Education tax benefits can offset college costs
Planning your college course schedule is important — and so is planning for the tax benefits available to help offset the expense of paying for those courses.
For 2012, federal education tax benefits include two credits: the American opportunity credit and the lifetime learning credit. Each has different rules, and you can only take one per student in the same year.
In addition, you’re limited to receiving one tax benefit from the same expenses. For example, say your employer provides educational assistance, and you use the money for qualified expenses, such as tuition. The employer-provided assistance is generally tax-free, so you do not include the expenses for which you used the money when calculating your American opportunity or lifetime learning credit.
The one-benefit rule also applies to expenses paid with scholarships, grants, or other tax-free assistance, or that you deduct elsewhere on your federal income tax return.
You can, however, claim whichever credit applies for other out-of-pocket education expenses. That’s true no matter whether you pay by cash, check, credit card, or loans.
If someone in your family is headed to college this year, please give us a call. We’ll help make paying for the courses a less taxing experience.
S corporation losses have deduction limits
Are you expecting losses in your S corporation this year? You already know S corporation losses are reported on the business tax return on Schedule K-1 of Form 1120S, and from there flow to your personal return.
What you may be less clear about is how much of the loss you can deduct on your personal return — which might not be the entire amount. Here’s why: S corporation losses are limited by your basis in the company, as well as by other tax provisions.
Basis is broadly defined as the total of the amount you have invested in the business (stock basis) and the funds you loan your company (debt basis). Stock basis starts off with the amount you pay for your stock and increases or decreases with income, deductions, and distributions. Debt basis consists of loans you make to the company, and rises or falls as qualified loans increase or are repaid.
Even if you have enough basis to deduct current year losses in full on your Form 1040, other rules may prevent you from claiming the entire amount. Those rules include how much you have “at risk,” which is typically the total of corporate borrowings you’re personally liable for, or for which you’ve used your own property as collateral.
Finally, deductible losses can also be limited when you do not materially participate in the business.
Please call if you anticipate a business loss for 2012. We’ll help you analyze your basis.
Taxes and disability: An overview
Do you live with a disability, or care for someone who does? If so, you may have disability-specific tax questions about income, deductions, and credits.
Here’s an overview.
- Income. In general, all income is taxable on your federal tax return, unless specifically excluded. For instance, income you earn for services is typically taxable, even if you are disabled. Part of your social security disability benefits may also be taxable, depending on your total income (including tax-exempt interest). However, supplemental security income is not taxable.
Other nontaxable disability payments include VA benefits, workers’ compensation when work-related and received under a workers’ compensation act, and wage-loss benefits from no-fault car insurance policies.
- Deductions and credits. You already know you can deduct medical expenses related to your disability, subject to the 7.5%-of-adjusted-gross-income limitation.
But what about impairment-related work expenses? These are out-of-pocket costs you incur so you can work, such as attendant care, and you claim them as an employee business deduction. This is an itemized deduction, not subject to the 2% of adjusted gross income limit.
When you’re self-employed, impairment-related work expenses are deductible on your Schedule C, “Profit or Loss From Business.”
If you work and must pay for disabled spouse or dependent care, you may qualify for a federal income tax credit of up to 35% of your expenses. The child or dependent care credit reduces taxes you owe dollar-for-dollar.
Depending on your disability and income, other exclusions and tax benefits may be available.
Call for more information 970-207-9724
New rules apply to business travel expenses
Will you be away from home this summer on business? If so, you might have tax-deductible expenses. Generally, when you travel away from home for your existing work or business, ordinary and necessary expenses are deductible on your federal tax return.
You probably noticed that one sentence contains three criteria — “away from home,” “existing work or business,” and “ordinary and necessary.” While you no doubt have a handle on the last two phrases, proposed regulations expanded the definition of the first — which could mean additional deductions.
What’s changed. The term “away from home” has traditionally been interpreted as a sleep-or-rest rule. That rule says when business travel keeps you away from home long enough to require a rest period — an overnight trip, for example — you can deduct your expenses.
Under the new rules, certain local business-related lodging expenses can now be deducted. For instance, say you want employees to attend training at a hotel near your business. Your employees could easily travel home in the evening and back the next morning, but you want them available for an early session. When you require all your employees to stay at the hotel overnight, you can deduct the cost. In addition, the amount you pay is not income to your employees, though they’re not traveling away from home under the standard definition.
The new rules do have limits. As an example, you can deduct the cost of a hotel room for a recently hired employee who has not yet moved to the area where your business is located. However, the payment is taxable to the employee.
The change can be applied to prior years. If you paid lodging expenses for local business travel in the past, you may want to amend those returns. Give us a call here at Dye and Whitcomb LLC for more information.