, they resemble retirement plans, offering tax-deferred growth on contributions. Plans vary and have different lifetime contribution limits — generally around $200,000 — but there is no federal tax on earnings, and often no state tax if your plan's beneficiary chooses an in-state college.

4. Avoid Estate and Inheritance Tax

The estate and inheritance tax doesn't affect many people, because you're not required to file an estate tax return unless your estate is valued at $5,430,000 or more as of 2015 — and only six states levy their own inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. And the transfer of property through an estate or inheritance is taxed only in Nebraska and Pennsylvania. Consider yourself lucky — unless you've got a very sizeable estate, your progeny will probably be spared this tax blow.

5. Buy a Home

When you purchase a home, you can deduct interest paid on your mortgage, a percentage of your real estate taxes and depreciation, and receive credits for certain home improvements. Not a bad deal. But if you're in the business of flipping real estate, it gets even better, because when you sell a property, any profit of under $250,000 (for single tax filers) is tax-free. That amount doubles to $500,000 if you're married and filing jointly. The only requirement the IRS has is that you occupy the home as your principal residence for at least two years before you sell.

What other easy tax shelters do you employ?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Green Home Rebates That Save You Big in 2015

Christa Avampato — Wed, 22 Apr 2015 17:00:09 +0000

For the first time, I'm beginning to seriously consider buying a home and I'm deep into the research and learning phase. One of the aspects I'm most intrigued by these days is how to perform a "green" renovation on an existing home. I've been happy to learn that there are multiple green rebates and credits that you can use in 2015 toward specific green improvements.

1. Geothermal Heat Pumps

Not surprisingly, energy consumption is one of the key areas that benefit from tax credits. Geothermal heat pumps are renewable energy appliances that are not only good for the environment, but also an incredibly comfortable way to heat and cool your home. These heat pumps utilize the ground to generate hot water, heat, and air conditioning, unlike traditional heat pumps which utilize air. Geothermal heat pumps are more efficient — and therefore less expensive — to run than traditional heat pumps.

2. Small Wind Turbines

Windmills may conjure visions of Holland or Don Quixote. But they should also give you visions of green, as in green energy and green back in your pocket. Small wind turbines convert kinetic wind energy into electricity that connects to your home's electrical system, and homeowners enjoy significant tax credits for their implementation

3. Solar Energy Systems

Solar energy systems have undergone significant innovation over the years, making them more efficient and less expensive than when they first appeared on the residential energy scene. In terms of tax rebates, there are two types of solar energy systems that qualify: solar water heaters and solar panels that convert sunlight into electricity. (See also: Cut Your Electric Bill With Solar Panels)

4. Fuel Cells

Of all of the green home rebates, the fuel cell is the newest kid on the block. Fuel cells take advantage of the emerging hydrogen economy to power cars and other consumer goods that have traditionally been powered by fossil fuels. They offer a much cleaner alternative to fossil fuels.

While these are the formal green home rebates offered by the federal government, there are plenty of other ways to save money (and the environment) with improvements to your home. ENERGY STAR offers an online Home Energy Yardstick that will help you determine the energy efficiency of your home as it currently stands, and will make suggestions for ways to improve it.

These improvements include better insulation and sealing, ENERGY STAR appliances and proper use of light fixtures, and even changes as simple as installing drapes, storm windows, and programmable thermostats. While these improvements don't carry tax rebates, they will help lower your energy costs without compromising your comfort. Good for you, good for the planet.

How have you made your home more "green"?

This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Much Money Will You Save With Energy Star Appliances?

Dealnews — Mon, 19 Mar 2012 09:48:19 +0000

Last week, we wrote about the power hogs that hide in your home, trampling all over your wallet while making your carbon footprint way too fat. This week we'll concentrate on how, going forward, you can combat your energy costs by purchasing Energy Star products. (See also: 5 Ways to Save Water, Energy, Money, and the World in One Afternoon)

While energy-efficient appliances can save you money through usage, few people realize that you can get a tidy refund via a tax credit (after the proper IRS paperwork), too! And though it's too late to claim such a credit on last year's taxes, you can start planning for a payoff on this year's, by purchasing an Energy Star appliance. Here is what you need to know about the savings can you expect when it comes to Energy Star products.

What Is Energy Star?

A joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy, Energy Star designates energy efficient products and practices. Besides household products and appliances, Energy Star extends its designations into home construction itself, meaning that a new home can earn an Energy Star seal. Thanks to Energy Star, Americans saved enough power in 2010 to prevent greenhouse gas emissions equivalent to those from 33 million cars — all while saving nearly $18 billion on their utility bills.

