2014 TAXES AND TIDBITS

 

2014 Standard Deduction Amounts

There are 2 main types of tax deductions: the standard deduction and itemized deductions. The standard deduction, which is subtracted from your AGI, reduces your taxable income and usually changes each year to reflect inflation.

     Filing Status                           Standard Deduction

  1. Single                                   $  6,200
  2. Married Filing Jointly            $12,400
  3. Married Filing Separately     $  6,200
  4. Head of Household              $  9,100

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,200 for married taxpayers or $1,550 for unmarried taxpayers.

 2014 Personal Exemption Amount and Phaseout

The personal exemption amount for 2014 is increased to $3,950.

The personal exemption is subject to a phaseout. Specifically, the total personal exemptions to which you’re entitled will begin to be reduced  as your adjusted gross income (that is, the bottom line of the first page of your Form 1040) exceeds a certain threshold amount (adjusted for inflation for 2014):

  • $254,200 for single taxpayers,
  • $305,050 for married taxpayers filing jointly,
  • $279,650 for taxpayers filing as head of household, and
  • $152,525 for married taxpayers filing separately.

“Pease” Limitation on Itemized Deductions

The amount of itemized deductions which you are allowed to claim is reduced by 3% of the amount by which your adjusted gross income exceeds certain threshold amounts. These threshold amounts are the same as the threshold amounts listed above for the personal exemption phaseout. However there are two important exceptions to this rule:

  1. Your itemized deductions cannot be reduced by more than 80% as a result of this limitation, and
  2. Your itemized deductions for medical expenses, investment interest expense, casualty/theft losses, and gambling losses are not reduced as a result of this limitation.

Non-Changes to Taxes on Investment Income

Because of the permanent changes implemented by the American Taxpayer Relief Act of 2012, qualified dividends and long-term capital gains will be subject to the same 0%, 15%, and 20% tax rates as last year, depending on which tax bracket the income falls into.

In addition, the 3.8% tax on net investment income is unchanged, because the threshold amounts (adjusted gross income of $200,000 if single or $250,000 if married filing jointly) are not indexed for inflation.

AMT Exemption Amount

The exemption amount for the Alternative Minimum Tax is now permanently indexed to inflation. The following are the AMT exemptions for 2014:

  • $52,800 for single taxpayers,
  • $82,100 for married taxpayers filing jointly, and
  • $41,050 for married taxpayers filing separately.

IRA and 401(k) Contribution Limits

For 2014, most retirement account contribution limits remain unchanged:

  • $5,500 for Roth and traditional IRAs, with an additional catch-up contribution of $1,000 for people age 50 or older, and
  • $17,500 for 401(k), 403(b), and most 457 plans, with an additional catch-up contribution of $5,500 for people age 50 or older.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a SEP IRA) is increased from $51,000 to $52,000.

Salary reduction contributions (SIMPLE IRA)

The amount the employee contributes to a SIMPLE IRA cannot exceed $12,000 in 2014 and $12,500 in 2015.

If an employee participates in any other employer plan during the year and has elective salary reductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $17,500 in 2014 and $18,000 in 2015.

  • Catch-up contributions. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $2,500 in 2014 and $3,000 in 2015.

 

Tax Season to Open on January 20th

Tax Season to Open on January 20th   

WASHINGTON — Following the passage of the extenders legislation, the Internal Revenue Service announced today it anticipates opening the 2015 filing season as scheduled in January.

The IRS will begin accepting tax returns electronically on Jan. 20. Paper tax returns will begin processing at the same time.

The decision follows Congress renewing a number of “extender” provisions of the tax law that expired at the end of 2013. These provisions were renewed by Congress through the end of 2014. The final legislation was signed into law Dec 19, 2014.

We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” said IRS Commissioner John Koskinen. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”

The IRS reminds taxpayers that filing electronically is the most accurate way to file a tax return and the fastest way to get a refund. There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin.

More information about IRS Free File and other information about the 2015 filing season will be available in January.

