Easy Common Mistakes to Avoid When Filing Taxes

People with a tax return on paper are 20 times more likely to make a mistake that those who use e-file. IRS e-file is the most accurate way to file your tax return in 2015.    Here are eight common mistakes to avoid:


Easy Common Mistakes to Avoid When Filing Taxes

  1. Social Security Numbers (SSN) wrong or omitted.  Be sure to enter all SSNs on your tax return exactly as shown on your social security card.
  2. Incorrect. Names   Be sure to write the names of all those in your tax return as is displayed on their social security cards.
  3. Errors in marital status.    Some people select the wrong filing status, such as head of household instead of single. The Interactive Tax Assistant ,can help you choose the right filing status
  4. Mathematical errors.  Double check your math. For example, be careful when adding or subtracting or when using a form or worksheet to do your calculations. The tax preparation software does the math for you and will prevent errors that can occur on paper.
  5. Errors in the computation of credits or deductions.  Many taxpayers make mistakes when determining Tax Credits, Earned Income Credit for Child, Dependent Care and the Standard Deduction. For example, if you are 65 or older, or is blind, make sure to claim the higher standard deduction.
  6. Wrong bank account numbers.  You should choose the direct deposit of your refund. However, it is very important that bank routing numbers and account are correct in your tax return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit. It may be a long process to recover funds that are sent to the wrong bank account.
  7. Forms without signatures or dates.   An unsigned tax return is like an unsigned check – it is invalid. Remember that both spouses must sign a joint return.
  8. Errors in the Electronic Submissions PIN.  When electronically must sign the return electronically using a Personal Identification Number (PIN). If you know the PIN that you used last year, you can use it now. Do not have it, you must enter your Adjusted Gross Income (AGI, for its acronym in English) of the federal income tax return for 2012. Do not use an AGI amount from the 2012 amended return or of a statement that has been corrected by the IRS.

College Education Credits and 529 Plans Qualified Tuition Programs

Can you use a qualified tuition program (529 Plan) and claim education tax credits?

States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. 529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.


What are Qualified Tuition Expenses?

A student or the student’s parents may claim an education credit for qualified tuition and related expenses paid by or with funds from a QTP, provided the other eligibility requirements are met. However, an individual’s qualifying higher educational expenses must be reduced by tax-free education benefits  plus the amount of the qualifying expenses taken into account in computing an education credit. The amount taken out would normally be things such as scholarships and employer-provided education assistance.


Coverdell ESA

Also remember, if there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.


More Information about Coverdell Education Savings Accounts

For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.

Last year I filed Form 1040 instead of Form 1040NR, now what?

What is a 1040NR?

I’m a foreigner who earned income on a J-1 visa that spanned over 2012 and 2013. Last year, as I had a US address, I filed a 1040 with TurboTax. However, now that I’m back home (in a foreign country), there were issues filing electronically with TurboTax again and TurboTax staff pointed out that as I was considered a non-resident alien the whole time (days spent on a J-1 do not count towards the substantial presence test), I should file Form 1040NR instead and TurboTax can’t do that.


Last year I filed Form 1040 instead of Form 1040NR, now what?

So that’s cool for this year, but what about last year? It took a while (I don’t remember the exact terminology but they sent me a letter saying my form was being investigated or something) but the IRS did end up sending me a return without complaining.

I should mention that I’m in the process of finding a CPA (which is kind of hard when you don’t live in the US), would it be only to help me do this year’s 1040NR, and that of course I’ll be asking him the same thing. However, for the time being, I’d like to have an idea of how big of a deal it is.


How to fill out 1040NR?

Technically you should have filed a Form 1040NR for 2012, as the Form 1040 is only for full-year U.S. residents and citizens. There will likely be a difference in the income tax liability because there are certain deductions that are allowed on the Form 1040 that are not allowed on the Form 1040NR (the most important being the standard deduction).

Who should file 1040NR?

