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Are You Really Eligible For The Earned Income Tax Credit?

The Earned Income Tax Credit is available to American families within certain income brackets. Tax credits can range from $475 to $5,891 depending upon how many children you have and what your income level is. Here is a look at the strict eligibility requirements for the credit so you can determine if you qualify.

Family Size

The amount of your earned income credit (EIC) is dependent upon how big your family is. For married couples with no eligible children, the tax credit is $475. Families with one eligible child can receive a tax credit of $3,169. Families with two eligible children can receive a tax credit of $5,236. Meanwhile, families with three or more eligible children can receive a tax credit of $5,891. There is no larger tax credit for families with more than three children.

Income Limits

Family eligibility is determined by a set of strict income limitations. To be eligible to receive the Earned Income Tax Credit with no children, your annual income cannot exceed $13,980 if filing a single return or $19,190 if married filing jointly. If you have one child, your annual income cannot be more than $36,920, or $42,130 if married filing jointly. For families with two children, your income cannot surpass $41,952, or $47,162 if you are filing jointly. Finally, if you have three or more qualifying children, your annual income cannot exceed $45,060, or $50,270 if married filing jointly. Income limits are subject to change from year to year, so it is vital that you check the IRS guidelines every year to see if you are still eligible for this tax credit.

Special Rules for Married Couples

The only way that a married couple will be eligible for the Earned Income Tax Credit is to file jointly. If they file separately, they will be immediately disqualified from receiving the tax credit. Similarly, many other tax credits are only available to married couples filing jointly. While filing separately can have its advantages, when it comes to the Earned Income Tax Credit, filing jointly is the way to get your tax bill reduced significantly.

The Bottom Line

The Earned Income Tax Credit is a highly attractive tax credit that many American families take advantage of year after year. Eligibility requirements and income maximums can change from year to year, so it is wise to check the IRS guidelines prior to filing your taxes so that you will not be caught off guard. There are no exceptions when it comes to the Earned Income Tax Credit. The guidelines are stringent, and either you are eligible or you aren’t. Do not try to file for this tax credit if you are not eligible. Doing so will likely result in an inquiry or audit from the Internal Revenue Service.
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6 Tax Deductions That Might Get You Audited

Exactly what triggers an audit from the IRS isn’t always clear. There are plenty of urban legends about exactly which tax deductions can bring you to the attention of the IRS, but not a lot of facts.
In particular, the home office deduction has a reputation for bringing down an audit on a taxpayer. But the reality is a little more complex: Because the home office deduction is often claimed incorrectly, it’s seemingly a lightning rod. But with a little care (i.e. good documentation), the IRS won’t care about your home office. Rather, there are some other factors that are more likely to trip you up.

Noncash Charitable Donations

Because you have to assign a value to any noncash donations you might make, like dropping off used clothes at Goodwill, this deduction can be a problem area. It’s easy to assign too high a value without meaning to. You need to be very pessimistic about the value of any noncash charitable donations you may make, unless you can clearly point to justification for your valuation.

Real Estate Losses

If you take a loss on a real estate investment, you need to be able to show that it’s not a passive investment. That means that you have to be active on a regular basis, in a substantial way. This isn’t an issue for real estate professionals, but if you’re just collecting rent for a property and wind up with a loss, you may have some problems.

Travel and Entertainment Deductions

As a business owner, you may be able to write off a portion of your travel, entertainment and food expenses as deductions. But your deductions need to be in line with what’s reasonable for your business. Even if you’re earning a lot of money, each deduction needs to clearly meet the business purpose test if you don’t want to talk to the IRS about it.

“Hobby” Losses

If you’re taking deductions for a business that routinely carries a loss, the IRS is going to take a close look at what you’re doing, and they may reclassify your business as a hobby. For a business, you need to be able to show that you depend on the income from the activity and that you’re seriously looking for ways to turn a profit.

