This section is dedicated to Retirement Savings including strategies during your "savings" years and and your retirement years.

As you approach retirement age, you might consider moving some of your retirement funds out of your employer's plan and into an IRA at a custodian like TD Ameritrade or Fidelity.

You can do a rollover while you're still employed as long as you are over 59½. However, withdrawing money from a past employer’s 401(k) plan may be a little difficult.

Tip: Draw down your taxable accounts first, then tax-deferred accounts (401Ks, IRAs), then tax-exempt (Roth IRAs). This will maximize the time that your tax deferred and tax exempt assets can grow.

Consider other factors:

Where will you live? It's worth considering the state income taxes and property taxes of the state you plan to retire in.

Working in retirement allows you to save and grow investments longer, delay tapping into your retirement funds and provides you with funded healthcare from your employer.

How will you claim Social Security and Pensions? Delay taking Social Security and Pensions as long as possible to maximize your income and survivor benefit. If you plan on working past age 62, you will want to delay Social Security until at least your Full Retirement Age to avoid the Social Security work penalty.

You should only consider using home equity in retirement when it becomes necessary However as people live longer more people may explore pro-actively using their home equity as part of their draw down strategy. Since it's typically accessed as debt - the cash flow doesn't create income tax obligations.

1. Save as much as possible as early as possible.
   Though it's never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's -- that's the power of compounding, and the best way to accumulate wealth.

2. Set real goals.
   Project your retirement expenses based on your needs. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.

3. A 401(k) is a great way to save for your retirement.
   Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and -- usually -- a matching contribution from your company.

4. An IRA will also provide you with a retirement boost.
   Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth where you pay taxes on your investment gains only when you withdraw. If you qualify, your contributions may be deductible. A Roth IRA doesn't allow for deductible contributions but offers tax-free growth where you will owe no tax when you make withdrawals, but contributions are not deductible.

5. Manage your asset allocation.
   How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.

6. Stocks are for Long-Term Growth.
   Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.

7. Don't allocate too heavily into Bonds, Even in retirement.
   Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation can erode the purchasing power of bonds' interest payments.

8. Making tax-efficient withdrawals can prolong your nest egg.
   Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.

9. Working part-time in retirement can help you.
   Working keeps you active and will keep you from relying as much on your nest egg.

10. Get more out of your retirement assets.
    You might consider relocating to an area with lower living expenses or simply downsizing.

Use the button for a Roth IRA Contribution Limit Calculator. provided by Fidelity.

Who is entitled to Social Security disability benefits?

An individual who is determined by the Social Security Administration to be "disabled" receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.

If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

Under the Social Security disability insurance program (title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability: 

• A disabled insured worker under full retirement age.
• Individual disabled since childhood (before age 22) who is a dependent of a parent entitled to title II disability or retirement benefits or was a dependent of a deceased insured parent.
• Disabled widow or widower, age 50-60 if the deceased spouse was insured under Social Security.
• Been disabled or expected to be disabled for at least 12 months
• Has filed an application for benefits, and
• Completed a five-month waiting period; however, the 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI. In addition, if you become disabled a second time within five years after your previous disability benefits stopped, there is no waiting period before benefits start.

Under title XVI, or SSI, there are two basic categories under which a financially needy person can get payments based on disability:

• An adult age 18 or over who is disabled.
• Child (under age 18) who is disabled.

For all individuals applying for disability benefits under title II, and for adults applying under title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system.

When do Social Security disability benefits begin?

If you are getting disability benefits on your own work record, or if you are a widow or widower getting benefits on a spouse's record, there is a five-month waiting period and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.

If the sixth month has passed, your first payment may include some back benefits. Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, then you will receive your check on the last banking day before that day. The check you receive is the benefit for the previous month.

Example: A check you receive dated July 3 is for June. Your benefit can either be mailed to you or be deposited directly into your bank account.

Are Social Security disability benefits taxable?

Some people who get Social Security have to pay taxes on their benefits. The rules are the same regardless as to whether Social Security benefits are received due to retirement or disability. If you file a federal tax return as an "individual" and your combined income is more than $25,000, you have to pay taxes. Combined income is defined as your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

How long do Social Security disability payments continue?

Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.

Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.

What happens to Social Security disability benefits when I reach retirement age?

If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person.

If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.

What happens if Social Security turns down my claim for disability benefits?

If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are: 

• Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
•  Hearing before an Administrative Law Judge. You can appear before a judge to present your case.
•  Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
•  Federal District Court. If the Appeals Council decides not to review your case or if you disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal all the way to the US Supreme Court if necessary.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled. They are:

• Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person who is reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and can bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
  
• Continuation of Benefits. While you are appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge makes his or her decision. However, you must request the continuation of your benefits during the first 10 days of the 60 days mentioned earlier. If your appeal is not successful, you may have to repay the benefits.

Will I receive Social Security when I retire?

Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

You can collect early retirement benefits at age 62, but you currently can't get full benefits until 65 for persons born in 1937 or earlier. For persons born 1938 and later, the full retirement age increases gradually until it reaches 67 for those born in years 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.

How can I find out what Social Security will pay me when I retire?

You can create "my Social Security account" with SSA and view your Social Security Statement online at any time.

Can I count on Social Security being around when I retire?

With retirement on the horizon for many baby boomers, it's very likely that Social Security will be in your future. However, the Social Security trust fund is being threatened and some type of reform is needed.

The deduction for educator expenses is up to $250 for 2018 and 2019. The tuition and fees deduction expired at the end of 2017.

If you can't meet the April 15 deadline to file your tax return, you can get an automatic six-month extension of time to file from the IRS. The extension will give you extra time to get the paperwork into the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amounts not paid by the April deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.

You must make an accurate estimate of any tax due when you request an extension. You may also send a payment for the expected balance due, but this is not required to obtain the extension.

To get the automatic extension, file Form 4868, Application for Extension of Time to File U.S. Individual Income Tax Return, with the IRS by the April 15 deadline, or make an extension-related electronic payment. You can file your extension request by computer or mail the paper Form 4868 to the IRS.

The system will give you a confirmation number to verify that the extension request has been accepted. Put this confirmation number on your copy of Form 4868 and keep it for your records. Do not send the form to the IRS.  As this is the area of our expertise, please contact us for more detailed information on how to file an extension properly!

Looking for ways to avoid the last-minute rush for doing your taxes? The IRS offers these tips:

Don't Procrastinate. Resist the temptation to put off your taxes until the last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

Organize Your Tax Records. Tax preparation time can be significantly reduced if you develop a system for organizing your records and receipts. Start with the income, deduction or tax credit items that were on last year's return.

Visit the IRS Online. Millions of taxpayers visited the IRS Web site last year, downloading nearly 600 million forms, publications and a variety of topic-oriented tax information. Anyone with Internet access can find tax law information and answers to frequently asked tax questions.

Take Advantage of Free Assistance. The IRS offers about 150 tax topics through its website atTax Topics. It also offers federal tax forms and publications at 1-800-TAX-FORM (1-800-829-3676). Some libraries, post offices, and banks carry the most widely requested forms and instructions. Libraries may also have reference sets of IRS publications. The IRS also staffs a tax Help Line for Individuals at 1-800-829-1040. Help for small businesses, corporations, partnerships and trusts which need information or assistance preparing business returns is available at 1-800-829-4933. Both lines are staffed on weekdays from 7 a.m. to 7 p.m. your local time (Alaska & Hawaii follow Pacific Time). Hearing-impaired individuals with access to TTY/TDD equipment may call 1-800-829-4059 to ask questions or to order forms and publications.

Use IRS Taxpayer Assistance Centers and Vounteer Programs. Free tax help is available at IRS offices nationwide. Also, check your newspaper or local IRS office to find locations for Volunteer Income Tax Assistance or Tax Counseling for the Elderly sites. To obtain the location, dates, and hours of the VITA or TCE volunteer site closest to you, call the IRS toll-free Tax Help Line for Individuals at 1-800-829-1040 or on the IRS website.

