Even if you think you know taxes, it’s easy to miss these breaks — whether you’re filing your 2019 income-tax return, making the most of your employer’s tax-advantaged benefits, contributing extra money to tax-deductible accounts, or understanding little-known expenses that qualify for tax-free withdrawals from 529s and health savings accounts. The following breaks and strategies can save you hundreds — or even thousands — of extra dollars in taxes. And it’s not too late to get a refund for some of these breaks if you missed them in the past.
Tax break for summer camp. If you have children under age 13 and pay for childcare while you and your spouse work (or if one of you works and the other spouse is a full-time student), you can claim the child-care tax credit, which can be worth from $600 to $1,050 if you have one child or $1,200 to $2,100 if you have two or more children, depending on your income. A wide range of care qualifies for the credit, including daycare, a nanny, preschool (before kindergarten), before- and after-school care, and even the cost of day camp in the summer or during school breaks (sleepaway camp doesn’t count).
To calculate the credit, see the income table in Form 2441 Child and Dependent Care Expenses. You must submit this form to claim the credit when you file your income-tax return, and you must include the care provider’s Social Security number or Tax ID. For more information, see IRS Publication 503 Child and Dependent Care Expenses.
Child-care credit even if you’ve maxed out your dependent-care FSA at work. If your employer offers a dependent-care flexible-spending account, where you can set aside up to $5,000 per year in pre-tax money for child-care costs, that’s usually an even better deal than the child-care tax credit, especially as your income rises. You can’t double-dip tax breaks, so you can’t take the child-care credit for the same expenses you paid with tax-free money from the dependent-care FSA. But if you have two or more children, you may still be able to take part of the child-care credit for extra expenses.
The most you can contribute to a dependent-care FSA is $5,000 per household per year. But if you have two or more children who are under age 13, you can count $6,000 in child-care expenses towards the child-care tax credit (or $3,000 if you have one child). That means families who have two or more children and $6,000 or more in child-care costs can count up to $1,000 extra towards the child-care tax credit, even if they’ve already maxed out their FSA. Depending on your income, that could cut your tax liability by an extra $200 to $350.
Extra credit for saving. If you contribute to a retirement-savings account — such as a 401(k), IRA, 403(b), 457, or the Thrift Savings Plan — you may already get a tax deduction for your contributions and benefit from tax-deferred growth of your investments. If you contribute to a Roth IRA, you don’t get a tax break now but can take tax-free withdrawals in retirement. And low- and middle-income people (and even retirees who work part-time) may get an additional tax break beyond those benefits, just for contributing to a retirement-savings account. Depending on your income, you may qualify for the Retirement Saver’s Credit, which reduces your tax liability by $200 to $1,000 per person. Your 2019 adjusted gross income must be less than $38,500 if married filing jointly, $28,875 for head of household, or $19,250 if single. You’ll need to complete Form 8880 when you file your income-tax return to claim the credit. See the IRS’s Saver’s Credit Factsheet for the calculation and more information.
American Opportunity Credit for college tuition, fees and books. This tax credit is worth up to $2,500 per student for each of the first four years of college. The student must be enrolled at least half-time for one academic period during the year in a program leading to a degree, certificate or other recognized educational credential. Money spent on tuition, fees and books counts towards the credit; room and board does not. The credit is worth 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000, totaling $2,500 for each of the four years. To claim the credit for 2019, your modified adjusted gross income must have been less than $90,000 if single or filing as head of household, or $180,000 if married filing jointly. See IRS Publication 970, Tax Benefits for Education for details.
Tax credit for grad school and continuing education. The American Opportunity Credit only counts for the first four years of college, but if you take longer to finish your undergraduate program, or if you’re in graduate school, or even if you’re taking continuing education classes, then you may be able to claim the Lifetime Learning Credit for those costs. There is no limit to the number of years you can claim this credit. The course must be part of a postsecondary degree program or taken to acquire or improve job skills, and must be offered by an eligible educational institution (which includes any college, university, vocational school or other postsecondary educational institution eligible to participate in a U.S. Department of Education student aid program). The Lifetime Learning Credit is worth 20% of the first $10,000 of tuition, with a maximum of $2,000 per tax return. To qualify for 2019, your modified adjusted gross income must have been less than $68,000 if single or filing as head of household, or $136,000 if married filing jointly. See IRS Publication 970, Tax Benefits for Education for details.
