January is over and that means one thing: tax season. As an accountant, I get asked tax questions all the time. While I shouldn't give advise on very specific cases, I thought it would be nice to answer a few of the questions I get asked a lot. Taxes are confusing, but with a little bit of time everyone should be able to understand the basics.
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What do I need to file?
The majority of people only need to file a form 1040. When people refer to filing their tax return, this is the form they are referring to. The 1040 is where you report most income, deductions, and basic information (address, number of dependents, filing status, etc.). This is also the form that will tell you if you owe taxes or are due a refund.
The majority of people only need to file a form 1040. When people refer to filing their tax return, this is the form they are referring to. The 1040 is where you report most income, deductions, and basic information (address, number of dependents, filing status, etc.). This is also the form that will tell you if you owe taxes or are due a refund.
Should I itemize or take the standard deduction?
For most people, the standard deduction is the best bet. The itemized deductions are found on schedule A. Most of the deductions have a starting limit, meaning you can't even start to use a specific part of the deduction until it is over a certain percentage of gross income. So in order to itemize, you need to have very high expenses (like lots of charitable giving and a high mortgage and high medical expenses). For a list of what is included on the schedule A, see the instructions to schedule A.
For most people, the standard deduction is the best bet. The itemized deductions are found on schedule A. Most of the deductions have a starting limit, meaning you can't even start to use a specific part of the deduction until it is over a certain percentage of gross income. So in order to itemize, you need to have very high expenses (like lots of charitable giving and a high mortgage and high medical expenses). For a list of what is included on the schedule A, see the instructions to schedule A.
2014 Standard Deduction
- Single $6,100
- Married Filing Jointly $12,200
- Head of Household $8,950
- Married Filing Separately $6,100
- Qualifying Widow(er) $12,200
What is a schedule C?
The schedule C is where you report gains or losses from a personal business. So if you have a small personal business like an etsy shop you would need to fill our the schedule C. On the schedule C, there are boxes for the different areas of income and expenses. If you aren't sure what qualifies as a business expense, the instructions to the schedule C have examples of what does and does not qualify.
If I run my business from home can I deduct the cost of my house?
Most likely not. To deduct home expenses as part of a business the area where the business is run has to be the only business office and it nothing else can occur in that area. For example: if I have a home office in my living room and I also have parties in my living room on occasion, then I can't deduct anything. If I have a home office in my den and that is its only use and I don't have any other office, then I can deduct a portion of my home expenses proportional to the square footage used.
Most likely not. To deduct home expenses as part of a business the area where the business is run has to be the only business office and it nothing else can occur in that area. For example: if I have a home office in my living room and I also have parties in my living room on occasion, then I can't deduct anything. If I have a home office in my den and that is its only use and I don't have any other office, then I can deduct a portion of my home expenses proportional to the square footage used.
Storing wholesale inventory in a garage or using a home as a daycare have different rules. You can look those up in the IRS Publication 587.
What are the rules for educational credits?
The IRS offers two types of educational credits: the American Opportunity Credit and the Lifetime Learning Credit. They both have different rules and are treated differently for tax purposes.
The IRS offers two types of educational credits: the American Opportunity Credit and the Lifetime Learning Credit. They both have different rules and are treated differently for tax purposes.
American Opportunity Credit
This is for people who are in their first four years of post secondary education at an accredited school (Mainly used for the undergrad portion of college). You can deduct any expenses that are directly related to continuing your education. For example: tuition, textbooks, and university fees are all part of continuing education and can be deducted. Health insurance and housing expenses are necessary even if you aren't in school, so they aren't deductible. Computers are only deductible if they are specifically required to take a course. This tax credit is refundable, which means if you don't owe any taxes, you can get refunded for a portion of your expenses.
This is for people who are in their first four years of post secondary education at an accredited school (Mainly used for the undergrad portion of college). You can deduct any expenses that are directly related to continuing your education. For example: tuition, textbooks, and university fees are all part of continuing education and can be deducted. Health insurance and housing expenses are necessary even if you aren't in school, so they aren't deductible. Computers are only deductible if they are specifically required to take a course. This tax credit is refundable, which means if you don't owe any taxes, you can get refunded for a portion of your expenses.
Lifetime Learning Credit
This credit if for anyone seeking any kind of post secondary education including trade schools and graduate programs. There are less expenses allowed to be deducted. For example, tuition and fees are deductible but books that can be purchased anywhere are not deductible. This credit is not refundable, so it can only bring your tax liability to zero.
This credit if for anyone seeking any kind of post secondary education including trade schools and graduate programs. There are less expenses allowed to be deducted. For example, tuition and fees are deductible but books that can be purchased anywhere are not deductible. This credit is not refundable, so it can only bring your tax liability to zero.
Both education credits are offset by grants and scholarships. So if you have to pay $2,000 for tuition and you have a $2,000 grant to pay for school, then you have no expense for the credit. If you have scholarships in excess of your expenses then it is classified as income.
EDIT: Health Care and Taxes
Since health case became mandatory last year, there is a new section on the 1040 for not being covered for the full year. Make sure you fill this out! Also, the deadline to sign up for health care is the 15th of February. The tax for 2015 is much larger than it was for 2014. Don't be caught without insurance.
EDIT: Health Care and Taxes
Since health case became mandatory last year, there is a new section on the 1040 for not being covered for the full year. Make sure you fill this out! Also, the deadline to sign up for health care is the 15th of February. The tax for 2015 is much larger than it was for 2014. Don't be caught without insurance.
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This should be a good start for most people. If you have other basic questions feel free to ask them in the comments. If you have something more specific or advanced, talk with a local tax preparer.