In this week’s episode, I discuss upcoming episodes, webinars, and presentations related to the Supreme Court case SD vs. Wayfair.  Visit http://www.yourtaxteacher.com/242 for the show notes.

In this episode, I discuss last minute tax ideas an whether to time to consider whether to file an extension. You can find this episode's show notes at http://www.yourtaxteacher.com/241.

The American Opportunity Credit was made permanent in 2015. 

The credit is an education credit that can be used if a taxpayer or a dependent of a taxpayer is attending a post-secondary school in pursuit of a certificate or degree.The American Opportunity Credit was made permanent in 2015.  The credit is an education credit that can be used if a taxpayer or a dependent of a taxpayer is attending a post-secondary school in pursuit of a certificate or degree.

A post-secondary school is defined as a college, university, community college, technical school, etc as long as the post-secondary school participates in federal aid.

The $2,500 credit can be claimed for tuition, course-related books, supplies, equipment, course fees, course materials, etc that are required for the first four years of a post-secondary education.

Expenses are not covered under the American Opportunity Credit are Room / Board Transportation Insurance Medical Expenses Student fees (not required) Same Expenses paid with tax-free educational assistance Same Expenses for other tax deductions, credits, or educational benefits

To qualify for the American Opportunity Credit,
1. The student must be at least half time 2. Has not completed a post-secondary education at the beginning of the year 3.  Can not be claimed for more than four (4) years 4.  The taxpayer or dependent can not have been convicted of a Federal / State felony drug conviction at the end of the year.

The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,500.  For example of the taxpayer or dependent had $3,000 of qualifying expenses, the credit would be 100% of the first $2,000 and 25% of the next $1,000 for a total credit of $2,250.   For qualifying expenses $4,000 and over, the credit is $2,500.

There are income limitations where the credit begins phasing out using the modifying gross income.

If the taxpayer is single the credit begins phasing out between $80,000 and $90,000.  The credit completely phases out at $90,000 for a single taxpayer.

If the taxpayer’s filing status is married filing jointly the credit begins phasing out between $160,000 and $180,000.  The credit completely phases out at $180,000 for taxpayers filing as married filing jointly.

For most taxpayers, the adjusted gross income (AGI) will be the modified gross income.   For taxpayers who have foreign income exclusion, foreign housing exclusion, foreign housing deduction, and exclusion of income by bonafide residents of American Samoa or Puerto Rico, taxpayers will add these exclusions and deductions to their adjusted gross income.

Taxpayers claiming the American Opportunity Credit will use Form 8863 to claim the educational credit.   The student (taxpayer or dependent) will receive a form 1098-T from the post-secondary school to claim the educational credit.

With tax reform, as tax preparers we expected that home equity loan interest was no longer going to be deductible after Congress passed the Tax Cuts and Jobs Act of 2017 that became law on December 22, 2018.

However, the IRS has advised taxpayers and taxpayers that they will look at what the home equity loan is being used for.

Is it being used for home improvements, purchase a home, remodeling, adding an addition on to the home. If so, the IRS said the interest for the home equity loan and home equity line of credit will still be deductible on schedule A.

If the home equity loan is being used to pay personal expenses, go to college, purchase a vehicle, then the interest for the home equity loan and the home equity line of credit will be deductible.

Of course, the deductibility of the home equity loan and the home equity line of credit is still limited to amount of the mortgage / loan. For most loans that closed after December 14, 2018, the mortgage limitation was $750,000. For loans that closed before December 14, 2018, the mortgage limitation was $1.1 million ($1 million mortgage and $100,000 home equity loan or home equity line of credit).

The IRS also provided insight and advice on how the mortgage for mortgage and home equity loans were secured by property to determine interest deductibility.

IRS provided three examples on their website to determine whether the home equity loan (home equity line of credit) was deductible. (Source: https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law)

Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).

Medical expenses are still deductible on your tax return even after tax reform as an itemized deduction. Of course, the amount of your medical expense itemized deduction depends on the amount of your medical expenses and your adjusted gross income.

In order to take a medical expenses as an itemized deduction, your medical expenses have to be more than 7.5% of your adjusted gross income (AGI) on the Form 1040. For example, if your AGI is $100,000, your medical expenses would need to be more than $7,500 before you could take the medical expenses as an itemized deduction.

Types of medical expenses that can be deducted are health insurance, doctor, surgeons, hospital care, eye care, opticians, prescriptions, nursing home care, service animals, and dental care.

Other medical expenses that can be deducted are: weight loss programs diagnosed for a specific disease or medical condition by a physician.

Transportation expenses including mileage for medical purposes are deductible. Costs to attend a conference related to chronic disease is deductible. However, the lodging and food while you are attending the conference is not deductible.

Self-employed health insurance may be deductible on the first page of Form 1040 or on Schedule A depending on the taxpayer’s self-employment net income.

The deductibility cost for a long term care policy is limited based on age. For 2018, the limitations for long-term care insurance policy is

Age attained before the close of the taxable year Maximum deduction for year
40 or less $420

More than 40 but not more than 50 $780

More than 50 but not more than 60 $1,560

More than 60 but not more than 70 $4,160

More than 70 $5,200

Per diem long-term care policies are limited to long-term care expenses of $360 per day.