How Much Money Will Energy Star Appliances Save Me?

The operating costs of many Energy Star appliances are printed on their labels, though it helps to know how much your old appliances used in order to gain a proper perspective. As mentioned last week, old refrigerators are often the biggest energy offenders, wasting up to three times as much energy as new ones. (You can calculate your savings with this refrigerator retirement savings calculator). Of course, Energy Star appliances run the gamut from air conditioners to lawn care tools. There are, of course, general guidelines for how much an Energy Star product can save your household, as compared to a non-Energy Star model.

For perspective, here are some figures from the National Resource Defense Council, courtesy of servicemagic.com. Replacing a 1980s model refrigerator with, perhaps, this Whirlpool 21.9-Cubic Foot Bottom-Freezer Refrigerator from Abt Electronics can save you $100 a year in total energy costs. Replacing a pre-1994 clothes washer will save you as much as $110 a year; and a new, Energy Star dishwasher — like the Whirlpool Super Capacity Tall Tub Stainless Steel Built-In Dishwasher — will save you about $25 per year. Multiply those savings over an appliance's 20-year lifetime, and you're talking thousands of dollars of potential cost reduction.

How Do Energy Star Tax Credits Work?

Tax credits are still available for consumers who purchased home improvement items in 2011, so if you splurged on some new windows or an air conditioner for the holidays, you're in luck. These tax-deductible goods include biomass stoves; heating, ventilating, and air conditioning; insulation; roofs (Metal & Asphalt); water heaters (non-solar); and windows and doors. The tax credit for these items is, on average, 10% of cost, and up to a cumulative deduction of $500. The tax credit applies only to an existing home or your principal residence; new construction and rentals do not qualify. To apply for the tax credits for 2011 purchases, you'll need to file IRS Form 5695 for Residential Energy Credits, a five-page attachment that your accountant or tax preparer can fill out easily with the proper receipts and documentation.

What's Changing for the 2012 Tax Year?

Unfortunately, some of the best Energy Star tax credits expired on January 1, 2012, including those that allowed folks to claim up to 30% of improvements like a new roof or hot water heater. However, through December 31, 2016, you'll be able to claim 30% of your costs (with no upper limit) on geothermal heat pumps, small, residential wind turbines, and solar energy systems. Existing homes and new construction qualify, as do principal residences and second homes, though rentals do not. What's more, homeowners can also earn a credit of up to 30% of the cost of residential fuel cells (up to $500 per .5kW of power capacity), through the end of 2016.

If you want to know how much a solar or wind system might cost to install, check out the handy cost estimator at SolarEstimate.org. Entering my ZIP code in Cook County, IL, along with some basic information on my electric bill, I learned that a solar system would be a "good" bet based on my area's solar rating, and that the total cost of a system would run about $17,700, after the $7,590 tax credit is applied. That's a large up-front cost, but long-term energy savings can be substantial; with a handy graphic it's estimated that I'd break even in 12 years — and be $20,000 ahead in 24 years.

What's the Bottom Line on Energy Star?

Appliances that earn an Energy Star rating may cost a bit more upfront, but in an overwhelming majority of cases, their operating costs yield big savings over the lifetimes of the products. And while you can't bank on the government bringing back the now-expired 2011 tax credits, anything is possible in an election year, especially when energy costs are an important voter issue. Regardless, the facts show that Energy Star is working for the betterment of the environment while simultaneously lowering electric bills. Even in our fractured political climate, that's a platform everyone can agree upon — and incentive enough for all of us to make some major changes around the house not just in 2012, but also in the years to come as well.

This is a guest post by Dealnews.

While it might seem smarter to stick with older appliances, stocking your home with Energy Star appliances can save you major cash in the long run.

This article is from Dealnews of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Inject Cash into Your Business

Jacob Harper — Sat, 10 Dec 2011 23:39:21 +0000

Link:

http://www.openforum.com/articles/4-ways-to-inject-cash-into-your-business

If you are a business owner you could probably use a bigger number on the positive side of your cash flow. Of course, the grand question is how best to accomplish that. You might think the answer to "How do I get more money for my business?" is "sell more of the goods and services my company provides," and you'd be right. But employing the economic skills honed at the lemonade stand isn’t the only way to succeed in business.

There are other strategies for injecting cash into your business that don't involve praying for an uptick in sales to flood your coffers. You probably offer important things you hadn’t thought of before that might be of keen interest to a buyer. And no, not your kidneys. We mean exploring options that you may not have considered previously.