College Financial Aid Forms – When and Where

When do I need to submit college financial aid forms?

It depends on the form you’re filling out and whether your child is a new college student or a returning student.

College deadlines for the federal government’s financial aid form, the FAFSA, might be anywhere from February 1 to April 1 for both new and returning students. But it’s in your best interest to submit the FAFSA as soon after January 1 as possible (it can’t be submitted before January 1) because some government aid programs operate on a first-come, first-served basis.

The FAFSA relies on tax information from the previous year, so it’s helpful to have your tax return already completed.  However, if you don’t, you can still file the FAFSA using estimated numbers and then go back later and update your FAFSA with final tax numbers once you’ve completed your tax return (the government offers an online  tool–the IRS Data Retrieval Tool–that allows you to import your  tax information directly into your FAFSA). The FAFSA captures two data points: the financial picture of  both the parent(s) and the student for the previous year.

The main financial aid form that most colleges use to distribute their own aid, the CSS Profile, is due anywhere from February 1 to March 1 for new students applying to college regular decision (or November 1 to December 1 for new students applying early decision or early action) and by April 15 for returning students. The CSS Profile captures six data points: the financial picture of both the parent(s) and student for the previous year, and an estimated financial picture of parent(s) and student for the current year and for the following year.

Even if you don’t think your child will qualify for need-based federal financial aid, you should consider submitting the FAFSA if: (1)  you want your child to be eligible for an unsubsidized Stafford Loan (a non-need-based federal student loan available to any student); and/or (2) you want your child to be considered for college need-based aid–colleges  generally require both  the FAFSA and the CSS Profile before they will consider your child for college need-based aid.

Both the FAFSA and the CSS Profile can be submitted online … click here: http://www.fafsa-application.com/home.php?s=MSN, and you must file them for each year that you want your child to be considered for aid.

Save for Retirement – Saver’s Credit

Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2014 and years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2014 tax return. People have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2015 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $60,000 in 2014 or $61,000 in 2015;
  • Heads of Household with incomes up to $45,000 in 2014 or $45,750 in 2015; and
  • Married individuals filing separately and singles with incomes up to $30,000 in 2014 or $30,500 in 2015.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax year 2012, the most recent year for which complete figures are available, saver’s credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $165 for heads of household and $127 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2014, this rule applies to distributions received after 2011 and before the due date, including extensions, of the 2014 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

Cheat Sheet to Tax Changes for 2014

Cheat Sheet to Tax Changes for 2014

The good news is that most people don’t need to worry about most parts of the tax code. Here’s a guide to some of the major changes (and non-changes) for 2014 that will impact almost every filer.

Income tax brackets

There’s a certain alchemy to taxes, but really, the biggest hit that most individuals receive is from the personal income tax. This is also where the government makes most of its money, collecting about 60 percent of total revenue from the personal income tax. Since it’s probably your biggest tax liability, it’s worth knowing which tax bracket you fall into. Remember that 2013 saw the addition of a new top tax bracket, which is sticking around for the foreseeable future.

Income tax brackets have once again changed — and, for the most part, for the better. The caps for each bracket have been raised so it’s possible, if your income doesn’t increase significantly, that when you file your fiscal 2014 taxes, you’ll fall into a lower bracket than when you filed in 2013.

Tax Bracket Single Married Filing Jointly   Head ofHousehold Married Filing Separately
10% $0 to$9,075 $0 to$18,150 $0 to$12,950 $0 to$9,075
15% $9,076 to$36,900 $18,151 to$73,800  $12,951   to$49,400 $9,076 to$36,900
25% $36,901 to$89,350 $73,801 to$148,850 $49,401 to$127,550 $36,901 to$74,425
28% $89,351 to$186,350 $148,851 to$226,850 $127,551 to$206,600 $74,426 to$113,425
33% $186,351 to $405,100 $226,851 to$405,100 $206,601 to$405,100 $113,426 to$202,550
35% $405,101 to $406,750 $405,101 to $$457,600 $405,101 to$432,200 $202,551 to$228,800
39.6% $406,751 ormore $457,601 ormore $432,201ormore $228,801 ormore