Although the IRS processed the original 2012 return and issued a refund, that does not mean the return was filed correctly. You should technically file an amended 2012 return such that you file a Form 1040NR instead of a Form 1040. The amended return form is 1040X. In general I would expect there to be a balance due with the amended return, but in some cases there may be no difference if your income was relatively small and you worked in a state that assess a state income tax.


J-1 Visa and 1040NR

On a side note: in certain circumstances the employment income you earn on a J-1 VISA may be exempt from U.S. income tax. However, that generally requires you to have been paid out of a non-U.S. payroll and the associated payroll could not have been cross-charged to a U.S. entity. If you received a Form W-2 from your employer reporting your U.S. wages and withholdings then this exception likely does not apply.

Best Tax Credit for Graduate Students

What are the best student tax tips for graduate students?

The “big three” tax credits are the Lifetime Learning Credit, the American Opportunity Credit, and Qualified Tuition and Qualified Education Expenses.

Graduate students are generally not eligible for the American Opportunity Credit, because they are well beyond their fourth year in post-secondary education.


What is the Lifetime Learning Credit?

The Lifetime Learning Credit is non-refundable (as shown under “What is the tax benefit of the lifetime learning credit” here. If a taxpayer is already going to get a refund, even without this credit,  does that mean taking advantage of this credit will not benefit when taking the credit?


Best Tax Credit for Graduate Students

The last option is Qualified Education Expenses, which you can view here. Even though tuition was paid with a student loan, a graduate student can claim up to $4,000 of tuition as a Qualified Education Expense, thereby reducing taxable income by $4,000 (and possibly netting us a larger return in the process). This is probably the best option for most graduate student taxpayers

Generally unless your income is above $160,000 you won’t have more benefit from using the tuition deduction than you would from the credit. Plan on the lifetime learning credit, but don’t be afraid to plug in the deduction instead into an online tax preparation program, to see what happens.


Refundable Tax Credit Explained

Let’s assume you worked all year, but you didn’t withhold anything for federal taxes. Let’s say your tax was calculated as $2000 for the whole year. Let’s also say you qualified for the antoinne85-is-awesome credit, which is a $3000 non-refundable credit. Since your tax came to $2000, you’d be able to take up to $2000 of this credit and owe no tax to Uncle Sam. Now, if that credit was a refundable credit, you’d reduce your tax bill by the first $2000, then the IRS would pay you $1000 on top of that (the difference between your tax bill and the full credit). Most credits aren’t refundable.

In both of the above examples you’d end up getting back any withholding you had for the year, since your total tax ended up being zero. This information should be applicable for must graduate students claiming educational tax credits or deductions.

Are Scholarships Taxable by the IRS?

Are school scholarships taxable by the IRS?

IRS Topic on Scholarships You must include in gross income amounts used for incidental expenses, such as room and board, travel, and optional equipment, and generally, amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. Also, you must include in income any part of the scholarship or fellowship that represents payments for services. 

What part of a scholarship is taxable?

Basically, the portion of the scholarship used for tuition and fees, books, supplies, and equipment are not taxes. The amount over this you are receiving and using for discretionary expenses (Food, Lodging, Transportation, etc) is taxable. You basically got free money that didn’t need to be spent on what the IRS deems “qualified”, so they think you should pay tax on it. Yeah, it sucks. Students tend to get hit hard by that tax because they rarely claim their own exemption.The IRS states that tuition reduction is equal to you receiving a wage from the university, and then turning around and paying it back. This means it is taxable, but you are able to treat it as a tuition expense and claim the lifetime learning credit on the amount of taxable scholarship. See http://www.irs.gov/pub/irs-irbs/irb03-07.pdf


American Opportunity Credit (AOTC) and Form 1098-T Info

The American Opportunity credit that only allows you to use expenses such as tuition and fees reported by the school (i.e. 1098-T) less scholarships, however it offers the largest credit on its own than the other credits. The other education credits allow you deduct other educational expenses not reportable by the school, like books, supplies, etc. The downside, is the benefit is smaller than the American Opp credit.