1. Learn Your Grants

You’ve undoubtedly heard all the ballyhoo about stimulus packages and other nice, shiny presents for the “job creators.” Well guess what, Mr. and Mrs. Q. Business Owner: you are one of those fabled job creators. The grants are there, and the federal government is just dying to give you one! Well, “dying” is a strong word. Let’s just say “possibly willing to consider doing so after you fill out the paperwork.”

A grant is a gift to you for moving your business into the future, as a job creator in a desired area, or maybe even as a business that employs cutting-edge energy saving measures. Just check it out—maybe your business qualifies for one of these gifts from one of the 26 federal agencies that provide grants. What’s to lose in finding out?

2. Sell Your Debt

Banks love buying debt. Even today. Even after banks buying debt is what got the banks and the rest of us into the current, ongoing, global, catastrophic economic meltdown. But while banks have (mostly) quit absorbing the toxic loans that first sickened them, banks simply need loans to survive, especially good loans. And your loan—the loan made to a small business with good credit—might look mighty tasty to them.

If you show a history of having enough money coming in to pay off your loan in a timely manner (banks have learned their lesson on that one!), you might qualify for a new loan that pays off your current small-business loan at a lower rate. Of course, shopping around for a new loan is not guarantee of a better deal, but, as with grants, the effort could be more than worth the cost of your time to investigate.

3. Talk to the City, Talk to the County, Talk to the State

The local government in which your business operates has an interest in seeing your business succeed and subsequently create more jobs. Thus, there is a chance that the community, the county, or the state would be willing to give you an ultra low-interest loan to establish, expand, or simply keep your business afloat. Or maybe the local authorities are offering tax incentives to encourage you.

There are many possibilities— tax breaks for locating in gentrifying neighborhoods, resources for getting your store used as a film location, among others. Visit the websites of your various local government entities, call up the civic chain, and find out what’s available.

4. Move the Dead Weight!

"Dead weight" here does not mean the employees who are actively dragging your business under, although, by all means, get rid of them, too. Dead weight means any and all inventory and equipment that is taking up space rather than producing income. If you need cash, move the stuff that’s slowing you down.

One truth for everybody—individuals and businesses alike—is the longer they stick around in one place, the more stuff they acquire. But you can break this habit of accumulation if you just remember that everything you have is wanted by someone. No business should go under when they still have stuff, even if it appears outwardly useless. Someone, somewhere will take it and pay you for the privilege. I have yet to find a single thing that cannot be sold via Craigslist.

Move that dead weight, upgrade your business with the cash you realize, and move forward, footloose and fancy free.

This article is from Jacob Harper of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways You May Benefit from the American Jobs Act

Barbara Weltman — Thu, 22 Sep 2011 19:57:09 +0000

Link:

http://www.openforum.com/articles/5-ways-you-may-benefit-from-the-american-jobs-...

The President has proposed a massive new jobs act. Congress is now considering what to do with it. Here is what the provisions in the jobs act could mean to you, both personally and for your business.

1. Tax Holiday for Workers

Whether you are an employee of your corporation or self-employed, you are currently enjoying a two percentage point reduction in Social Security taxes. This 2011 tax break represents a savings of more than $2,000, depending on your earnings. The tax holiday does not diminish the Social Security credits you earn and what you will receive when you retire.

The President has proposed that the current holiday be expanded for 2012. The proposal would cut the Social Security tax rate in half, from 6.2 percent to 3.1 percent. The Social Security Administration has not yet released the wage base for 2012, which is the maximum amount of earnings on which the Social Security tax is figured. The 2011 wage base of $108,600 is expected to be increased, so the savings for higher income taxpayers could be even more meaningful next year. If, for example, the wage base were to rise to $110,000 for 2011, a 3.1 percent Social Security tax rate would mean a savings of more than $3,400 for earners at or above this limit. The savings for the average worker is projected to be about $1,500.

2. Tax Holiday for Employers

The act would allow employers to enjoy their own payroll tax holiday. The size of their savings would depend on the size of their payroll.

The Social Security tax would be cut in half to 3.1 percent for employers on the first $5 million in wages.
The tax would be waived entirely for employers who, in 2012, increase wages paid to existing workers and/or add new workers to the payroll as compared with 2011. The break would apply for payroll up to $50 million above 2011.

Again, the employer-share of reduced Social Security taxes would not diminish a worker’s Social Security credits, which ultimately translate into retirement benefits.

