Managing AGI could protect tax breaks

How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions. Knowing how close you are to the “edge” can help preserve tax breaks for 2015.

Many phase-outs are based on modified adjusted gross income, or MAGI. MAGI is the adjusted gross income shown on your tax return as “modified” by adding back certain deductions. The “add-backs” vary with specific phase-outs. That means you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying rules differ – including the MAGI threshold.

Here are some common federal tax benefits with MAGI phase-outs.

*   Education credits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 if you’re married filing jointly ($80,000 if you’re single). The credit disappears completely when your MAGI is greater than $180,000 for joint returns ($90,000 if your filing status is single).

For 2015, the Lifetime Learning Credit begins to phase out at $110,000 when you’re married filing a joint return and $55,000 when you’re single. Once your MAGI reaches $130,000 (married) or $65,000 (single), the credit is no longer available.

*  Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer’s plan and your MAGI exceeds $98,000 ($61,000 when you’re single).

While Roth IRA contributions are not tax-deductible, the amount you can contribute for 2015 begins to phase out when your MAGI reaches $183,000 and you’re married filing jointly ($116,000 if you’re single).

In addition, the federal “saver’s” credit for contributing to retirement plans phases out when your 2015 MAGI is more than $61,000 and your filing status is married filing jointly ($30,500 for singles).

*   Other phase-outs. The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your MAGI over the base amount of $32,000 when you’re married filing jointly. The base amount is $25,000 when you’re single.

Phase-outs also reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.

Contact our office for guidance in managing your income for maximum tax breaks.

Miscellaneous deductions could cut your tax bill

If you itemize deductions, you may be able to deduct some of the miscellaneous expenses you pay during the year. These miscellaneous deductions can be taken only if their total exceeds two percent of your adjusted gross income. Deductions include such expenses as the following:

*    Unreimbursed employee expenses.

*    Job hunting expenses (in your same line of work).

*    Certain work clothes and uniforms.

*    Tools needed for your job.

*    Union or professional dues.

*    Work-related travel and transportation (not commuting costs).

IRS publishes tips for amending returns

If you discover an omission or error made on your already filed tax return, you may need to file an amended return. Here are some IRS tips for amending returns.

  1. Use Form 1040X. You must file a paper amended return; this form can’t be e-filed.
  2. File an amended return to correct errors or change your original filing.
  3. Don’t file an amended return to correct math errors or to attach forms you forgot to attach originally. The IRS will mail a request for the forms and will automatically correct math errors.
  4. You generally have three years from the original filing date to file an amended return.
  5. If you’re filing for multiple years, you must file a separate Form 1040X for each year.
  6. If you’re due a refund from your original filing, wait until you’ve received the original refund before you file Form 1040X for an additional refund.
  7. If you owe more tax with Form 1040X, pay it as soon as possible to avoid added interest and penalties.
  8. You can track the status of your filed Form 1040X with the IRS’s “Where’s My Amended Return?” tool at www.irs.gov

Back to school? Check this tax credit

If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don’t owe any taxes.