Monthly Archives: May 2013

American Opportunity Credit Helps Pay for First Four Years of College

College Students May be Eligible for Tax Breaks According to Scarsdale CPA

The American Opportunity Tax Credit can help college students save big bucks!

Scarsdale CPA Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

More parents and students can use a federal education credit to offset part of the cost of college under the  American Opportunity Credit. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

  • Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
  • The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
  • Forty percent of the American Opportunity Credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax. See IRS Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, please contact us or see IRS Publication 970, Tax Benefits for Education.

Business Expenses

Westchester accountants at Herman & Company CPA’s have all the answers to your personal finance questions!

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. Business-Expense-Tips-from-Westchester-Accountant

 

 

 

 

 

 

 

 

An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold
  • Capital Expenses
  • Personal Expenses

Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold:

  • The cost of product or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses

  • Employees’ Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirement.
  • Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

Our Westchester accounting firm is here for all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

Increased Medicare Payroll Tax

Westchester accountants at Herman and Company CPA’s have all the answers to your personal finance questions!

The Medicare payroll tax is the primary source of financing for Medicare, which generally pays medical bills for individuals who are 65 or older or disabled. Wages paid through December 31, 2012, were subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed individuals pay both halves of the tax, but are allowed to deduct the employer-equivalent portion (i.e., 1.45%) for income tax purposes.

Westchester NY CPA Medicare Tips

Make sure you’re up to date on this year’s increased Medicare payroll taxes!

Unlike the social security payroll tax, which applies to earnings up to an annual ceiling ($113,700 for 2013), the Medicare tax is levied on all of an employee’s wages subject to FICA taxes.

Beginning in 2013, individuals who have wage and/or self-employment income exceeding $200,000 ($250,000 if married, filing a joint return; $125,000 if married, filing separately) are subject to an additional 0.9% Medicare tax (i.e., 2.35% total) on their earned income exceeding the applicable threshold. The employer portion of the Medicare tax is not increased. However, employers are required to withhold and remit the additional tax for any employee to whom it pays over $200,000. Companies are not responsible for determining whether a worker’s combined income with his or her spouse makes the employee subject to the additional tax. Therefore, many individuals (especially those who are married with each earning less than $200,000, but earning more than $250,000 combined) should adjust their federal income tax withholding (FITW) by submitting a new Form W-4 to the employer or make quarterly estimated tax payments to be sure they are not hit with an underpayment penalty when filing their income tax return each year.

Self-employed individuals who pay both halves of the Medicare tax (i.e., 2.9%) will pay a total Medicare tax of 3.8% on earnings above the thresholds. The additional 0.9% tax is not deductible for income tax purposes. Self-employed individuals should adjust their quarterly estimated income tax payments to account for this additional tax.

Married couples with combined incomes approaching $250,000 should keep tabs on their total earnings to avoid an unexpected tax bill when filing their individual income tax return. At this time, the threshold amounts ($200,000/$250,000) are not adjusted for inflation. Therefore, it is likely that increasingly more people will be subject to the higher payroll taxes in coming years.

Please contact our Westchester NY CPA firm for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Larchmont NY, Mount Kisco NY, Purchase NY, Scarsdale NY, White Plains NY, Bedford Hills NY, Chappaqua NY and beyond.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.