Over the counter drugs, nicotine patches, supplements, etc are not deductible.

Interest income is taxable income unless it is non-taxable income..

Depending on whether it’s taxable or non-taxable income is how it gets reported on the Form 1040. While both types of interest is reported on the Form 1040, taxable interest income gets added to a taxpayer’s taxable income while non-taxable income does get added to taxable income.

U.S. Treasury Notes and Bonds and Municipal Bonds (Munis) are types of non-taxable interest income.

However, Series EE U.S. Savings Bonds is taxable income along with bank interest (Checking, Savings, CDs, Money Markets, etc...) and corporate bond interest (OID, Bond Discount and Bond Premium Amortization, Accrued Bond Interest).

Other types of interest income are seller finance installment sales and notes receivable.

For seller finance through an installment sale, the seller should provide the buyer with an amortization schedule and get the buyer’s name and their social security number to report on Schedule B.

Schedule B is the tax form used to report interest and dividend income to report total interest and dividend income over $1,500. The amount reported on Schedule B will flow onto Form 1040. Taxpayers who have total dividend and interest income under $1,500 will the interest and dividend income on Form 1040 without using the Schedule B.

When it comes to the tax year rolling over to the new year, most taxpayers will ask me if there are any deductions that can still take once the tax year rolls past December 31st.

While the answer is normally no, taxpayers can still contribute to a traditional IRA contributing up to $5,500 for both themselves and their spouse (if married). If the taxpayer(s) is or are over the age 50, the taxpayers can contribute up to $6,500 to a traditional IRA.

In order to qualify for a prior year tax deduction, the traditional IRA contribution must be made before April 15th.

Taxpayers who contribute to a traditional IRA before April 15th has the choice of taking the deduction for the IRA in the current year or the previous year.

When it comes to home ownership deductions, there are three primary deductions that you can deduct against your adjusted gross income for homeowners on Schedule A (Itemized Deductions).

Property taxes can be deducted on property for which you pay taxes under the State and Local Taxes section on Schedule A. For 2017, there is no limitation of the amount of state and local taxes you can deduct against your adjusted gross income. Beginning on January 1, 2018, there is a $10,000 cap on the amount of state and local tax deduction when you file your taxes next year.

Mortgage interest is another itemized deduction that homeowners pay be able to take against their adjusted gross income. The mortgage interest deduction begins phasing out for mortgage debt over $1,000,000. Beginning after December 14, 2017, mortgage interest begins phasing out for mortgage debt over $750,000.

For 2017, home equity interest is deductible on the Schedule A for home equity less than $100,000. Beginning with 2018, home equity loan interest will not be deductible against your adjusted gross income.

Modifications or improvements to your home for medical purposes is deductible as a medical expense for medical expenses in excess of 7.5% of your adjusted gross income. The modifications must be for a medical purpose.

As taxpayers and tax preparers are preparing for the January 29, 2018 kickoff of the 2017 tax return tax preparation season, taxpayers and tax preparers will notice some changes to the final Form 1040.

Line 34 in prior years was the “Tuition and Fees” deduction against taxable income. This year taxpayers and tax preparers will notice that the line now is “Reserve for future use” after Congress didn’t extended the Tuition and Fees deduction that expired on December 31, 2016.

2017 Schedule A’s medical deduction floor is 7.5% for all taxpayers. For example, if a taxpayer is earning $50,000 and has $5,000 in medical expenses, then $1,250 is the medical expense itemized deduction ($50,000 x .075 = $3,750, $5,000 - $3,750 = $1,250).

The 2017 personal exemption is $4,050 for each dependent.

The passthrough deduction is available for 2017.

Taxpayers will still need to report their healthcare coverage on their 2017 tax return.

The W-2 box 9 includes a sixteen (16) digit verification code to combat identity theft. Taxpayers will need to include the verification code on the tax return if it listed in box 9.

The standard deduction is $6,350 (single taxpayers and married filing separately), $12,700 (married and surviving spouse), $9,350 (head of household). There is an $1,250 additional deduction if the taxpayer(s) is blind or aged. An additional $1,500 if the taxpayer is aged, blind, and single and not a surviving spouse.

With income taxes, it comes down to income. Taxable income to specific. Of course, deductions plays a major role in determining taxable income.

Income on a tax return is broken down into taxable income and non-taxable income. What isn’t non-taxable income is taxable income.

Municipal bond interest, treasury notes and bond interest, child support, inheritances, gifts, and bequests, welfare payments, healthcare benefits and cash rebates are examples of non-taxable income.

Salaries, wages, dividends, non-municipal bond and treasury note interest, commissions unemployment income, strike pay, rental income, business income, alimony, royalty income, stock options, rental income, capital gains are examples of taxable income.

Social security income may be taxable up to 85% depending on the total of your other combined taxable income. If you’re single and your total other combined income is more than $25,000 than 85% of your social security income may be taxable. If you’re married and your total other combined income is more than $32,000 than 85% of your social security income may be taxable.

Retirement income from traditional IRAs, SEP, 401ks, Simple IRA, etc is taxable income. Retirement income from a Roth IRA is generally non-taxable income.

States tax refunds may be taxable if you itemize your deductions.