Tax-free 529 withdrawals for an off-campus apartment — and some new tax-free withdrawals, too. Not only can you take tax-free withdrawals from a 529 account if the student lives in a dorm, but you can also withdraw money tax-free from a 529 plan to pay rent if the student lives in an off-campus apartment and is enrolled at least half-time in college or other eligible post-secondary school. You can withdraw the amount you pay for rent, up to the room-and-board allowance the college includes in the cost of attendance for federal financial aid purposes (that number is usually listed at the college’s website or you can ask the financial aid office).
Also, you may be able to take tax-free 529 withdrawals for some new types of expenses. In addition to the cost of tuition, room and board, fees, books and a computer for students in college and other eligible post-secondary school, you can now withdraw up to $10,000 per student each year tax-free to pay tuition for kindergarten through 12th grade. And under a new law passed in December (the Secure Act), you can also withdraw up to $10,000 from a 529 tax-free to pay qualified education loans (the $10,000 for student loans is a lifetime limit). The Secure Act also lets you withdraw money tax-free from a 529 plan for apprenticeship programs. For more information about 529 plans, see https://www.savingforcollege.com/ Savingforcollege.com.
Older taxpayers can get a break for charitable contributions even if they don’t itemize. You can only take the charitable deduction if you itemize your income-tax deductions — and fewer people itemize now that the standard deduction is so much higher than it had been in the past. But if you’re older than 70 ½, you can take a “qualified charitable distribution” from your IRA. This means you can transfer up to $100,000 tax-free directly from your IRA to a charity each year. The money you transfer isn’t included in your adjusted gross income but counts as your required minimum distribution. Even though the Secure Act increased the age people need to start taking RMDs from their retirement savings from 70 ½ to 72 starting in 2020, you can still make a tax-free transfer from an IRA to charity anytime after you turn age 70 ½.
Tax-free HSA withdrawals for Medicare premiums. People age 65 and older who have a health savings account can withdraw money tax-free from the HSA to pay premiums for Medicare Part B, Part D and Medicare Advantage plans (but not for Medigap). You can take this tax-free withdrawal even if you have your Medicare premiums automatically deducted from your Social Security benefits — you just need to keep records showing the expense and reimburse yourself from the HSA. For more information about tax-free HSA withdrawals, including some frequently overlooked HSA Strategies, see Six strategies to make the most of a health savings account.
Tax-free HSA withdrawals for long-term care insurance premiums. You can also withdraw money tax-free from an HSA to pay a portion of your long-term care insurance premiums. Most standalone long-term care policies are eligible, but hybrid policies generally are not. The amount you can withdraw for long-term care premiums each year is based on your age — it’s $430 in 2020 if you’re age 40 or younger, $810 if age 41 to 50; $1,630 if age 51 to 60; $4,350 if age 61 to 70, and $5,430 if you’re older than 70.
Tax breaks for freelance work. Even if do just a little freelance work, you can make tax-deductible contributions to a small business retirement plan, such as a Simplified Employee Pension or a solo 401(k) plan. Your contributions can reduce your taxable income and grow tax-deferred until retirement. And you still have until April 15, 2020, to make tax-deductible contributions to a SEP based on 2019 self-employed income. For more information, see Retirement savings options for freelancers.
Get a refund from tax breaks you missed in the past. If you discover you missed tax credits or deductions in the past, you generally have up to three years after the tax-filing deadline to file an amended return and get the money back in a refund. File Form 1040X, enter the year of the return you are amending, fill in the new numbers, and attach any tax forms that are affected by the change. (You can’t file an amended return electronically; you have to file the return on paper and mail it to the IRS.) Also file an amended return with your state, along with a copy of your federal Form 1040X.
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