3. Tax Incentives for Hiring the Unemployed

The act would create three new tax credits for hiring long-term unemployed individuals (defined as those unemployed for more than six months):

Basic credit of up to $4,000 for hiring any long-term unemployed person;
Returning Heroes Tax Credit of up to $5,600 for hiring unemployed veterans ;
Wounded Warriors Tax Credit of up to $9,600 for hiring unemployed workers with service-connected disabilities.

4. Startup Assistance

Currently, Delaware, Maine, New Jersey, New York, Oregon, and Pennsylvania all have self-employment assistance programs for people who are collecting unemployment benefits. Instead of requiring the unemployed to seek employment, they can continue to receive unemployment benefits while starting a business. The act would give states without such programs the flexibility to help long-term unemployed workers effectively create their own jobs by starting their own small businesses.

5. Capital investments

For 2011, if you buy new equipment for your business or make certain leasehold, restaurant, or retail improvements, you can deduct all of your costs. This break, which is called 100 percent bonus depreciation, is scheduled to be only 50 percent in 2012. The act would extend the 100 percent bonus depreciation rules through 2012.

Final Word

While the President can make proposals, it remains for Congress to decide whether to enact them and what the details will be. What to do now:

Watch for progress on the measure.
If you expect these provisions to be enacted, determine now whether you’ll want to take advantage of them. For example, if you had been rushing to complete improvements to your leased facilities, you may be able to stretch expenditures into 2012 without losing the full write-off.
If you are currently unemployed, decide whether now is the right time to start a business. Check to see if your state has or will have a self-employment assistance program to help you. Alternatively, your job-hunting in 2012 may be a little easier if employers can get a tax break for hiring you.

Work with your tax advisor to see how you can optimize any changes that may benefit your business.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Target Your Hiring for Targeted Tax Credits

Barbara Weltman — Sat, 21 May 2011 21:51:02 +0000

Link:

http://www.openforum.com/articles/target-your-hiring-for-targeted-tax-credits

More than one-third of small business owners have indicated that they intend to add to their payroll in the coming months. If you are hiring now, factor in the tax breaks you can garner if your new employees fall into certain categories. This can reduce your costs without reducing the quality of your workforce.

Workers in Special Categories

There is a federal tax credit called the Work Opportunity Credit for hiring someone that falls within one of 10 targeted groups. In most cases, the credit is 40% of a qualified employee’s first-year wages up to the first $6,000 for those who work a minimum of 400 hours, producing a top credit of $2,400. There is no limit to the number of employees for whom you can claim the credit.

For 2011, the 10 targeted groups are:

A Hurricane Katrina employee;
A long-term family assistance recipient;
A qualified recipient of Temporary Assistance for Needy Families (TANF);
A qualified veteran;
A qualified ex-felon;
A designated community resident;
A vocational rehabilitation referral;
A summer youth employee;
A Supplemental Nutrition Assistance Program (SNAP) recipient;
A Supplemental Security Income (SSI) recipient.

In 2010, there were two additional groups for unemployed veterans and disconnected youth, but these groups were not extended for 2011. After 2011, the Work Opportunity Credit is set to expire, but could be extended by Congress.

Details about the credit and these categories can be found in the instructions to Form 5884.

Important: There may be a similar tax credit available against state income taxes; check with your state.

Workers in Certain Locations

In addition to workers in the categories noted above, there are federal tax credits for hiring workers within certain designated areas, too.

Empowerment Zone Credit

Empowerment zones are urban and rural areas that are economically distressed and have obtained special designation from the federal government. The tax credit is 20% of first-year wages up to the first $15,000, for a top credit of $3,000 per eligible employee. This tax credit is also set to expire at the end of this year unless Congress extends it.

You can find a listing of federal empowerment zones in the instructions to Form 8844 or by using an online locator. Also check to see whether there are any tax credits for new hiring within special areas in your state. For example, within California’s Enterprise Zones, companies can earn $37,440 or more in state tax credits for each qualified employee hired. In New York, companies within an Empire Zone paying employees at least 135% of minimum wage may be entitled to a $3,000 credit for targeted employees or $1,500 credit for non-targeted employees.

Indian Employment Credit

Companies that hire someone who is an enrolled member of an Indian tribe (or a spouse of such a person) and who lives on or near an Indian reservation may be eligible for a tax credit. The amount of the credit reflects increases in employer costs for wages and health insurance coverage.

Details about this tax credit can be found in the instructions to Form 8845.

