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FAQ: Deductions | October 2012

Question: Can I deduct separate maintenance paid to my spouse or alimony paid to my former spouse?

Answer:

If you are separated or divorced, you may generally deduct payments of separate maintenance or alimony paid in cash (including check or money order payable on demand) to, or on behalf of, your spouse or former spouse.

 

Question: Am I eligible to claim both my job-related education expenses (minus 2% of AGI) and the Lifetime Learning Credit on my tax return?

Answer:

If you are eligible to deduct educational expenses and are also eligible for one of the education credits (the Lifetime Learning Credit or the American Opportunity Tax Credit), then it is possible to claim both. You cannot use the SAME educational expenses to claim both benefits (no “double benefit”).

  • You may choose to allocate some of your expenses to the deduction and others to the credit.
  • This can be desirable because a qualifying expense for one benefit may not be a qualifying expense for the other tax benefit. For example, the cost of course-related books ordinarily qualifies for the deduction, but not for the Lifetime Learning Credit. For tax years beginning in 2009 and 2010, course-related books may qualify for the American Opportunity Tax Credit.

 

 

Question: What types of work-related educational expenses are deductible?

Answer:

Deductible work-related educational expenses include:

  • Amounts spent for tuition, books, supplies, laboratory fees and similar items.
  • Transportation and travel expenses to attend qualified educational activities may also be deductible.

 

 

Question: Is interest on a home equity line of credit deductible as a second mortgage?

Answer:

You may deduct home equity debt interest, as an itemized deduction, if all the following conditions apply:

  • You are legally liable to pay the interest
  • You pay the interest in the tax year
  • The debt is secured with your home
  • The home equity debt is limited to the fair market value of the home reduced by home acquisition debt, up to a total of $100,000.
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FAQ: Education Credits

Question:   Do tuition and related expenses paid to attend a private high school qualify for an education credit?
Answer:   No. Expenses paid to attend a private high school do not qualify for an education credit because a high school is not an eligible educational institution.In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution.  In addition, in order to be an eligible educational institution, the school must be eligible to participate in a student aid program administered by the Department of Education.
Question:   What expenses qualify for an education credit?
Answer:   Expenses that qualify for an education credit are qualified tuition and related expenses paid by the taxpayer during the taxable year.  Qualified tuition and related expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent at an eligible educational institution for courses of instruction.  An eligible educational institution means a college, university, vocational school or other postsecondary educational institution that is accredited and eligible to participate in the student aid programs administered by the Department of Education.Qualified tuition and related expenses do not include the following types of expenses:
  • Expenses related to any course of instruction or education involving sports, games or hobbies, or to any noncredit course (unless the course is part of the student’s degree program or, in the case of the Lifetime Learning Credit, the student takes the course to improve job skills),
  • Student activity fees (unless required for enrollment or attendance),
  • Athletic fees (unless required for enrollment or attendance),
  • Costs of room and board,
  • Insurance premiums or medical expenses (including student health fees),
  • Transportation expenses, and
  • Other personal, living or family expenses.

In general, qualified tuition and related expenses generally do not include the costs of books, supplies and equipment, because eligible educational institutions usually do not require payment of those costs to the institution as a condition of the student’s enrollment or attendance.  For taxable years 2009 through 2012, however, qualified tuition and related expenses include costs of course materials, as well as tuition and fees, required for the student’s enrollment or attendance at an eligible education institution.

Question:   Who can claim the Hope Credit or the American Opportunity Credit?
Answer:   Generally, you can claim the Hope Credit if all three of the following requirements are met:
  • You pay qualified tuition and related expenses for the first 2 years of postsecondary education.
  • The tuition and related expenses are for an eligible student.
  • The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return.

You cannot claim the Hope Credit if any of the following applies:

  • Your filing status is married filing separately.
  • You are listed as a dependent in the Exemptions section of another person’s tax return (such as your parents’).
  • Your modified adjusted gross income is above a certain dollar limitation.
  • You (or your spouse) were a nonresident alien for any part of the tax year, and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
  • You claim the Lifetime Learning Credit for the same student in the same year.

In general, the Hope Credit is based on tuition and related expenses required for enrollment or attendance at an eligible educational institution.

For a taxpayer to claim the Hope Credit, the student for whom you pay tuition and related expenses must be an eligible student. To be an eligible student, generally, the student must:

  • Not have had expenses that were used to figure a Hope Credit in any 2 earlier tax years.
  • Not have completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before this tax year.
  • Must have been enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year.
  • Must have been free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

For tax years 2009, 2010, 2011, and 2012, the American Opportunity Tax Credit modifies the Hope Credit as follows:

  1. The maximum amount of the credit is increased to $2,500.00.
  2. The credit can now be claimed for the first 4 years, not 2, of postsecondary education.
  3. The modified adjusted gross income limitations are increased.
  4. Qualified expenses include course materials.
  5. Generally, 40% of the Hope Credit is now refundable (up to $1,000).

However, for a student who attended an educational institution located in a Midwest disaster area, you can choose instead to claim the credit under the previous rules, but then you must use the previous rules for all students for whom you claim the credit.

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FAQ: Refund Splits

Question: What is a split refund?

Answer: A split refund lets you divide your refund, in any proportion you want, and direct deposit the funds in up to three different accounts with U.S. financial institutions.

 

Question: What are the benefits of splitting my refund?

Answer: By splitting your refund, you get the convenience of directing some of your refund to your checking account for immediate needs and sending some to savings for future use. Plus, you get the safety and speed of direct deposit, meaning you will have access to your refund faster than if you opt to receive a paper check.

Instead of choosing between depositing your refund into a checking or saving account and later moving part of your refund to another account, you can allocate your refund among up to three different accounts and send your money where you want it the first time.

 

Question: Does my refund have to exceed a certain amount to split it into different accounts?

Answer: Your deposit to each account must be at least $1.00.

 

Question: Must I file electronically to split my refund?

Answer: No, you can split your refund regardless of whether you file electronically or on paper.

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Small Business FAQs | October 2011

Question:   If I, a sole proprietor, pay personal expenses out of my business bank account, should I count the money used as part of my income? Can I write these expenses off?
Answer:   
  • You would include the money used to pay personal expenses in your business income when it was earned by your business.

  • You would not write off these expenses because they are not ordinary and necessary costs of carrying on your trade or business.

  • Personal, living, or family expenses which are not specifically provided by law are not deductible.

  • It is recommended that you not mix business and personal accounts as this makes it easier to keep records.

Question:   Must a partnership or corporation file a tax form even though it had no income for the year?
Answer:   A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.A domestic corporation must file an income tax form whether it has taxable income or not.

 

Question:   Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?
Answer:   Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership unless the spouses elect to be treated as a Qualified Joint Venture or, in a community property state,Rev. Proc. 2002-69 applies.
A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a “qualified joint venture.” Requirements for a qualified joint venture:
• The only members in the joint venture are a husband and wife who file a joint tax return,
• The trade or business is owned and operated by the spouses as co-owners (and not in the name of a state law entity such as an LLC or LLP),
• The husband and wife must each materially participate in the trade or business, and
• Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture and each spouse filing with the Form 1040 a separate Schedule C, C-EZ, or For Form 4835 accordingly, and, if required, a separate Schedule SE to pay self-employment tax.
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