Individual Tax Advice

The ABCs of the tax deduction for educator expenses

At back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses.

The miscellaneous itemized deduction

Generally, your employee expenses are deductible if they’re unreimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business.

These expenses must be claimed as a miscellaneous itemized deduction and are subject to a 2% of adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed 2% of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet.

The educator expense deduction

Congress created the educator expense deduction to allow more teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses. The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

An added benefit

The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit: Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.

Contact us for more details about the educator expense deduction or tax breaks available for other work-related expenses.

Tax Accounting and Business Consulting for Metairie, Louisiana
Industry Specific Accounting
Metairie CPA Services
Metairie CPA News

Tax Accounting and Business Consulting for Mandeville, Louisiana
Industry Specific Accounting
Mandeville CPA Services
Mandeville CPA News

Tax Accounting and Business Consulting for Baton Rouge, Louisiana
Industry Specific Accounting
Baton Rouge CPA Services
Baton Rouge CPA News

Tax Accounting and Business Consulting for Covington, Louisiana
Industry Specific Accounting
Covington CPA Services
Covington CPA News

Mandeville Notary Public Services
Madisonville Notary Public Services
Covington Notary Public Services

 

How to determine if you need to worry about estate taxes

Among the taxes that are being considered for repeal as part of tax reform legislation is the estate tax. This tax applies to transfers of wealth at death, hence why it’s commonly referred to as the “death tax.” Its sibling, the gift tax — also being considered for repeal — applies to transfers during life. Yet most taxpayers won’t face these taxes even if the taxes remain in place.

Exclusions and exemptions

For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, then no federal estate tax will be due.

Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But every gift you make won’t use up part of your lifetime exemption. For example:

• Gifts to your U.S. citizen spouse are tax-free under the marital deduction. (So are transfers at death — that is, bequests.)
• Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
• Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
• Each year you can make gifts up to the annual exclusion amount ($14,000 per recipient for 2017) tax-free without using up any of your lifetime exemption.

What’s your estate tax exposure?

Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does. So you could have state estate tax exposure even if you don’t need to worry about federal estate tax.

If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us. We also can keep you up to date on any estate tax law changes.

Tax Accounting and Business Consulting for Metairie, Louisiana
Industry Specific Accounting
Metairie CPA Services
Metairie CPA News

Tax Accounting and Business Consulting for Mandeville, Louisiana
Industry Specific Accounting
Mandeville CPA Services
Mandeville CPA News

Tax Accounting and Business Consulting for Baton Rouge, Louisiana
Industry Specific Accounting
Baton Rouge CPA Services
Baton Rouge CPA News

Tax Accounting and Business Consulting for Covington, Louisiana
Industry Specific Accounting
Covington CPA Services
Covington CPA News

Mandeville Notary Public Services
Madisonville Notary Public Services
Covington Notary Public Services

Will Congress revive expired tax breaks?

Most of the talk about possible tax legislation this year has focused on either wide-sweeping tax reform or taxes that are part of the Affordable Care Act. But there are a few other potential tax developments for individuals to keep an eye on.

Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The question now is whether Congress will extend them for 2017.

An education break

One break the PATH Act extended through 2016 was the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers).

You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings.

But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts.

Mortgage-related tax breaks

Under the PATH Act, through 2016 you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. The deduction phased out for taxpayers with AGI of $100,000 to $110,000.

The PATH Act likewise extended through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modified the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. So even if this break isn’t extended, you might still be able to benefit from it on your 2017 income tax return.

Act now

Please check back with us for the latest information. In the meantime, keep in mind that, if you qualify and you haven’t filed your 2016 income tax return yet, you can take advantage of these breaks on thattax return. The deadline for individual extended returns is October 16, 2017.

Tax Accounting and Business Consulting for Metairie, Louisiana
Industry Specific Accounting
Metairie CPA Services
Metairie CPA News

Tax Accounting and Business Consulting for Mandeville, Louisiana
Industry Specific Accounting
Mandeville CPA Services
Mandeville CPA News

Tax Accounting and Business Consulting for Baton Rouge, Louisiana
Industry Specific Accounting
Baton Rouge CPA Services
Baton Rouge CPA News

Tax Accounting and Business Consulting for Covington, Louisiana
Industry Specific Accounting
Covington CPA Services
Covington CPA News

Mandeville Notary Public Services
Madisonville Notary Public Services
Covington Notary Public Services

A refresher on the ACA’s tax penalty on individuals without health insurance

Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”

Penalty exemptions

Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:

• Their household income is below the federal income tax return filing threshold.
• They lack access to affordable minimum essential coverage.
• They suffered a hardship in obtaining coverage.
• They have only a short-term coverage gap.
• They qualify for an exception on religious grounds or have coverage through a health care sharing ministry.
• They’re not a U.S. citizen or national.
• They’re incarcerated.
• They’re a member of a Native American tribe.

Calculating the tax

So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentativeamount equals the greater of the following two prongs:

1. The applicable percentage of your household income above the applicable federal income tax return filing threshold, or
2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.

In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).

The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.

If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.

Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.

Tax Accounting and Business Consulting for Covington, Louisiana
Industry Specific Accounting
Covington CPA Services
Covington CPA News

Tax Accounting and Business Consulting for Metairie, Louisiana
Industry Specific Accounting
Metairie CPA Services
Metairie CPA News

Tax Accounting and Business Consulting for Mandeville, Louisiana
Industry Specific Accounting
Mandeville CPA Services
Mandeville CPA News

Tax Accounting and Business Consulting for Baton Rouge, Louisiana
Industry Specific Accounting
Baton Rouge CPA Services
Baton Rouge CPA News

Mandeville Notary Public Services
Madisonville Notary Public Services
Covington Notary Public Services