Tax procrastinators, rejoice. You have until April 18 (April 19 if you live in Maine or Massachusetts) to file your tax return this year. That’s because federal offices in Washington, D.C., will be closed on Friday, April 15, for Emancipation Day. So resolve to use the extra time to make sure you take advantage of all of the tax breaks available to you.
Don’t expect a lot of help from the IRS. Last year, fewer than 40% of taxpayers who called the agency reached a customer service representative, and the average wait time for those who did was 30 minutes. This year, the IRS was able to use a $290 million budget increase to hire additional customer service reps. Still, you can expect dropped calls and long wait times.
At the end of December, Congress revived some expired tax provisions that could cut your taxes. Better yet, lawmakers agreed to make some of the tax breaks permanent. And don’t overlook money-saving tax deductions and credits that have been around for years. For example, if you looked for a job last year in your same line of work, you may be able to deduct your job-hunting costs, even if you didn’t land a new position. You must itemize to claim this tax break, and the expenses can be deducted only to the extent that total miscellaneous expenses exceed 2% of your adjusted gross income. If you changed jobs last year and moved at least 50 miles farther from your home than your old job (or 50 miles from home if it was your first job), you can deduct a long list of moving expenses. You don’t have to itemize to claim this write-off.
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Help for homeowners. Lenders typically require buyers who put down less than 20% to buy private mortgage insurance. Congress revived the break allowing itemizers to deduct PMI premiums—as long as you obtained your mortgage in 2007 or later and the loan is for your primary residence or a second home that’s not a rental property. The deduction phases out if your 2015 adjusted gross income exceeds $100,000 and disappears if your AGI exceeds $109,000. This tax break is good for 2015 and 2016.
There’s relief for taxpayers who had mortgage debt written off due to foreclosure or a short sale, which occurs when a home is sold for less than the mortgage balance. Ordinarily, forgiven debt is taxable, but Congress extended through the end of this year a provision that excludes from taxes up to $2 million in forgiven mortgage debt on a principal residence. The exclusion will also apply to mortgage debt forgiven in 2017 if the agreement to discharge the debt was signed in 2016.
Write off sales taxes. Congress also revived and made permanent a deduction for state and local sales taxes that you can take instead of the write-off for state income taxes. This deduction primarily benefits residents of the nine states with no income tax, but taxpayers who live in states with low income taxes, along with seniors who live in states with special breaks for retiree income, could also get a bigger tax break by deducting their sales taxes. Taxpayers who made a big purchase last year may also get a bigger deduction by claiming sales taxes, says Lisa Greene-Lewis, a CPA with TurboTax. Go to the IRS's Sales Tax Calculator to figure out how much you can deduct in sales taxes, based on your income and your state and local sales tax rates.
An opportunity to deduct college bills. If you paid college tuition bills last year, don’t overlook the American Opportunity tax credit. This credit is worth up to $2,500 per eligible student during the first four years of college. Now it’s permanent, so you no longer have to worry about losing the tax break before your child gets a degree.
You can claim the credit for qualified expenses you paid for a dependent child, yourself or your spouse. If you have more than one child in college at the same time, you can claim multiple credits. Married couples filing jointly qualify for the full credit if their modified adjusted gross income is $160,000 or less; for single filers, the cutoff is $80,000. Married couples with MAGI of up to $180,000 and singles with MAGI of up to $90,000 can claim a reduced amount.
When claiming qualified expenses toward the credit, make sure you report the amount you paid, not the amount you were billed, says Aaron Blau, an enrolled agent in Tempe, Ariz. For example, if you received a tuition bill in December but didn’t pay it until January, you can’t use that amount toward your American Opportunity credit for 2015, he says. By now, you should have received a Form 1098-T from your child’s college or university. Look at Box 1, which will show you how much you paid in qualified educational expenses during the year. (Some schools report the amount that was billed during the year in Box 2; in that case, use receipts of your payments.) If you claim expenses that don’t match what’s on the form, expect the IRS to reject the credit. Starting in tax year 2016, taxpayers will be required to have a 1098-T in order to claim the American Opportunity credit, along with other educational tax credits.
Tax breaks for good deeds. As you scramble to finish your tax return, don’t overlook charitable contributions you made during the year online or via payroll deduction in addition to donations made using credit cards and checks. You’re required to keep records for all donations, even small ones. For contributions of less than $250, keep the bank record, credit card statement, receipt or written acknowledgment from the charity. If you made a donation via text message—-a popular option after a natural disaster—-your cell-phone bill should be sufficient. For donations of cash or property valued at $250 or more, you should have an acknowledgment in writing from the charity, which should state whether you received any goods or services in exchange for your gift.