IRS Form 1098-T

You must remember, everything on your 1098-T is reported to the IRS as well. Any mismatched numbers could trigger an audit down the road. With interest and penalties, it would be much higher than it is now (if changes are necessary). Also, the IRS has significantly increased collections over the past year. They are going after anyone and everyone they can find.

Withholding and Reporting on Tips for Tax Return

How are tips received reported on a tax return?

Generally, you must report all tips you received in 2014 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer as required in 2014 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you did not report to your employer.


Withholding and Reporting on Tips for Tax Return

Tips are taxable income just like wages and tips are included under the broad definition of income that Congress has created. The basic rule is that if you earn tips, you’re responsible for paying income, Social Security and Medicare tax on the tip money you receive. This could be considered self-employment income in certain situations.


Reportable Cash Tips to IRS

Employees who receive cash tips of $20 or more in a calendar month while working, are required to report to their employer the total amount of tips they receive. The employees must give written reports by the tenth of the following month. Employees who receive tips of less than $20 in a calendar month are not required to report their tips to you but must report these amounts as income on their tax returns and pay taxes, if any.

If your employer doesn’t have a process for reporting tip income, you can use Form 4070. If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50 percent of the Social Security and Medicare tax you fail to pay.


What Tax Forms to Report Tips:

Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to figure social security and Medicare taxes and/or Form 8959, Additional Medicare Tax, to figure Additional Medicare Tax. Enter the tax(es) on your return as instructed, and attach the completed Form 4137 and/or Form 8959 to your return.

  • IRS Form 4070
  • IRS Form 4137


Common examples of service charges (sometimes called “auto-gratuities”) in service industries are:

  • Large Party Charge (restaurant),
  • Bottle Service Charge (restaurant and night-club),
  • Room Service Charge (hotel and resort),
  • Contracted Luggage Assistance Charge (hotel and resort), and
  • Mandated Delivery Charge (pizza or other retail deliveries).


Who Must Report Tip Income?

Remember, the requirement to report tip income isn’t just for restaurant employees. There is also no threshold amount you have to reach, either for tips to be required reported on a tax return. The IRS is looking out for people who work in industry where tips are commonly received and will try to find out this information on an audit. The best advice is to use the proper forms and to report the tips you receive on your tax return. If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report on your income tax return any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.

Claiming a Personal Exemption on Tax Return

How to Claim a Personal Exemption?

Claiming a person exemption is one way that the IRS lets individuals reduce the amount of taxes that they owe. For certain taxpayers, the combination of the personal exemption and standard deduction may eliminate all the taxes that a person owes. You generally can take one for yourself and, if you are married, one for your spouse.


Claiming a Personal Exemption on Tax Return

Generally, an individual taxpayer may generally claim a personal exemption deduction for himself or herself equal to the exemption amount for the year ($3,900 for 2013; $3,950 for 2014) on their tax return, plus any exemptions for dependents. The amount of exemptions that a taxpayer plans on taking can be adjusted on their W-4 Form that they fill out with their employers. Getting this amount correct on the W-4 is a good way to ensure that an employer is not over withholding for taxes.


Who cannot take a person exemption?

An individual who is eligible to be claimed as a dependent on another taxpayer’s return cannot take a personal exemption. This is something that children who decide to file their own tax returns should watch out for. Students working part-time during the year or for the summer may not claim a personal exemption on their own return if their parents, or any other taxpayers, are entitled to claim them on their return. If dependents who are not allowed their own exemptions have gross income in an amount not exceeding $1,000 in 2013 ($1,000 for 2014), they will not be taxed on that amount and need not file income tax returns.


Personal Exemption Rules for Different Filing Status

  • A husband and wife are allowed at least two personal exemptions if they file a joint return together. This is true even if one spouse has no income.
  • If a husband and wife file a joint return, neither can be claimed as a dependent on the return of any other taxpayer.
  • If a husband and wife file separate returns, each must take his or her own exemption on their respective return.
  • If a husband or wife file separate returns and one of the spouses has no gross income and is not the dependent of another taxpayer, then the spouse with gross income may claim the personal exemption for the other spouse on his or her separate return.
  • A married taxpayer who files a separate return may not claim two exemptions for his spouse, one as a spouse and one as a dependent.