S Corporation Wages

For companies operating as S corporations, particularly smaller ones, there’s a question of what constitutes a fair wage. The IRS will take a close look at the salaries of employees of the corporation to make sure that the wages meet market rates. If they don’t, the agency may conclude that the corporate structure is simply an effort to avoid paying taxes.

Unreimbursed Employee Business Expenses

Because you can only deduct unreimbursed expenses incurred as an employee when the total goes over 2% of your adjusted gross income, there’s a tendency to abuse this deduction by writing off work clothes, the cost of getting to work and other expenses that aren’t allowed. You’ll need to properly document any expense you’re claiming as an employee and double-check that it is allowed.

The Bottom Line

If you’re worried about your tax return, make the time to go over it with a tax professional before you turn it in to the IRS. You may be able to find potential problems and resolve them ahead of time. Avoiding math errors and accurately reporting the numbers on your other documents will reduce your chances of being audited dramatically. The IRS only audits about 2% of all tax returns it receives, so if you can avoid red flags on your tax return, you may be able to avoid an audit.
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When a 401(k) Hardship Withdrawal Makes Sense

Many workers count on their employer-sponsored 401(k) for the lion’s share of their retirement funds. That’s why these accounts shouldn’t be the first place you go if you need to make a major expenditure or are having trouble keeping up with your bills.
But if better options are exhausted – for example, an emergency fund or outside investments – tapping your 401(k) early may be worth considering. Most major employers allow hardship withdrawals if employees meet specific guidelines. And in some cases, you can pull money out without paying a 10% percent penalty to the IRS, which is normally the case when you withdraw retirement funds before age 59½.
If your employer offers 401(k) loans – which differ from hardship withdrawals – borrowing from your own assets may be a better way go. Under IRS guidelines, savers can take out up to 50% of their vested balance, up to $50,000. One of the advantages of a loan is that the plan participant isn’t forced to pay income taxes on it that same year. Be aware, however, that you have to repay the loan within five years (ensuring that your retirement fund doesn’t get depleted), which requires steady employment. “An outstanding loan with a job termination triggers immediate 60-day repayment, tax liability and potential penalties if you’re under 59½,” says Jason R. Tate of Jason Tate Financial Consulting in Murfreesboro, Tenn.
But in certain circumstances (for example, if your company doesn’t offer loans), a hardship withdrawal may make sense. In some cases, you will owe taxes; in others you won’t. Here are some rules you need to know.

Paying Medical Bills

Plan participants can draw on their 401(k) balance to pay for medical expenses that insurance doesn’t cover. If the bills exceed 10% of the individual’s adjusted gross income (AGI), the 10% tax penalty is waived. To avoid the fee, the hardship withdrawal must take place in the same year that the patient received medical treatment.
As with most hardship withdrawals, the amount you can take out is generally equal to the amount of your elective contributions, less any previous distributions.

Living With a Disability

If you become “totally and permanently” disabled, getting access to your retirement account early becomes easier. The government allows you to withdraw funds before age 59½ without penalty. Be prepared to prove that you’re truly unable to work. Disability payments from either Social Security or an insurance carrier usually suffice, though a doctor’s confirmation of your disability is frequently required.
Keep in mind that if you are permanently disabled, you may need your 401(k) even more than most investors. Therefore, tapping your account should be a last resort, even if you lose the ability to work.

Substantially Equal Periodic Payments (SEPP)

If you’ve left your employer, the IRS allows you to receive “substantially equal periodic payments” penalty-free (though they’re technically not hardship distributions). One important caveat is that you make these regular withdrawals for at least five years or until you reach 59½, whichever is longer. That means that if you started receiving payments at age 58, you’d have to continue doing so until you hit 63. As such, this isn’t an ideal strategy for meeting a short-term financial need. If you cancel the payments before five years, all penalties that were previously waived will then be due to the IRS.
There are three different methods you can choose for calculating the amount of your withdrawals: fixed amortization, fixed annuitization and required minimum distribution. A trusted financial advisor can help you determine which method is most appropriate for your needs. Regardless of which method you use, you’re responsible for paying taxes on any income, whether interest or capital gains, in the year of the withdrawal.

