College credits aren’t just for youngsters, nor are they limited to just the first four years of college. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse. . . not just for your children.
The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take even in retirement at a vocational school or community college can count. If you brushed up on skills in 2016, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $55,000 to $65,000 on an individual return and from $110,000 to $130,000 for couples filing jointly.
THOSE BLASTED BAGGAGE FEES
Airlines seem to revel in driving travelers batty with extra fees for baggage, online booking and for changing travel plans. Such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you’re self-employed and travelling on business, be sure to add those costs to your deductible travel expenses.
CREDITS FOR ENERGY SAVING HOME IMPROVEMENTS
Your 2016 return is the last chance to claim a tax credit for installing energy-efficient windows or making similar energy-saving home improvements. You can claim up to $500 in total tax credits for eligible improvements, based on 10% of the purchase cost (not installation) of certain insulation, windows, doors and skylights. The credit is subject to a lifetime cap, so if you’ve already pocketed the max, you’re out of luck. But there’s no such limit on the much more powerful incentive for those who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines in 2016. Your credit can be 30% of the total cost (including labor) of such systems.
BONUS DEPRECIATION ... AND BEEFED-UP EXPENSING
Business owners—including those who run businesses out of their homes—have to stay on their toes to capture tax breaks for buying new equipment. The rules seem to be constantly shifting as Congress writes incentives into the law and then allows them to expire or to be cut back to save money. Take “bonus depreciation” as an example. Back in 2011, rather than write off the cost of new equipment over many years, a business could use 100% bonus depreciation to deduct the full cost in the year the equipment was put into service. For 2013, the bonus depreciation rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014... when Congress reinstated it retroactively to cover 2014 purchases. Then, the provision expired again.., but near the end of 2015, Congress revived the break. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.
Perhaps even more valuable, though, is another break: supercharged “expensing,” which basically lets you write off the full cost of qualifying assets in the year you put them into service. This break, too, has a habit of coming and going. But as part of the 2015 tax law, Congress made the expansion of expensing permanent. For 2016 and future years, businesses can expense up to $500,000 worth of assets. The half-million-dollar cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in a single year.
SOCIAL SECURITY TAXES YOU PAY
This doesn’t work for employees. You can’t deduct the 7.65% of pay that’s siphoned off for Social Security and Medicare. But if you’re self-employed and have to pay the full 15.3% tax yourself (instead of splitting it 50-50 with an employer), you do get to write off half of what you pay. That deduction comes on the face of Form 1040, so you don’t have to itemize to take advantage of it.
AMORTIZING BOND PREMIUMS
If you purchased a taxable bond for more than its face value—as you might have to capture a yield higher than current market rates deliver—Uncle Sam will effectively help you pay that premium. That’s only fair, since the IRS is also going to get to tax the extra interest that the higher yield produces.
You have two choices about how to handle the premium:
You can amortize it over the life of the bond by taking each year’s share of the premium and subtracting it from the amount of taxable interest from the bond you report on your tax return. Each year you also reduce your tax basis for the bond by the amount of that year’s amortization.
Or, you can ignore the premium until you sell or redeem the bond. At that time, the full premium will be included in your tax basis so it will reduce the taxable gain or increase the taxable loss dollar for dollar.
The amortization route can be a pain, since it’s up to you to both figure how each year’s share and keep track of the declining basis. But it could be more valuable, since the interest you don’t report will avoid being taxed in your top tax bracket for the year—as high as 43.4%, while the capital gain you reduce by waiting until you sell or redeem the bond would only be taxed at 0%, 15% or 20%.
If you buy a tax-free municipal bond at a premium, you must use the amortization method and reduce your basis each year. . . but you don’t get to deduct the amount amortized. After all, the IRS doesn’t get to tax the interest.
LEGAL FEES PAID TO SECURE ALIMONY
Although legal fees and court costs involved in a divorce are generally nondeductible personal expenses, you may be able to deduct part of your attorney’s bill.
Since alimony is taxable income, you can deduct the part of the lawyer’s fee that is attributable to setting the amount. You can also deduct the portion of the fee that is attributable to tax advice. You must itemize to get any tax savings here, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a tax-saving deduction.
DON’T ALWAYS REPORT A STATE INCOME TAX REFUND
There’s a line on the tax form for reporting a state income tax refund, but most people who get refunds can simply ignore it even though the state sent the IRS a copy of the 1099-G you got reporting the refund. If, like most taxpayers, you didn’t itemize deductions on your previous federal return, the state tax refund is tax-free.
Even if you did itemize, part of it might be tax-free. It’s taxable only to the extent that your deduction of state income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 100% of your refund is taxable—since 100% of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax-free. Don’t report any more than you have to.
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