Reader Q & A
By Ceda Putiyon, CAP Accounting
Q: Which is better, standard deduction or itemizing?
A: Whichever allows you the higher deduction. Tally your itemized deductions; if they are higher than the standard deduction, itemized is better. Note that medical expenses can only be included if they total more than 7.5% of your Adjusted Gross Income. Miscellaneous deductions can only be taken if they exceed 2% of AGI. For the 2012 tax year the standard deductions are:
■ $11,900 for a married couple filing a joint return
■ $5950 for single individuals and married couples filing separately
■ $8,700 for head of household.
Q: We have a son in college and we pay his college bill monthly. Should we send an extra payment ?
A: For tax purposes, it will make no difference. However, there are tax advantages that you may quality for. The American Opportunity Tax Credit is available for the cost of undergraduate tuition and course materials. It is a refundable tax credit worth up to $2,500 on the first $4,000 of qualifying education expenses.
The Lifetime Learning Tax Credit for any person taking a college class provides a credit of 20% of tuition expenses on the first $10,000 of qualifying college expenses. The Student Loan Interest Deduction is a deduction of up to
$2,500 on the adjustments to income section on the 1040 Form. It cannot be combined with the American Opportunity Tax Credit or the Lifetime Learning Tax Credit.
Expenses must be for yourself, your spouse or dependents. Learn more at www.irs.gov.
Q: What is a health saving account and how can it help me? A: A health savings account (HSA) combines a high deductible health insurance with a tax-favored savings account. Advantages include that contributions are 100% tax deductible and withdrawals can be made tax free if used to pay for qualifying medical expenses including dental and vision. Interest is also either tax deferred or tax free if used to pay for qualifying expenses. Unlike a Flexible Spending Account, any remaining money in the account at year end is yours to keep and continues to grow tax- deferred. Annual out-of-pocket expenses excluding premiums cannot exceed $5,950 for individual coverage and
$11,900 for family. HSA withdrawals that are not used for qualified medical expenses are taxed at your income tax rate in addition to a 10% tax penalty.
Ceda Putiyon is an Enrolled Agent and owner of CAP Accounting.
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The Lifetime Learning Tax Credit for any person taking a college class provides a credit of 20% of tuition expenses on the first $10,000 of qualifying college expenses. The Student Loan Interest Deduction is a deduction of up to
$2,500 on the adjustments to income section on the 1040 Form. It cannot be combined with the American Opportunity Tax Credit or the Lifetime Learning Tax Credit.
Expenses must be for yourself, your spouse or dependents. Learn more at www.irs.gov.
Q: What is a health saving account and how can it help me? A: A health savings account (HSA) combines a high deductible health insurance with a tax-favored savings account. Advantages include that contributions are 100% tax deductible and withdrawals can be made tax free if used to pay for qualifying medical expenses including dental and vision. Interest is also either tax deferred or tax free if used to pay for qualifying expenses. Unlike a Flexible Spending Account, any remaining money in the account at year end is yours to keep and continues to grow tax- deferred. Annual out-of-pocket expenses excluding premiums cannot exceed $5,950 for individual coverage and
$11,900 for family. HSA withdrawals that are not used for qualified medical expenses are taxed at your income tax rate in addition to a 10% tax penalty.
Ceda Putiyon is an Enrolled Agent and owner of CAP Accounting