Separation of Service

Those who retired or lost their job in the year they turned 55 or later have yet another way to pull money from their employer-sponsored plan. Under a provision known as “separation of service,” you can take an early distribution without worrying about a penalty. But as with other withdrawals, you’ll have to be sure you can pay the income taxes. Of course, if you have a Roth version of the 401(k), you won’t owe taxes because you contributed to the plan with post-tax dollars.
Type of Withdrawal
10% penalty?
Medical expenses
No (if expenses exceed
10% of AGI)
Permanent disability
Substantial equal periodic payments (SEPP)
Separation of service
Purchase of primary residence
Tuition and educational expenses
Prevention of eviction or foreclosure
Burial or funeral expenses

What Costs the Most: Withdrawals for Homes and Tuition

Under U.S. tax law, there are several other scenarios where an employer has a right, but not an obligation, to allow hardship withdrawals. These include the purchase of a principal residence, payment of tuition and other educational expenses, prevention of an eviction or foreclosure and funeral costs.
However, in each of these situations, even if the employer does allow the withdrawal, the 401(k) participant who hasn’t reached age 59½ will be stuck with a sizable 10% penalty on top of paying ordinary taxes on any income. Generally, you’ll want to exhaust all other options before taking that kind of hit. “In the case of education, student loans can be a better option, especially if they’re subsidized,” says Dominique Henderson, Sr., owner of DJH Capital Management, LLC, a registered investment advisory firm in Cedar Hill, Texas.

The Bottom Line

If employees absolutely need to use their retirement savings before age 59½, 401(k) loans are ordinarily the first method to pursue. But if borrowing isn’t an option, a hardship withdrawal may be a possibility for those who understand the implications. Take note of which situations would institute a 10% penalty and which won’t. This may make the difference between a smart method of getting cash or a costly blow to your future retirement.
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Top Reasons to File Separately When Married

When it’s time to complete their tax returns, couples have one big question to answer: married filing jointly or married filing separately?

Just under 5% of the approximately 56 million married couples filed their taxes jointly in 2013, according to IRS statistics. But that doesn’t necessarily mean that filing jointly is right for you every year.

The IRS advises that you and your spouse will “generally” pay less in combined taxes if you file jointly, but it advises couples to figure their taxes both ways to make sure of that.

Just what we all need: Double the aggravation at tax time. You can skip that exercise, if you understand the key differences between the two methods of filing.

You Probably Want to File Jointly…

  • If you have children. Some “miscellaneous” deductions and credits are not ordinarily allowed if you are married, but filing separately. Notably, these include the childcare credit, the deduction for student loan interest, and the credit for adoption expenses. The full list of exclusions can be found here.
  • If one of you earned most or all of the income. Joint filing allows for double the deductions for some expenses, notably for a contribution to a retirement savings account. As a couple, you can reduce your tax bill and boost your retirement income at the same time, if you take full advantage of this doubled deductibility.

You May Want to File Separately…

  • If one of you has unusually high deductible expenses. Some deductible costs, notably the medical expenses deduction, have a “floor.” Say one of you had a huge medical bill that is not covered by your health insurance. You’re owed a deduction of costs that exceed 10% of gross adjusted income, or 7.5% if you’re 65 or older. (These numbers may change in future.) That floor may be within reach on your individual income. Similarly, unreimbursed business expenses can be deducted only if they exceed 2% of adjusted gross income (AGI). If each of you files separately, the spouse with big expenses may qualify for a meaningful deduction, based on that smaller AGI.
  • If each of you earns about the same amount. By filing separately, you may avoid hitting the higher tax rate that might be levied on your doubled income.

