By Bill
Two Tax Credits Help Pay Higher Education Costs
Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts from the IRS about these important credits.
The American Opportunity Credit is:
- Worth up to $2,500 per eligible student.
- Only available for the first four years at an eligible college or vocational school.
- Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
- For students earning a degree or other recognized credential.
- For students going to school at least half-time for at least one academic period that started during the tax year.
- For the cost of tuition, books and required fees and supplies.
The Lifetime Learning Credit is:
- Limited to $2,000 per tax return, per year, no matter how many students qualify.
- For all years of higher education, including classes for learning or improving job skills.
- Limited to the amount of your taxes.
- For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.
For both credits:
- Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.
- You must file Form 8863, Education Credits, to claim these credits on your tax return.
- You can’t claim either credit if someone else claims you as a dependent.
- You can’t claim both credits for the same student or for the same expense, in the same year.
- The credits are subject to income limits that could reduce the amount you can claim on your return.
- Visit IRS.gov and use the Interactive Tax Assistant tool to see if you’re eligible to claim these credits.
See Publication 970, Tax Benefits for Education for more on this topic. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
By Bill
Reporting Gambling Income & Losses
Introduction
Gambling losses are indeed tax deductible, but only to the extent of your winnings. This requires you to report all the money you win as taxable income on your return. However, the deduction for your losses is only available if you are eligible to itemize your deductions. If you claim the standard deduction, then you can’t reduce your tax by your gambling losses.
Keeping track of your winnings and losses
The IRS requires you to keep a diary of your winnings and losses from lotteries, raffles, horse and dog races, casino games, poker games and sports betting as a prerequisite to deducting losses from your winnings. Your diary must include the date and type of gambling you engage in, the name and address of the places where you gamble, the people you gambled with and the amount you win and lose. Other documentation to prove your losses can include Form W-2G, Form 5754, wagering tickets, canceled checks or credit records and receipts from the gambling facility.
Limitations on loss deductions
The amount of gambling losses you can deduct can never exceed the winnings you report as income. For example, if you have $5,000 in winnings but $8,000 in losses, your deduction is limited to $5,000. You could not write off the remaining $3,000, or carry it forward to future years.
Reporting gambling losses
To report your gambling losses, you must be eligible to itemize your income tax deductions on Schedule A. You are eligible to itemize deductions if your gambling losses plus all other itemized expenses are greater than the standard deduction for your filing status. This means that if you claim the standard deduction, you are still obligated to report and pay tax on all winnings you earn during the year. However, you will not be able to deduct any of your losses.
Only gambling losses
The IRS does not permit you to simply subtract your losses from your winnings and report your net profit or loss. And if you have a particularly unlucky year, you cannot just deduct your losses without reporting any winnings. If the IRS allowed this, then it’s essentially subsidizing taxpayer gambling. The bottom line is that losing money at a casino or the race track does not by itself reduce your tax bill. You need to first owe tax on winnings before a loss deduction is available. Therefore, at best, deducting your losses allows you to avoid paying tax on your winnings, but nothing more.
By Bill
Ten Facts about Capital Gains and Losses
When you sell a ’capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:
1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.
2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
3. You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. For details see IRS.gov/aca.
4. You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.
5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’
7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.
8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.
10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.
For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses. They’re both available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).