 

Personal exemptions, standard deductions, and itemized deductions

The tax code may be packed full of unfair exemptions and loopholes for certain businesses and the super wealthy, but the average Joe has at least one thing going for him: the personal exemption. The personal exemption acts like a tax deduction, meaning it reduces your total taxable income. It is regularly adjusted upwards, and 2014 is no exception. The personal exemption increased by $50, from $3,900 in 2013 to $3,950 in 2014.

Remember that the personal exemption now has a phase out (and also remember that you can’t file for a personal exemption if someone claims you as a dependent.) Your personal exemption will be reduced by 2 percent of the amount of income you earn that exceeds the amount listed here:

  • $250,200 for single taxpayers
  • $305,050 for married taxpayers filing jointly
  • $279,650 for taxpayers filing as head of household
  • $152,525 for married taxpayers filing separately

Itemized deductions are also subject to a phaseout rule similar to the personal exemption phaseout rule, except the reduction is 3 percent of the amount of income you earn that exceeds the threshold (same as above), or 80 percent, whichever is lower. However, there are three big exceptions to be aware of: deductions claimed for medical expenses, investment interest, or for casualty or theft losses are unaffected.

The 2014 standard deduction amounts are listed below.

  • Single: $6,200
  • Head of Household: $9,100
  • Married Filing Jointly: $12,400
  • Married Filing Separately: $6,200
  • Qualifying Widow/Widower: $12,400

For dependents, the standard deduction is a little more complicated. Dependents can deduct whichever is greater: $1,000, or earned income plus $350, but not in excess of $6,200 (the standard deduction for a single filer)

Those who are aged 65 years or older and those who are legally blind can increase their standard deduction by $1,550 if they are filing as a single or as a head of household, and by $1,200 if they are married filing jointly, separately, or a qualifying widow.

Retirement account contribution limits

Not a lot about retirement account contribution limits has changed between 2013 and 2014 (knock on wood), but it’s these limits are some of the most important pieces of tax-related information you can know. For the record, contribution limits are indexed to inflation, but, as the IRS put it, “Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment.”

The contribution limit for Roth and traditional IRAs is unchanged at $5,500, with a catch-up contribution allowance of $1,000 for those aged 50 or more. The contribution limit 401(k)s is also unchanged at $17,500, with a catch-up contribution allowance of $5,500 for those aged 50 or more.

Remember, if your employer sponsors a retirement plan, then the deductions you can claim for contributions to a traditional IRA begin to phase out at a certain income level (the IRS can tell you exactly what the phaseout range is.) Contributions to a Roth IRA also phase out at certain income levels, regardless of workplace plans.

Finally, the income limit for the savers credit was bumped up to $60,000 for married couples filing jointly, $45,000 for heads of households, and $30,000 for married people filing separately or single filers.

Alternative minimum tax

Think you can deduct your way to a tax-free 2014? Well, think again. The introduction of the alternative minimum tax made it (theoretically) impossible for wealthier Americans to game the tax system and totally eliminate their tax liability through the abuse of deductions. To make a long story short, if you earn less than the following amounts by filing status, you don’t need to worry.

  • $52,800 for single taxpayers
  • $82,100 for married taxpayers filing jointly
  • $41,050 for married taxpayers filing separately
  • If you earn more than this, or if you’ve claimed any of about two-dozen specific deductions (find out which ones at the IRS website), you need to fill out the dreaded form 6251. This form calculates income tax differently than normal, primarily through the exclusion of certain deductions. If you end up owing more in income tax through form 6251 than you do through the normal calculation, then you must pay the difference as an additional tax.
  • Those of you who are married with children should definitely make sure to check whether or not the AMT applies to you. The AMT does not allow for personal exemptions, meaning you can’t deduct your children (or yourselves.)