Congress reanimated an expired tax provision that allows taxpayers age 70½ and older to transfer up to $100,000 from their IRAs to charity. The contribution counts toward donors’ required minimum distributions without increasing their adjusted gross income. If you didn’t transfer the money from your IRA to charity before December 31, you can’t take advantage of this tax break to reduce your 2015 AGI. But if you want to make a charitable transfer in 2016, you don’t have to wait until December to see whether the provision will once again be extended. It’s here to stay.
New health care rules. If you have health insurance through your job, you should receive a Form 1095 from your employer confirming your coverage. Some employers provided this form to their workers last year, but it wasn’t mandatory. Employees of large companies will receive a 1095-C; those who work for small companies, as well as those covered by military or government insurance plans, will receive a 1095-B. Employers send a copy of the form to the IRS, too. You don’t need to attach the 1095 form to your return, and if you filed before you received the document, you don’t need to amend your return. As was the case last year, you simply check a box on your tax return to show that you had health insurance coverage in 2015. Keep a copy of the 1095 with your tax records.
If you bought health insurance through one of the exchanges set up by the Affordable Care Act, you should have received IRS Form 1095-A. This form shows the amount of any subsidy you received. You do need this form to file your return, so if you haven’t received it, log on to your health care marketplace website and search for an electronic version.
Use the information to fill out Form 8962, which is used to determine your subsidy, based on the estimate you provided of your 2015 income. If you overestimated, you’ll receive a credit in the form of a larger tax refund or smaller tax bill. If you underestimated and got a more generous subsidy than you deserved, your refund will be reduced or what you owe will increase.
As was the case last year, taxpayers who were uninsured for all or part of the year may owe a penalty. The penalty for 2015 is $325 per person or 2% of household income above the filing threshold, whichever is greater. (To see what you owe, use the calculator at www.healthinsurance.org.) Before you pay, make sure you’re not eligible for an exemption. There are more than 30 provisions that could eliminate or reduce the size of your penalty, says Mark Ciaramitaro, vice president of health care services at H&R Block. You can find a full list at www.healthcare.gov
Contribute to a traditional IRA. You have until April 18 to make a 2015 contribution to your IRA. The IRA deduction is “above the line,” which means you can claim it even if you don’t itemize. It will reduce your adjusted gross income dollar for dollar, which could also beef up other tax breaks tied to AGI.
If you’re not enrolled in a 401(k) or some other workplace retirement plan, you can deduct an IRA contribution of up to $5,500 ($6,500 if you’re 50 or older), no matter how high your income. But if you have a company plan, the right to the IRA deduction is phased out as 2015 adjusted gross income rises between $61,000 and $71,000 if you’re single or between $98,000 and $118,000 if you’re married and file jointly.
If your spouse is covered by a workplace-based retirement plan but you are not, you can deduct your full IRA contribution as long as your joint AGI doesn’t top $183,000 for 2015. You can take a partial tax deduction if your combined AGI is between $183,000 and $193,000.
Contribute to a SEP-IRA. If you or your spouse earned self-employment income last year, you can shelter even more from the tax man with a SEP-IRA. In 2015, you can contribute up to 20% of net self-employment income (business income minus half of your self-employment tax), up to a maximum of $53,000. You have until April 18 (or October 18 if you file for an extension) to set up and fund a SEP.
Fund a health savings account. You also have until April 18 to fund a health savings account for 2015. To qualify for the full contribution, you must have had an HSA-eligible policy on December 1, which means your policy had a deductible of at least $1,300 for individual coverage or $2,600 for family coverage. You can contribute up to $3,350 if you had single coverage or $6,650 if you had family coverage (and you can contribute an additional $1,000 if you were 55 or older in 2015). As with contributions to a deductible IRA or SEP, money you invest in a health savings account will reduce your AGI dollar for dollar.
Reporting HSA distributions
If you took money out of a health savings account last year to pay for medical expenses, you should have received Form 1099-SA from your HSA provider. The IRS will also receive this form, so make sure you reconcile it on Form 8889 of your tax return. (This is also the form you use to report contributions to your HSA.) You’ll be asked how much of the distribution was used for qualified medical expenses; for most taxpayers, it will be the entire amount. Here’s why it’s important to get this right: Withdrawals from an HSA for nonqualified expenses are taxable, and you’ll also pay a 20% penalty if you’re under 65.
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