Resident Alien and Claiming a Personal Exemption on Tax Return

A resident alien may claim his or her own personal exemption and, if he or she files a joint return, may claim a similar exemption for his or her spouse.

Information about the Hope Scholarship Credit

What is the Hope Scholarship Tax Credit?

In general, the Hope Scholarship provides a federal income tax credit based on the first $4,000 in postsecondary education expenses paid by the taxpayer during the tax year. This could be a very useful student tax credit depending on what stage the taxpayer is currently at in their education.The American opportunity credit modifies the Hope Scholarship credit for any tax years beginning in 2009 through 2017. The maximum amount of the credit is $2,500 and 40% of the Hope credit is refundable (up to $1,000).


Information about the Hope Scholarship Credit

For tax years beginning after December 31, 2017, the Hope scholarship credit amount per eligible student is equal to 100 percent of the first $1,000 of qualified tuition expenses and 50 percent of the second $1,000 of qualified tuition paid during the year. In order to claim this education tax credit, several eligibility requirements must be met first.


An eligible student for the Hope Tax credit is any individual who:

  • has not elected to claim the Hope credit in any two earlier years;
  • has not completed the first two years of post-secondary education before the beginning of the current tax year;
  • is enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credentials; and
  • has not been convicted of any Federal or State felony class drug offense for possession or distribution.

A student must meet all of the requirements in order to claim the federal tax credit also known as the Hope scholarship.


You may claim the Hope Scholarship credit if:

  • You pay qualified tuition and related expenses (defined below) for the first 4 years of postsecondary education.
  • The qualified expenses are for an eligible student (defined below).
  • You show the name and taxpayer identification number of the eligible student on the return.
  • You show the name and address of the qualifying educational institution and in most cases show the federal employer identification number of the institution.
  • Your modified adjusted gross income is below a certain dollar limitation.
  • You are not listed as a dependent in the exemption section of another person’s tax return (such as your parents’).
  • If you are married, your filing status is married filing jointly.
  • You do not claim the lifetime learning credit for the same student in the same year.
  • If you (or your spouse) are a nonresident alien for any part of the tax year, the nonresident alien elects to be treated as a resident alien for tax purposes. For additional information, refer to Publication 519U.S. Tax Guide for Aliens.

In general, qualified tuition and related expenses means tuition, fees and course materials required for the enrollment or attendance of you, your spouse or your dependent with respect to whom you are allowed a deduction, at an eligible educational institution.


How much of Hope Scholarship Credit is Refundable?

One other good aspect of the Hope Scholarship is that the tax credit is partially refundable. If the taxpayer does not have sufficient tax liability to fully offset the tax credit, up to 40% of the amount of the tax credit may be refunded to the taxpayer. For example, if the taxpayer has $4,000 in education expenses (enough for a $2,500 tax credit) but only $1,500 in tax liability, the taxpayer may obtain the remaining $1,000 tax credit as a refund.

Deducting out-of-pocket classroom-related expenses of school teachers

What are the tax rules that teachers can use to deduct out of pocket classroom related expenses?

School teachers will often pay for school supplies with their own money. This can get expensive as many schools are cutting back on the supply budgets of school teachers. Congress realizes that teachers doing this is common and provides a special tax break for teachers. The important news is that if you qualify as an “eligible educator,”  a school teacher will be allowed a “classroom expense deduction” of up to $250 for expenses paid during the school year.


Deducting out-of-pocket classroom-related expenses of school teachers

Generally, the deduction is possible with expenses paid for books, certain supplies, computer equipment, software, other equipment, and supplementary materials you use in the classroom

A nice thing about this deduction is that the classroom expense deduction is allowed whether or not you itemize deductions. Most of the time, unreimbursed expenses are among the “miscellaneous itemized deductions” that are deductible only to the extent your total “miscellaneous itemized deductions” exceed 2% of your adjusted gross income (AGI). This would prohibit the deduction of most expenses, because the limit could be very high.


