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Social Security and Medicare Taxes |
| Anytime self-employment tax is mentioned, it only refers to social Security and Medicare taxes. Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. This is most common when the individual has her own business and no employer to tell her what to do and how to do her job. All your combined wages, tips, and net earnings in the current year are subject to 2.9% Medicare tax, the self-employment tax and also the social security tax or railroad retirement tax. |
| In 2013 an additional Medicare tax rate of 0.9 % went into effect and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. Also, under Section 2042 of the Small Business Jobs Act, a deduction, for income tax purposes, is allowed to self-employed individuals for the cost of health insurance. |
| Social Security and Medicare tax may apply to caregivers. Special rules apply to workers who perform in-home services for elderly or disabled individuals (caregivers). Caregivers are typically employees of the individuals for whom they provide services because they work in the homes of the elderly or disabled individuals and these individuals have the right to tell the caregivers what needs to be done. For self-employment income earned in 2013 and 2014, the self-employment tax rate is 15.3%. |
Tax Benefits for Education |
| Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education. Additionally, a tax credit reduces the amount of income tax you may have to pay. On the other hand, a deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay. Furthermore, certain savings plans allow the accumulated earnings to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both. |
| An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. Currently there are two education credits available through the IRS. These credits are the American Opportunity Tax Credit and the Lifelong Learning Credit. There seems to be more credits, but the other benefits available are not considered credits. |
| In order to take the American Opportunity Credit or the Lifelong Learning Credit, you and your dependent or a third party needs to have paid qualified education expenses for higher education. Furthermore, an eligible student must be enrolled at an eligible educational institution. You can only claim the American Opportunity Credit for yourself, your spouse or for a dependent you list on your tax return. |
| Generally, you can claim the tuition and fees deduction if you paid qualified education expenses of higher education and the education expenses incurred are for an eligible student. This eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return. Please note that you cannot claim the tuition and fees deduction if your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). Also, you cannot claim the tuition and fees deduction if you were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. Additionally, if you or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid, then you cannot recycle these expenses for the tuition and fees deduction. Another person can claim an exemption for you as a dependent on his or her tax return. If this is so, you cannot take the tuition and fees deduction even if the other person does not actually claim that exemption. |
| There is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This deduction is a student loan interest deduction for interest you paid during the year on a qualified student loan. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500. You can claim the student loan interest deduction even if you do not itemize deductions on your Form 1040's Schedule A. |
| A qualified student loan is a loan you took out solely to pay qualified education expenses that were for you, your spouse, or a person who was your dependent when you took out the loan. These education expenses were paid or incurred within a reasonable period of time before or after you took out the loan. Furthermore, the expenses were for education provided during an academic period for an eligible student. Loans solely to pay qualified education expenses that you took out from certain sources are not considered qualified student loans. For examples, loans from related persons, from a qualified employer plan or a corporation where you are a majority stock holder, are not permitted. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Such expenses include tuition and fees, room and board, books, supplies, equipment and other expenses such as the cost of transportation. |
| The cost of room and board qualifies for the student loan interest deduction only to the extent that it is not more than the greater of a) the allowance for room and board as determined by the eligible institution, which was included in the cost of attendance (as stipulated by federal financial aid) for a particular academic period and living arrangements of the student or b) the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. |
| Copyright © 2014 [Hera's Income Tax School]. All Annual Filing Season Program rights reserved. |
| Revised: 12/14/14 |
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