If you itemize your deductions, those of you with a large medical bill should be aware that if you want to claim a medical expense deduction, it has to exceed an additional 2.5 percent of your adjusted gross income under the AMT. Normally, you can only deduct the part of your medical and dental expenses that exceed 10 percent of your adjusted gross income.

Still Time to Act to Avoid Surprises at Tax-Time

Still Time to Act to Avoid Surprises at Tax-Time

Even though only a few months remain in 2014, you still have time to act so you aren’t surprised at tax-time next year. You should take steps now to avoid owing more taxes or getting a larger refund than you expect.  Here are some actions you can take to bring the taxes you pay in advance closer to what you’ll owe when you file your tax return:

  • Adjust your withholding.  If you’re an employee and you think that your tax withholding will fall short of your total 2014 tax liability, you may be able to avoid an unexpected tax bill by increasing your withholding. If you are having      too much tax withheld, you may get a larger refund than you expect. In either case, you can complete a new Form W-4, Employee’s Withholding Allowance Certificate and give it to your employer. Enter the added amount you want withheld from each paycheck until the end of the year on Line 6 of the W-4 form. You usually can have less tax withheld by increasing your withholding allowances on line 5. Use the IRS Withholding Calculator tool on IRS.gov to help you fill out the form.
  • Report changes in circumstances.  If you purchase health insurance coverage through the Health Insurance Marketplace, you may receive advance payments of the premium tax credit in 2014. It is important that you report changes in circumstances to your Marketplace so you get the proper type and amount of premium assistance. Some of the changes that you should report include changes in your income, employment, or family size. Advance credit payments help you pay for the insurance you buy through the Marketplace. Reporting changes will help you avoid getting too much or too little premium assistance in advance.
  • Change taxes with life events. You may need to change the taxes you pay when certain life events take place. A change in your marital status or the birth of a child can change the amount of taxes you owe. When they happen you can submit a new Form W–4 at work or change your estimated tax payment.
  • Be accurate on your W-4.  When you start a new job you fill out a Form W-4. It’s important for you to accurately complete the form. For example, special rules apply if you work two jobs or you claim tax credits on your tax return. Your employer will use the form to figure the amount of federal income tax to withhold from your pay.
  • Pay estimated tax if required.  If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay the tax four times a year. Use Form1040-ES, Estimated Tax for Individuals, to figure and pay the tax.

For more see Publication 505, Tax Withholding and Estimated Tax. You can get it and IRS forms on IRS.gov, or call 800-TAX-FORM (800-829-3676) to get them by mail.

3.8% Net Investment Income Tax

Investment Income – Do I have to pay an additional tax?

You might, depending on a few important factors.

A 3.8% net investment income tax is imposed on the unearned income of high-income individuals. The tax is applied to an amount equal to the lesser of:

  • Your net investment income
  • The amount of your modified adjusted gross income (basically, your adjusted gross income increased by an amount associated with any foreign earned income exclusion) that exceeds $200,000 for a single person ($250,000 if married filing a joint federal income tax return, and $125,000 if married filing a separate return)

So if you’re single and have a MAGI of $250,000, consisting of $150,000 in earned income and $100,000 in net investment income, the 3.8% tax will only apply to $50,000 of your investment income.

The 3.8% tax also applies to estates and trusts. The tax is imposed on the lesser of undistributed net investment income or the excess of MAGI that exceeds the top income tax bracket threshold for estates and trusts ($12,150 in 2014). This relatively low tax threshold potentially could affect estates and trusts with undistributed income. Consult a tax professional.

What is net investment income?

Net investment income generally includes all net income (income less any allowable associated deductions) from interest, dividends, capital gains, annuities, royalties, and rents. It also includes income from any business that’s considered a passive activity, or any business that trades financial instruments or commodities.

Net investment income does not include interest on tax-exempt bonds, or any gain from the sale of a principal residence that is excluded from income. Distributions you take from a qualified retirement plan, IRA, 457(b) deferred compensation plan, or 403(b) retirement plan are also not included in the definition of net investment income.

If you are subject to the 3.8% net investment income tax, there are strategies to consider that may help you manage that tax.

Strategies on how to manage the net investment income tax

If you are subject to the 3.8% net investment income tax, there are strategies  that may help you manage that tax. The tax is applied to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the applicable income tax threshold. MAGI is basically adjusted gross income plus any associated foreign earned income exclusion. Any strategy you consider should be directed at the appropriate target.

If your net investment income is greater than your MAGI over the threshold, then your focus should be aimed at reducing your MAGI. Conversely, if your MAGI over the threshold is greater than your net investment income, you should try to reduce your net investment income.

Here are a few strategies that may help you manage the net investment income tax:

  • Before selling appreciated securities, consider whether you can offset the gain with capital losses.  Likewise, if you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of the capital losses.
  • Consider gifts of appreciated securities to tax-qualified charities.
  • If passive income is from a business, offset passive income with passive losses. If you don’t have passive losses, you may be able to convert the passive income to non-passive income (not subject to the tax) by becoming more active in the business.
  • You may be able to reduce your MAGI by increasing contributions to a traditional IRA, 401(k), or 403(b).
  • Consider investments that may have growth potential but typically do not generate dividends.
  • Generally, any gains in tax-deferred annuities and cash value life insurance are not reportable as income unless withdrawn, which may help reduce both your MAGI and your net investment income.

While any of these alternatives may help reduce your net investment income or your MAGI, they may also affect your financial planning. So before implementing strategies  to reduce or eliminate exposure to the net investment income tax,  consult with a tax professional to help with your specific situation.

Keep More of Your Money – Easy to Understand Tax Tips

Tax Tips Easy-to-understand tips to keep more of your money

Let’s face it, taxes can be confusing. But you’re not alone. Here are some of Alice’s tax tips to help you through different stages in your life. If you have questions or need help with your taxes, you should always contact a tax professional.

New Baby

In order to claim your new child as a dependent on your tax return, the first thing you need to do is get him or her a Social Security number. If you don’t, you’ll delay the process. You can request a Social Security card at the hospital when you apply for a birth certificate.

$1,000 Child Credit

Kids are great. A new baby gives you a tax credit and the ability to claim a tax deduction until your child reaches the age of 17. With a credit, your tax bill is reduced dollar for dollar, while a deduction reduces the amount of income that Uncle Sam can touch. Income limits do apply, so ask your local tax pro for details.

Single Parent

If you’re a single parent, you may be able to file your returns as head of household rather than single. The advantage? You get a bigger standard deduction, and you’ll fit into a better tax bracket. In order to be considered head of household, you must pay more than half the cost of providing a home for a qualifying person (your child)

Childcare Expenses

Working parents, don’t miss this tax break on your childcare expenses. You qualify if:

  • Your child is younger than age 13, and
  • You pay someone else to watch your child while you work or look for work, and
  • You and your spouse have earned income, or one of you is a full-time student.

You can receive a 20–35% tax credit for up to $3,000 of your childcare expenses for one child, or up to $6,000 for two or more children. The credit is based on your income, so the more you make, the less credit you’ll receive.

If it’s available at your workplace, you might get a better deal by paying for childcare expenses through a Flexible Spending Account (FSA). The money you contribute is subtracted from your paycheck pre-tax, which means you’ll avoid paying federal, Social Security and Medicare taxes on that money. So, contributing the maximum $5,000 can save you at least $1,133—more if you are in a higher tax bracket. You’ll save even more if you live in a state that has an income tax.

Remember, you and your spouse might need to adjust your withholdings from work.

Newly Married

If you get a big tax refund each year, it doesn’t mean that you are getting a bonus from the government. You overpaid your taxes from the previous year, and they are just sending back your overpayment. That’s a bad idea. You just let the government use your money interest-free for one year. Make that money work for you!

Make sure that both of you adjust your withholdings at work. When you pay your taxes each year, you want to come as close to zero as possible (meaning you don’t owe the government, and they don’t owe you). This is true for singles and married couples.

Sending Kids to College

Did you know that Uncle Sam lets you deduct some of your tuition costs? Depending on your income and filing status, you can deduct up to $4,000 of college tuition and related fees. Also, you don’t have to itemize your deductions to claim it. Not a bad deal.

However, not all tuition and fees are eligible for the deduction. Only certain tuition costs and fees qualify, so you should speak with a tax advisor to see if you can save a few thousand dollars this year.

The American Opportunity Credit has been extended through 2017. Each eligible student can qualify for a maximum credit of $2,500.

Death in the Family

The federal estate tax applies only to estates that exceed $5.25 million, but state estate taxes can vary. Consult your local tax professional to find out how the laws affect your situation.

You will also need to file a final income tax return to comply with tax laws that ensure taxes on your loved-one’s income, before his or her death, doesn’t go uncollected. That responsibility falls to the executor of the estate or, if there is not an executor, a family member. The tax return is filled out the same way as if he or she was still alive, but “deceased” is written after the taxpayer’s name.

College Tax Credits for 2014 and Years Ahead

Back-to-School Reminder for Parents and Students: Check Out College Tax Credits for 2014 and Years Ahead

IR-2014-90, Sept. 15, 2014

WASHINGTON ― With another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American opportunity tax credit and lifetime learning credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for 4 tax years per eligible student.
  • The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

You can use the IRS’s Interactive Tax Assistant tool to help determine if you are eligible for these benefits. The tool is available on IRS.gov. Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

10 Basic Tax To-Dos for the Rest of 2014

10 Basic Tax To-Dos for the Rest of 2014

Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.

1. Make time to plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings when you can assess whether you’ll be paying taxes at a lower rate in one year than in the other. So, carve out some time.

2. Defer income

Consider any opportunities you have to defer income to 2015, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

3. Accelerate deductions

You might also look for opportunities to accelerate deductions into the 2014 tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2015, could make a difference on your 2014 return.

Note:  If you think you’ll be paying taxes at a higher rate next year, consider the benefits of taking the opposite tack–looking for ways to accelerate income into 2014, and possibly postponing deductions.

4. Know your limits

If your adjusted gross income (AGI) is more than $254,200 ($305,050 if married filing jointly, $152,525 if married filing separately, $279,650 if filing as head of household), your personal and dependent exemptions may be phased out, and your itemized deductions may be limited. If your 2014 AGI puts you in this range, consider any potential limitation on itemized deductions as you weigh any moves relating to timing deductions.

5. Factor in the AMT

If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end tax planning. For example, if you’re subject to the AMT in 2014, prepaying 2015 state and local taxes probably won’t help your 2014 tax situation, but could hurt your 2015 bottom line. Taking the time to determine whether you may be subject to AMT before you make any year-end moves can save you from making a costly mistake.

6.  Maximize retirement savings

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) could reduce your 2014 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, so there’s no immediate tax savings. But qualified distributions are completely free from federal income tax, making Roth retirement savings vehicles appealing for many.

7. Take required distributions

Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working and participating in an employer-sponsored plan). Take any  distributions by the date required–the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of the amount that should have been distributed.

8.  Know what’s changed

A host of popular tax provisions, commonly referred to as “tax extenders,” expired at the end of 2013. Among the provisions that are no longer available: deducting state and local sales taxes in lieu of state and local income taxes; the above-the-line deduction for qualified higher-education expenses; qualified charitable distributions (QCDs) from IRAs; and increased business expense and “bonus” depreciation rules.

9. Stay up-to-date

It’s always possible that legislation late in the year could retroactively extend some of the provisions above, or add new wrinkles–so stay informed.

10. Get help if you need it

There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation, keep you apprised of legislative changes, and help you determine if any year-end moves make sense for you.