You Definitely Want to File Separately…

  • If you don’t trust your spouse! As the IRS points out, by filing jointly you each accept responsibility, legally and financially. Put bluntly, if you suspect your spouse isn’t reporting some income, or might be hit with a big bill for taxes or penalties, consider filing separately. You can ask later for something called “Innocent Spouse Relief,” but there are no guarantees you’ll get it.
  • That goes double if you are separated or in the process of a divorce. The IRS points out that even a court decree in a divorce case might not protect you from their powers to collect taxes and penalties from you in the event that your ex-doesn’t pay up.

There is some icing on the cake, though. As noted above, some childcare credits are “usually” not available to those filing separately. The unusual case, according to the IRS, is separation or divorce.

The Bottom Line

The joint tax return continues to be the preferred choice for most American couples. It is, after all, designed to meet their needs.

A glance at the figures under “Married filing jointly” and “Married filing singly” on the IRS tax tables for 2015 shows that couples filing jointly pay less taxes after their combined taxable income reaches the $9,250 – $9,300 range.

However, if you have a year with an extraordinary event, like a big medical expense or a sudden boost in one partner’s income, you might want to check its impact on your taxes if you file separately.

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Charitable Contributions Deduction

One of the itemized deductions accessible for citizens who give donations to charity. The Charitable Contributions Deduction enables citizens to deduct the greater part of their commitments to qualifying beneficent commitments of money and property inside specific limitations. These conclusions must be recorded on Schedule A of the 1040.

BREAKING DOWN ‘Charitable Contributions Deduction’

The Charitable Contributions Deduction permits citizens who make considerable magnanimous blessings to take a sizeable duty conclusion for the year in which their gifts are made. The guidelines for deducting these blessings can be fairly entangled in specific cases. Citizens with inquiries concerning the deductibility of their gifts should download the instructions for Schedule A off of the IRS website.

Did you make donations this year? Contact us in the chat now and let’s get started!

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Discovering IRS Debt Relief

If you are in debt to the IRS and have no way of paying what you owe, then you might be very
interested in learning about IRS debt relief. There is help waiting for you if you are willing to talk
to a professional tax lawyer or consultant. You need to take immediate action if you owe money
for current or back taxes.

The IRS has many ways to get the money from you and you need someone with extensive tax
knowledge to help you work with the IRS to find a resolution to your tax problems. The IRS can
issue federal tax liens and garnishments against you and can also send you intimidating
notices. It even makes ugly phone calls on occasion.

IRS Debt Relief

The IRS wants its money but in today’s difficult economic times, it is sometimes willing to settle
for less from taxpayers who just don’t have the funds to pay their taxes. It evaluates each tax
payer’s individual financial circumstances carefully and tries to find some kind of resolution to
the tax liability. In order to save money in the long run, the IRS offers tax relief programs to
taxpayers with past due federal income tax liabilities. The most common programs offered by
the IRS are Offer in Compromise (OIC), Installment Agreement and Currently Not Collectible

You can work directly with the IRS or, preferably, with a taxpayer advocate service. A taxpayer
advocate is well trained in all of the components of federal income tax law and will look after
your best interests when dealing with the IRS. The IRS is staffed by people of various levels of
knowledge and they often don’t seem to have the skills necessary to help you with your tax debt
problems. If this is the case, then a taxpayer advocate is someone you ought to see

He or she will gather your information, evaluate your options and talk directly to the IRS for you.
The advocate will treat you fairly and competently which might be lacking with some IRS staff
members. IRS debt relief is a way that you can decrease or eliminate your debt to the IRS.
Providing accurate information and obtaining the right advice is necessary in order to assure
that your interests are a top priority.

Let us help you, let’s schedule a meeting to talk about how we can help you worry less.
Call us now: 914-476- 2202
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Tax Deductions

# 1A Deductions

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#1B Deductions

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Accounting 1 On 1

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