Have your accountant Double-Check Your Math and Data Entries. Review your return for possible math errors and make sure you have provided the names and correct (and legibly written) Social Security or other identification numbers for yourself, your spouse and your dependents.

Have Your Refund Deposited Directly to Your Bank Account. Another way to speed up your refund and reduce the chance of theft is to have the amount deposited directly to your bank account. Check the tax instructions for details on entering the routing and account numbers on your tax return. Make sure the numbers you enter are correct. Wrong numbers can cause your refund to be misdirected or delayed.

Don't Panic if You Can't Pay. If you can't immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card, either as part of an electronic return or directly through a processing agent, either by phone or online. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April 15 due date, with no fee. Note that if you file your tax return or a request for a filing extension on time, even if you can't pay, you avoid potential late filing penalties.

Have Your Accountant Request an Extension of Time to File — But Pay on Time. If the clock runs out, you can get an automatic six-month extension of time to file, to October 15. An extension of time to file does not give you an extension of time to pay, however. You can e-file a Form 4868, Application for Automatic Extension of Time to File, that is included in most tax preparation software, or send a paper Form 4868 to the IRS to request the extension. You will need the adjusted gross income and total tax amounts from last year's return if you request the extension by electronic filing. You may also get an extension by charging your expected balance on a credit card at Official Payments Corporation or Link2Gov Corporation. There is no IRS fee for credit card payments, but the processors charge a convenience fee.

With more and more United States citizens earning money from foreign sources, the IRS reminds people that they must report all such income on their tax return, unless it is exempt under federal law. U.S. citizens are taxed on their worldwide income.

This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned income, such as wages and tips, and unearned income, such as interest, dividends, capital gains, pensions, rents and royalties.

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $102,100 for 2017 and $104,100 for 2018, of their foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S. Please contact us if you feel you may have earned foreign income to learn more!

When you sell capital assets like stocks and bonds, rental property, your home, precious metals, etc. etc., the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. Below, you will find  ten facts on how gains and losses can affect your federal income tax return.

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. You also must not have excluded gain on another home sold during the two years before the current sale.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home.  Send us a message for more!

If you gave any one-person gifts valued at more than $15,000 (Spouses can elect to give up to $30,000 to one person.), it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.

The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.

You make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

Tuition or medical expenses that you pay directly to an educational or medical institution for someone's benefit

Gifts to your spouse

Gifts to a political organization for its use

Gifts to charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact us for more!

Foreign income taxes.

You can deduct estimated taxes paid to state or local governments and prior year's state or local income tax if they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. The Tax Cuts and Jobs Act (TCJA) limit the total amount of the above state and local taxes an individual can deduct in a calendar year to $10,000.

Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax.

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

You may be able to take the Credit for the Elderly or the Disabled if you were age 65 or older at the end of last year, or if you are retired on permanent and total disability, according to the IRS. Like any other tax credit, it's a dollar-for-dollar reduction of your tax bill. The maximum amount of this credit is constantly changing.

You can take the credit for the elderly or the disabled if:

• You are a qualified individual,
• Your nontaxable income from Social Security or other nontaxable pension is less than $3,750 to $7,500 (also depending on your filing status).

Generally, you are a qualified individual for this credit if you are a U.S. citizen or resident at the end of the tax year and you are age 65 or older, or you are under 65, retired on permanent and total disability, received taxable disability income, and did not reach mandatory retirement age before the beginning of the tax year.

If you are under age 65, you can qualify for the credit only if you are retired on permanent and total disability. This means that:

• You were permanently and totally disabled when you retired, and
• You retired on disability before the end of the tax year.

Even if you do not retire formally, you are considered retired on disability when you have stopped working because of your disability. If you feel you might be eligible for this credit, please contact us for assistance.

If you are an employee of your own one-man corporation, whether a regular "C" corporation or a "sub-chapter S" corporation, you have three choices for handling the costs of a qualifying home office:

The best way  to get money out of your closely-held corporation tax-free is being reimbursed under an accountable plan The corporation can deduct the amount of the reimbursement and you do not have to report the payment as income.

This option is better than having the corporation pay you rent for the home office. While your corporation can deduct the rent paid to you, you must report the rent as income on Schedule E. In addition, you can only deduct the pro-rated share of real estate taxes, mortgage interest and casualty losses against the rental income on Schedule E, expenses that are otherwise deductible in full on Schedule A. You cannot deduct the proportionate share of any other expenses "with respect to the use of the home". While this generally includes insurance, repair and maintenance,, depreciation, and certain other indirect expenses, it does not include expenses which are not used with the dwelling", such as the cost of electricity used to power office lights and equipment.

To qualify as a home office, the space (it does not have to be an entire room) must be used regularly (on a continuous, ongoing or recurring basis) and exclusively (there can be no personal use) for your trade or business, and it must be your principal place of business or a place where you physically meet with patients, clients or customers on a regular basis. The space will be considered your principal place of business if it is used for performing administrative or management activities, such as billing, bookkeeping, ordering supplies, setting up appointments and writing reports, and there is no other fixed location where you regularly perform these activities.

As an employee, the home office must be for the convenience of your employer. This means the home office is required as a condition of employment, it is necessary for the business to function or it is necessary for you to properly perform your duties as an employee. If you do not have any other place of business, such as a rented office or storefront, your home office should qualify.

For an expense reimbursement plan to be considered "accountable", the expenses that are reimbursed must be for actual job-related expenses and you, as the employee, must substantiate the expenses by providing your employer with receipts or other documentation.

You should use a mobile app like Zoho Expense for your corporation. You should do this whether or not you have a home office. You can use the app for business mileage and other out-of-pocket business expenses, such as postage, office supplies, parking and tolls, meals and entertainment, etc. You won't need to keep  receipts with app since it captures the image as well as the information so you don't need to key anything in.

In calculating the "business use percentage" of your home office, divide the square footage of the office area by the total square footage of the home. List each item of expense paid during the month, such as real estate taxes, homeowner's insurance, oil heat, gas and electric, water and sewer, alarm or security service, garbage disposal, general repairs and maintenance, and mortgage interest (taken from the monthly mortgage billing statement or a loan amortization statement you can create online). Multiply the total of these expenses by the business use percentage to determine the amount to be reimbursed.

With the Zoho expense app, you can submit the expense report and pay yourself for it.

Fyi: You must reduce the amount of your itemized deduction for real estate taxes and mortgage interest by the amount of reimbursement you receive from your corporation during the year

Deducting, or being reimbursed for, a home office today will no longer turn around and bite you when you sell your personal residence, as had been the case in the past. If the home office is within the same "dwelling unit" as the residential portion of your home, you are treated as using the entire home as a principal residence.

If the office space was 10% of the total area of your home, you DO NOT have to pay income tax on 10% of the gain from the sale. You will be able to exclude the entire gain, up to the $250,000 or $500,000 limits, if you qualify, less any "post-May 6, 1997" depreciation. You must report any depreciation you deducted on the home office after May 6, 1997 as "unrecaptured Section 1250 gain", which will be taxed at the capital gains rates up to a maximum of 25%. 

You are married and you sell your personal residence, which you owned and lived in for the past 4 years and in which you had a qualified home office that was 15% of the total area, for a net gain of $300,000. During the 4 years you lived in the home you were able to deduct $5,000 in depreciation on the home office portion. You can exclude $295,000 of the gain, and will pay tax on only $5,000.

If you were not able to deduct depreciation on your home office, or were not reimbursed by your corporation for depreciation, there is no income to report and 100% of the gain, up to the limits, will be tax-free.

Although fewer people will be taking charitable gift donations on their taxes, some individuals still look for every deduction they can get.

What you need to know:

“Real” charities:

All good causes are not charities. The IRS wants you to pick a charity with a 501c(3) designation.

Holding periods: When considering gifts where you are expecting a big deduction, the IRS wants the donor to have owned the item for at least a year.

Written confirmation: Gifts of $ 250.00 or more to a charity must be acknowledged by the charity in writing. If you attend a gala, they usually indicate how much of the ticket price is considered a contribution. You can only deduct the contribution amount.

Fair market value: Most charities need money, not things. They will accept your items but will most likely sell them. The value of your gift is usually the amount at which they can sell it, or what is called “market value”.

$ 500, $ 5,000 or $ 500,000 gifts: Charitable deductions totaling $500 or more requires the filling out of IRS form 8283. Donations of property of $5,000 or more require a qualified appraisal. Bigger gifts, like a $500,000 real estate donation, require the appraisal to be attached.

Donation of Used Clothing: You should deliver it directly to the charity, hand it over to a person behind the counter, and get your signed or stamped receipt and make sure they dated it. Attach the receipt to an itemized list of items with a market value. Organizations like Goodwill may have a printed value guide.

Used Furniture: Process is similar to used clothing. Make sure the donated furniture is in good, usable condition. Organizations like the Salvation Army provide valuation sheets with ranges.

Used Vehicles: This is another fair market value deduction. Use the KBB website to appraise your vehicle. Using the “retail price” is the market value.

Jewelry: The organization that sells it is getting the fair market value. That’s your deduction.

Antiques: The charity might accept it, but it’s probably going to be sold to generate cash. Know the difference between monetary value, and sentimental value.

Artwork: This gets complicated. Artists can’t donate their own work for more than the cost of materials and if you donate a painting to a museum for their display, you can deduct it at market value. If the museum intends to sell it, you can only deduct your original cost basis.

Real Estate: This is similar to securities. Get the fair market value for your deduction with a documented appraisal.

Rules for the rich:

Personal Foundations: If you are giving to your own personal charity, your asset donation value is the lower of the cost or fair market value.

Ceilings on Deductions: Under the new tax laws, you can donate up to 60 percent of it to a public charity.

The cost for higher education is expensive, and it keeps outpacing inflation. The average annual cost of tuition and fees is around $10,000 for public four-year universities in-state students and around a whopping $36,000 for private four-year universities out of-state students. The good news is the federal government offers 2 nice tax credits may be able to claim:

The American Opportunity Credit:

This credit provides the largest benefit if you are eligible for it. The maximum benefit is $2,500. This credit applies only to the first four years of post-secondary education and the student must attend at least half time. Tuition, course materials and fees qualify for this credit and the credit is equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses.

The phaseout are based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

For unmarried individuals: between $80,000 and $90,000

For married filing jointly, individuals: between $160,000 and $180,000

Up to 40 percent of the American Opportunity credit is refundable meaning the credit can reduce your tax liability below zero.

The Lifetime Learning Credit:

This credit equals 20% of the first $10,000 of qualified education expenses for up to a $2,000 credit per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.

The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. This credit works well for graduate programs and part-time students who take a qualifying course at a local college to improve job skills. The expenses apply to tuition, fees and materials. They do not include books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.

The phaseout are based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

For unmarried individuals: between $58,000 and $68,000

For married filing jointly, individuals: between $116,000 and $136,000

The Lifetime Learning credit isn't refundable. It can bring any tax you may owe down to zero.

The American Opportunity credit is often a greater credit, so taxpayers normally claim the Lifetime Learning credit when they're unable to claim the American Opportunity Credit due to enrollment restrictions.

Note: You can't claim both the Lifetime Learning credit and the American Opportunity credit for the same student in the same year. You can claim the Lifetime Learning credit for one student and the American Opportunity credit for another.

The basis limitation is a limitation on the amount of losses and deductions that a partner of a partnership or a shareholder of a S-Corporation can deduct. The basis limits are the first of three limitations that are applied to Schedule K-1 losses and deductions. After the basis limits are applied, the At-risk limits (Form 6198) are applied. If losses are allowed by the basis and at-risk limits, the passive limits (Form 8582) are applied, if applicable.

Per Schedule E (1040), shareholders of S Corporations are required to attach a basis calculation to their tax return each year. There is no form for the basis limitation, but a worksheet, and some instructions have been provided in the partner and shareholder instructions for Schedule K-1.

It is important to note that the capital account shown on the Partner's K-1 is not the same as basis. According to the Partner's Instructions for Schedule K-1, the basis schedule represents outside basis while the capital account represents inside basis. These can differ, even when the partnership maintains its books and records on a tax basis. One way this difference can occur is when a partner buys his partnership interest from another partner, since the purchase price becomes the starting point for his outside basis. (For more information on general K-1 issues, please see K-1 Issues for Individual Taxpayers, General)

Computation

The starting point for the basis limitation is adjusted basis at the beginning of year. The adjusted basis at the beginning of the year is the ending adjusted basis from last year reduced by loss allowed in the previous year. In the initial year, basis is equal to the adjusted basis of property contributed to the partnership, plus any gain recognized on the contribution of property.

The following adjustments are made to arrive at the beginning adjusted basis used in applying the basis limitation:

Increases:

Adjusted basis is increased by current income from the activity, additional amounts invested in the activity, and depletion in excess of the oil and gas property basis.

Additionally, the adjusted basis of a partner's interest in a partnership includes the partner's share of the partnership's liabilities. This is not the case for shareholders in an S-Corporation. Because the S-Corporation is a corporation, it is a distinct legal entity separate from the shareholder, so the shareholder does not increase his or her basis by their share of liabilities. The shareholder only increases their basis by the loans they make directly to the corporation.

Increases to Shareholders' debt basis:

Once losses have reduced a shareholder's stock basis to zero, basis in loans that the shareholder has made to the S-corp is used to allow losses. In future years, any net increases increase debt basis before stock basis. It is important to note "Net Increases" is determined by netting together current year income, losses, prior year losses and distributions. If prior year losses are in excess of current year income, there is no "net increase" and therefore no restoration of debt basis. For more information, please see IRC. 1367(b)(2)(B)).

Decreases:

Distributions, decreases in a partner's share of partnership debt, and repayments on loans the shareholder made to the S corporation are all reductions to a partner's or a shareholder's basis.

If the current year plus prior year disallowed losses exceed basis, some of the loss is disallowed. Any disallowed loss is carried to the following year return and is treated as incurred in the following tax year.

For partners, the allowed loss is allocated pro-rata to each category of loss or deduction (Ordinary, 1231, capital gains/losses, 179 expense, etc.). For shareholders, there are ordering rules. Nondeductible expenses and depletion are allowed in full first, unless the shareholder has filed an election to do otherwise. (Regulation 1.1367-1(f))

Distributions in excess of basis

Per Internal Revenue Code Sections 704(a)(2) and 1367(a)(2) basis can never fall below zero. If there has been a distribution in excess of basis, then gain has to be recognized on the distribution. This gain is not reported on schedule K-1. The partner/shareholder reports the gain on their tax return.

Per Internal Revenue Code Section 1368, the treatment of a distribution in excess of stock basis depends upon whether or not the S-Corporation has any earnings or profits from when it was a C-Corporation.

If there were no earnings and profits, then any amount distributed in excess of stock basis is considered gain from the sale or exchange of property. IRC. 1368(b)(2)). The character of the gain is dependent upon the holding period of the S-Corporation stock.

If the S-Corporation had earnings and profits from when it was a C-Corporation, then, per Internal Revenue Code section 1368(c) the following rules apply:

A. The portion of the distribution that does not exceed the accumulated adjustments account is treated as a gain from the sale or exchange of property.

B. The portion of the distribution remaining after step A above is treated as a dividend to the extent it does not exceed accumulated earnings and profits of the S corporation.

C. Any distribution remaining after applying the two steps above is treated as gain from the sale or exchange of property.

For partners, Distributions in excess of basis also results in gain. (IRC. 731(a)(1)) Any gain recognized is considered gain from the sale of exchange of the partnership interest. See Internal revenue code section 731 for how to determine the character of the gain.

Alternative Rule for computing partnership basis

In circumstances where the general rule for computing a partner's basis cannot be practicably followed, an alternative method of computing basis may be available. This alternative method computes the partner's basis by referencing the partner's share of the adjusted basis of partnership property they would receive upon termination of the partnership. (See Regulation 1.705-1(b) for more details about the alternative rule).