Workers with Disabilities

There is no separate tax credit for hiring someone with a disability. However, if you are a small business (those with gross receipts in the prior year did not exceed $1 million or did not have more than 30 full-time employees) and do hire a disabled worker requiring you to make certain accommodations in your workplace, you may be eligible for the disabled access tax credit. Expenditures eligible for the credit are those needed to comply with the Americans with Disabilities Act, such as removing architectural barriers or modifying equipment and devices to accommodate an employee with a disability. The credit is 50% of eligible costs over $250, but not over $10,250, for a top credit of $5,000.

You can find details about this credit in the instructions to Form 8826.

Bottom Line

If you’re planning on doing any hiring in the near future, discuss the potential for tax incentives with your tax advisor. The results could influence whether you seek out “special” employees.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Save Money with a Dependent Care Tax Credit and FSA

Xin Lu — Tue, 01 Feb 2011 14:00:15 +0000

If you pay for the care of a dependent, then you may be able to save several thousand dollars a year via a dependent care flexible spending account (FSA) or the Child and Dependent Care Credit. Here is a quick guide to how you can maximize your savings:

Eligible Expenses

The expenses you can claim are usually the same for dependent care FSAs and the Child and Dependent Credit: the amount you pay to someone other than your spouse for the care of a child or dependent. If you are claiming expenses for the care of a child, the child must be under 13 years old. If you are not claiming a child, then the person you are caring for must qualify as an exemption on your tax return. Basically, your dependent must be unable to take care of himself or herself and have lived with you for at least half of the tax year. The expenses incurred also must be due to the need to work. You should keep detailed receipts of who provided the care and their tax identification numbers in order to back up the claim for your expenses. (See also: Tips for Choosing and Using a Babysitter)

The Dependent Care Flexible Spending Account

The dependent care flexible spending account is a common benefit at workplaces. It has a contribution limit of $5,000 per family, but the contribution is pre-tax, so you get to keep more of your wages. The money is taken out of your paychecks, and you can claim a reimbursement with a valid receipt from a caretaker or preschool. Because the FSA contribution is exempt from federal income tax, payroll taxes, and most state taxes, the maximum amount that families can save with a dependent care flexible spending account varies by their residence and tax brackets. For example, if you were a Californian with a 15% federal income tax, 9.55% state income tax, and a 7.65% payroll tax for a total tax burden of 32.2% and you contributed and spent the full $5,000, it works out to be a savings of about $1,610.

The Child and Dependent Care Credit

The Child and Dependent Care Credit allows a 20% to 35% credit for up to $3,000 of expenses for one dependent. The percentage of credit varies by the income of the tax filer. If your family makes over $43,000 a year, then the credit would be 20% of the expenses you incurred. If you have more than one dependent, you can claim up to $6,000 of expenses. However, you need to subtract the amount you contributed to a dependent care FSA from the amount you claim. So if you already had $5,000 in your FSA and you had more than $6,000 of eligible expenses, you can only claim $1,000 in expenses for the purpose of the tax credit. This means that the maximum credit is $600 to $1,050 if you have one dependent and $1,200 to $2,100 if you have two or more dependents. The percentage of credit varies by the income of the tax filer. Currently the 35% credit is available to families making less than $15,000 a year, and then it gradually decreases to 20% for families making more than $43,000 a year. Since the median household income of the United States is around $46,000, most families will receive a 20% credit. The full details are in IRS Publication 503 (PDF).

How to Maximize Your Savings

What is the best choice for your family? Let's assume that you are in a family with the median household income of $46,000. Here are some possible scenarios:

Scenario 1: One Dependent

If you have one dependent and spend at least $5,000 a year, then contributing to the FSA is definitely more advantageous. This is because the tax credit you would receive is only $600, but the amount you save via the FSA is at least $1,132.50 due to a federal income tax savings of 15% and a payroll tax savings of 7.65%. If you have a state tax that's waived on the contribution, then you would save more.

Scenario 2: Two or More Dependents

If you have two or more dependents and spend at least $6,000, then you should still contribute $5,000 to the FSA and claim $1,000 in expenses for the tax credit. This will yield an additional savings of $200 over the first scenario.

Scenario 3: No FSA Available

If your workplace doesn't offer the FSA, then you should take the full tax credit available to you. This is a tax credit that is often overlooked.

My conclusion is that for most families, it is best to contribute to the FSA first for your dependent care expenses. The percentage of taxes saved is usually higher than what the tax credit would give, but the tax credit does give a boost in savings to low-income families and families that spend above the FSA contribution limit. Either way, if you currently have dependent care expenses, you should definitely run the numbers and see how much you can save.

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: