The Affordable Care Act, or Obamacare, is an individual mandate that requires all eligible Americans to have some form of basic health coverage by 2014. Those without insurance will receive a penalty when they file their tax returns – that is, unless they have an exemption. TurboTax’s Exemption Check can help you find out whether or not you qualify for an exemption.
If your income is so low that you aren’t required to file a tax return, then you’re automatically exempt from the penalty. For example, if a single taxpayer’s income in 2014 was less than $10,150, there typically was no need to file a return; for married couples, the cutoff was $20,300. Even if you do file a return — to claim a refund, for example, or because you are self-employed and earned enough money to require it — you’re still exempt from the insurance requirement if your income is below the cutoff.
You’re also exempt from the requirement if the most inexpensive coverage you can find would cost you more than 8% of your household income.
Membership in certain groups qualifies you for an exemption from the coverage requirement. The law specifically exempts:
Members of federally recognized Indian tribes. The Interior Department currently recognizes 566 Native American and Alaska Native groups.
People eligible to receive care from the federal Indian Health Service
Members of health care sharing ministries. These are religious-based organizations whose members pledge to pay one another’s medical bills.
Members of recognized religious groups that object to insurance for religious reasons. The objection must be to all forms of insurance, including social insurance programs such as Social Security and Medicare, not just health insurance or Obamacare.
Exemptions based on legal status
You’re exempt from the requirement if you are not “lawfully present” in the United States or if you are incarcerated. U.S. tax laws apply to everyone who earns income in the United States, regardless of whether they’re here legally. Illegal or undocumented immigrants are required to file tax returns if their income is high enough, but they are exempt from the coverage requirement. They are also barred from obtaining health insurance through the online insurance marketplaces set up under the Affordable Care Act.
People who are incarcerated — in jail or prison — are exempt. This applies whether you have been convicted and are serving a sentence or are being held awaiting trial.
The law makes hardship exemptions available for people whose current situation makes it too difficult to afford health insurance. These are not permanent exemptions — they last until you can get “back on your feet.” Common situations that may qualify you for a hardship exemption include:
Eviction or foreclosure
Fire, flood or other disaster that caused major damage to your home
Receiving a notice that your electricity, water or other utility service will be shut off
Death of a close family member
Being a victim of domestic violence
Losing health insurance and being unable to find affordable coverage
High debt from medical bills
High expenses for caring for a sick, disabled or aging family member
Note that these are not the only hardships that may qualify you for an exemption. The government will make a decision on each application for a hardship exemption based on the specific information in the application.
The 5 Most Popular Tax Credits: Can You Use Them, Too?
Tax credits are especially valuable, because unlike deductions, credits reduce your total tax bill dollar for dollar. Whenever you can qualify to take a tax credit, it’s always worth taking a close look to maximize its value and ensure that you remain eligible.
To help you home in on the credits that are most likely to help you, we looked at the latest data from the IRS — from the 2012 tax year — to see which credits people are most likely to take.
5. Retirement Savings Contributions Credit
More than 6.9 million taxpayers took the retirement savings contributions credit, which matches up to 50 percent of the first $2,000 in contributions that single filers make to an IRA or an employer-sponsored retirement plan at work, or $4,000 for joint filers. The dollar value of those credits was relatively low at just $1.2 billion, but that nevertheless saved an average of about $175 per taxpayer in tax liability.
The credit is only available to single filers making less than $30,000 or joint filers making less than $60,000, and the highest percentages apply only to those who meet even smaller income limits of $18,000 and $36,000, respectively. The purpose of the credit is to encourage everyone to save, and so if you set money aside, this credit is your reward for being financially prudent.
4. Foreign Tax Credit
About 7.1 million taxpayers claimed the foreign tax credit. But even though not many more people claimed it than the retirement savings contributions credit, the foreign tax credit had a much more significant financial impact, saving taxpayers $19.1 billion.
The foreign tax credit is intended to avoid double taxation on income earned from another country. It most often applies to international investments, where many brokers withhold foreign taxes automatically. For those whose only exposure to international investments is through mutual funds, it’s sometimes possible to take a full credit against your U.S. taxes for any foreign taxes you pay. Yet complex rules can apply in more complicated situations, so this is an area where a good tax advisor can be extremely helpful.
3. Education Credits
More than 10 million taxpayers took advantage of credits designed to offset college and other educational costs. The vast majority of those taking educational credits used the American Opportunity Tax Credit, which applies to the first four years of college and can reduce your tax bill by up to $2,500. In some cases, you can get a portion of the American Opportunity Tax Credit back as part of your refund even if you didn’t have enough tax liability to apply against it.
When you also combine the Lifetime Learning Credit, which pays 20 percent of up to $10,000 in annual educational costs for a wider range of schooling including graduate school and training classes, taxpayers collected about $19.3 billion from education credits, of which $8.8 billion was refundable. Those amounts make a huge difference to cash-strapped families sending kids to college.
2. Child Tax Credits
Families benefit from credits for having qualifying children, with 22.9 million taxpayers claiming the regular child tax credit and 20.5 million using the additional child tax credit as well. Combined, those two credits returned $55.4 billion to taxpayers.
The regular child tax credit pays up to $1,000 for qualifying children under age 17, of which there were more than 70 million, with phase-outs starting for singles earning $75,000 or more and joint filers with incomes of $110,000. Because the regular child tax credit is nonrefundable, the additional child tax credit fills in the gap for lower-income taxpayers, offering a refundable credit to those who have sufficient job income that makes up for any lost regular child tax credit amounts.
1. Earned Income Tax Credit
The most often-taken credit is the Earned Income Tax Credit, which appeared on 27.8 million returns. It’s also a hugely important credit for Americans, paying out more than $1.02 trillion, or almost $3,700 per taxpayer claiming the credit.
The Earned Income Tax Credit is aimed at low- and middle-income taxpayers, with the highest amounts paid to those who have eligible children. It’s also one of the few credits that is fully refundable, meaning that you can get a refund for up to the full amount of the credit even if you don’t have any tax liability against which to apply it.
Credits are extremely valuable for taxpayers, and you should do everything you can to find credits you qualify for. If you do, they’ll do a great job of reducing your tax liability as much as possible.
Tax Hacks 2015: 6 Things Sneaky Tax Preparers Won’t Tell You
It’s sad. Many highly ethical tax professionals are working hard to help taxpayers, but tax season brings out fraudsters, scammers and plain vanilla take-advantage-of-you-while-your-guard-is-down types. It can be hard to tell the difference.
From fraud to incompetence to hinky tricks to outright ripoffs, the field of tax preparation is a magnet for some of the worst consumer abuses. In the video above, Money Talks News founder Stacy Johnson describes common tax-time schemes to part you from your money. After watching, read on to find out what the worst tax preparers won’t tell you.
1. I’m incompetent and untrained.
Tax preparation is a mostly unregulated field. According to The National Consumer Law Center, in a report called “Riddled Returns: How Errors and Fraud by Paid Tax Preparers Put Consumers at Risk and What States Can Do”:
There are no minimum educational, training, competency or other standards. In 47 states, there are more regulatory requirements for hairdressers than tax preparers.
Preparers commit errors, misclassify taxpayers’ filing status, mishandle tax credits and even falsify information on tax returns, the report says. These aren’t just a few bad eggs, either. The problems involve “a significant percentage of the preparers tested,” the report says.
It’s no joke for taxpayers. “Consumers who select incompetent or unscrupulous preparers could face audits by the Internal Revenue Service or even criminal sanctions,” a NCLC statement warns.
Stay safe with tax preparation experts who are:
Licensed CPAs (certified public accountant).
IRS enrolled agents.
Trained volunteers with one of two programs, Volunteer Income Tax Assistance or AARP Tax Aide (details below).
2. You could do this yourself.
Doing your own taxes saves the $273, on average, that National Society of Accountants says taxpayers will spend for tax preparation assistance this year. According to Huffington Post financial contributor Carrie Smith, you’re a good DIY candidate if you:
Have just one job.
No major changes in your income or filing status last year.
Own no property or investments.
Can understand the tax laws.
Are “a numbers person.”
Didn’t marry, divorce, lose a spouse or have a child last year.
Didn’t start a new business.
Aren’t easily overwhelmed by money issues.
One possible reason to consult an expert, Smith says, is that tax credits and deductions for dependents expire, depending on their ages:
If your child goes to college full-time, you can still claim them — and any education expenses — until they’re 24. Determining these situations accurately takes someone who is knowledgeable.
If you made less than $60,000 last year, you may use the IRS Free File tax prep software to prepare and file free of charge online. Free File uses electronic versions of IRS paper forms. You fill them out and file your taxes online. The software includes basic guidance only, however, so it’s best used if you’ve done your own taxes before.
3. You shouldn’t pay so much.
It can be hard to comparison shop for tax preparation services because preparers may be unwilling to quote a price or, if they do, give inaccurate quotes, according to The National Consumer Law Center report. If you can’t get a ballpark figure after describing your situation to a preparer, look for someone else.
It’s easy to try and compare the many tax preparation software products offered for free or cheap online for federal taxes, says Consumer Reports. Most don’t charge until you file your completed tax form, so CR recommends that you try programs and then close them before filing if you don’t like the price they quote.
4. Don’t click on those pop-ups.
There’s a cavalcade of free online tax preparation products, but they are free only if you ignore the options for upgrades. Stick with the no-frills versions of online products by turning a blind eye to pop-ups that offer enhanced services with fees attached.
5. You could get free help.
Some tax preparers will take your money although they know full well you qualify for free tax prep services. Before paying for tax help, check the options.
Free tax preparation is available from IRS-trained volunteers through VITA, Volunteer Income Tax Assistance. You qualify if you are older than 65 or make less than $53,000 a year. People with disabilities and limited English-speaking abilities are eligible, too. VITA volunteers help with basic state and federal tax returns. Use VITA’s online locator tool to find help near you.
The AARP Foundation’s Tax-Aide program offers free tax help from IRS-trained volunteer for anyone, although it is focused especially on older Americans. Use AARP’s online locator to find help near you or call 888-227-7669.
For more free tax prep options, read Tax Hacks 2015: 8 Ways to Get Free Help Preparing Your Taxes.
6. You can get your refund quickly without these crazy fees.
Try to wait the roughly two-to-three weeks it takes to receive your refund and, if you can, avoid instant-refund products because of the ridiculously steep fees. The IRS describes these products:
If you file electronically, your tax preparer or tax preparation and filing software may suggest you purchase a bank product that typically sets up a temporary bank account to receive your income tax refund. Such bank products include, but are not limited to, refund anticipation loans, refund anticipation checks, gift cards and debit cards.
Federally regulated banks no longer make refund anticipation loans. But you’ll find them elsewhere, writes USA Today, citing an example of a refund loan with 273 percent interest.
Here are safe ways to get your refund as quickly as possible:
If you can’t pay the tax prep fee. Instead of getting a refund anticipation check to cover your tax prep costs, see if you can use one of the many no-cost tax preparation options.
If you don’t have a bank account. If you e-file, you can get your refund loaded onto a prepaid card or payroll card, says CreditCards.com. Or consider Walmart’s (WMT) new Direct2Cash tax refund service: Use a participating (non-electronic) tax-prep service (Walmart often has them in-store) and pick up your refund at a Walmart location after receiving a confirmation code in the mail. “Cash refunds will be available in roughly the same amount of time it takes for a direct deposit to show up in a filer’s account,” USA Today says. Walmart charges nothing, and the tax preparer can charge no more than $7 for the service.
If you have a checking account. Have the IRS deposit your refund directly into it, saving you from waiting for the mail to deliver your check.
If you just want the money fast. Also, U.S. News says that IRS data shows early filers get their returns in 21 days, on average, compared with longer waits for those who file later. Also, e-filing (filing electronically rather than sending a paper form by snail mail) puts your return in IRS hands faster.
WASHINGTON — You’ve downsized to an apartment, the kids are long gone, and you’re no longer eligible for some of the deductions and exemptions that had helped you lower your tax bill. But for those 65 years or older, there are other tax breaks that might benefit you come tax time.
For one, not all your Social Security benefits are subject to federal taxes. How much depends on your other income and filing status. “No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service rules,” the Social Security Administration says on its website.
To determine what percent of your benefits might be taxable, add half your benefits to your other income, including nontaxable interest. If your combined income is between $25,000 and $34,000 and your filing status is single, up to 50 percent of your benefits might be taxable, according to the IRS. For married couples filing jointly, the 50 percent taxable figure applies if your combined income is between $32,000 and $44,000. Combined income lower than the threshold? Social Security benefits aren’t taxable. If the combined income is above these income ranges, up to 85 percent is subject to income taxes.
Be sure to check your state tax laws. In many states, you won’t have to pay state tax on all or some of your Social Security benefits. The IRS offers free tax help for people 60 and older, working through nonprofit groups like AARP Foundation.
Standard Deduction or Itemize?
People 65 and over also should consider whether it’s more beneficial for them to claim the standard deduction or to itemize.
The standard deduction is higher for seniors — $7,750 if your filing status is single, $14,800 if you’re married filing jointly and you and your spouse are both at least 65. That compares to $6,200 for single filers under 65 and $12,400 for married taxpayers under 65 who are filing jointly.
“Seniors very often have already paid up their mortgage and they very often don’t itemize anymore,” said Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block (HRB). But it’s important to do the math — or let your tax preparer or tax software do it for you — to see whether it still makes sense to itemize even with the higher standard deduction.
Even if you don’t have mortgage interest to deduct, you can still deduct any property taxes you paid. State income taxes also are deductible, or alternatively, you can choose to deduct state sales taxes, an attractive option if you live in a state that doesn’t have an income tax.
Medical Expenses and Charities
For seniors, medical expenses have to exceed 7.5 percent of adjusted gross income to be deductible. That threshold applies even if only one spouse has reached 65 and you file jointly. For those under 65, medical expenses are deductible only if they exceed 10 percent of your adjusted gross income.
And medical bills can be hefty for seniors. Covered medical expenses include the portion of doctor, dentist and hospital bills and the cost of prescription drugs not covered by insurance, as well as premiums for Medicare or other insurance coverage. Prescription eyeglasses are deductible, as are the cost of false teeth, hearing aids and wheelchairs. So is the cost of transportation to medical appointments.
Charitable donations also are deductible. However, seniors who are at least 70½ had another option for charitable donations. At that age, you’re required to take a minimum distribution for your individual retirement accounts. If you rolled that distribution over directly to a charity — instead of taking the money and then donating it — the distribution is not counted as income and therefore is not taxable.
“The difference is you’re lowering not only your taxable income but also your adjusted gross income,” Perlman said. And that can affect such things as whether Social Security benefits are taxable and whether you can deduct your medical expenses. But there’s no double-dipping. If you itemize, you can’t also deduct a charitable donation that was made through a direct rollover from an IRA.
There is also a small tax credit for low-income seniors, which Perlman says is not widely used. “It might be helpful for someone who neither contributed to the Social Security system nor ever married.”