Who is an eligible educator for tax deduction?

An “eligible educator” is an individual who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year, and a school is any school which provides elementary education or secondary education (kindergarten through 12th grade), as determined under state law.

To be deductible-under both the classroom expense deduction rule and the unreimbursed employee business expense rule-expenses must be “ordinary and necessary expenses” that you pay in connection with doing your job as a teacher. This means that the expenses must be customary and usual for teachers in your type of school located in your area, and must be appropriate or helpful (but not necessarily essential) to doing your job properly. The ordinary and necessary test will depend on the area in which a teacher is teaching.


What kind of expenses can teachers deduct on taxes?

The biggest qualification for this is that the expense must not be reimbursable by an employer. The item must also be for something that occurs in the classroom. A teacher would not be able to pay for expenses related to an out of classroom field trip.


Deducting Expenses as Teacher

In order to claim a deduction for classroom expenses-either under the classroom expense deduction rule or the unreimbursed employee business expense rule-you must be able to prove that you paid the expenses, when you paid them, and what the expenses were for. It is absolutely necessary for receipts for the items purchased showing the date and amount of the purchase, and identifying the specific items purchased, will usually do the trick.. Photographs of the items in the classroom would be helpful in this regard and can substantiate the classroom deduction expenses upon an IRS audit.  The deduction is not available for expenses paid after Dec. 31, 2013.


$250 classroom expense deduction 

In addition to these requirements, the up-to-$250 classroom expense deduction is subject to one further limitation: the deduction is allowed for expenses only to the extent the amount of those expenses exceeds the sum of the following amounts that are excluded from gross income for the tax year:

  • redemption proceeds from U.S. savings bonds redeemed to pay for qualified higher education expenses;
  •  certain amounts distributed from so-called “qualified tuition programs” (also called “529 plans”) for the financing of qualified higher education expenses; and
  • certain amounts distributed from Coverdell education savings accounts for qualified education expenses.

Special Education Expenses deducted as Medical Expense

Deducting Special Education Costs as Medical Expense

The IRS has generous tax rules for taxpayers who find themselves in situation in which they may have more living expenses than other taxpayers. Expenses that taxpayers incur in order to enable a child to compensate for or overcome disabilities or to prepare a child for future normal education or normal living are deductible medical expenses and can be deducted yearly on a tax return.

Special Education Expenses deducted as Medical Expense

In general, any expenses for therapy that helps your child’s adaptation are deductible medical expenses. In addition, the expenses of your child’s schooling at a “special school” for mentally or physically disabled individuals are deductible if the resources of the school are the reason for your child’s presence and the educational services provided are rendered only as an incident to the medical care provided. The IRS says exactly, ‘“Deductibility of tuition depends on exactly what the school provides an individual because a school can have a normal education program for most students, and a special education program for those who need it. Thus, a school can be ‘special’ for one student and not for another.”


Schools Qualifying for Medical Expense Deduction

A school qualifies as a special school only if the primary focus of its curriculum is to enable students to compensate for or overcome disabilities, and to prepare them for future normal education or normal living. Schools that would qualify for the medical expenses deduction would be:

  • schools that provides special services for children with mental and/or physical disabilities, such as schools for the teaching of braille or lip reading are special schools because the primary purpose of the schools is alleviating or treating a physical handicap.
  • Similarly, schools with special programs for treating severe learning, mental, psychological or emotional disorders or dyslexia are special schools.

In contrast, a school that does not provide a special program, but is beneficial because of its small class size or because it provides added services within a normal academic setting, is not a special school, since the primary purpose of the school is academic. No tax deduction would be allowed for sending a child to an ordinary school.


Deducting the cost of special medical expenses

In addition, a taxpayer cannot deduct any special education expenses to the extent the expenses are borne by the state or locality. Remember that before deducting the cost of special medical expenses,  the medical expense deduction is limited to the amount that exceeds 7.5% of your adjusted gross income.