Affordable Care Act Tax Potholes: Know These Tax Breaks

Although it’s widely accepted that the tax code is complex, there is little forgiveness for making mistakes on a tax return. Tax filing procedures can fluctuate – the tax rules change, filing requirements are updated and the IRS rules can be amended. Two of the most important evolving factors to consider are tax credits and deductions. These not only reduce the tax liability at the time of return preparation but also help in financial and tax planning.

The Affordable Care Act has brought its own set of tax rules, including new penalties. While most taxpayers will only need to address a new line item, others may have a more complex situation ahead of them. It’s important to consider your situation and any applicable tax breaks that you can claim this tax season. The Wall Street Journal shares:

HEALTH INSURANCE. Get ready for some new lines on this year’s forms because of the Affordable Care Act. For most, this should be fairly simple. “The majority of taxpayers—more than three out of four—will simply need to check a box to verify they have health insurance coverage,” the IRS says. Others will face trickier issues. Some may be eligible to claim an exemption from the coverage requirement. But those who don’t have qualifying coverage or who don’t qualify for an exemption will need to make “an individual shared responsibility payment.” Others may qualify for a “premium tax credit.” See irs.gov/aca for details. For some “this will be very complicated,” warns Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting U.S.

SOCIAL SECURITY TAX. Some people who worked for two or more employers last year may have paid too much in Social Security tax. The maximum amount that should have been withheld by all your employers for 2014 was $7,254. (That’s 6.2% of $117,000, the maximum amount of wages subject to the Social Security tax.) If you had too much withheld, you typically can claim the excess as a credit. See IRS Publication 17 for details.

INVESTMENT LOSERS. Did you lose money on stocks, bonds, and other investments you sold last year? Use your capital losses to offset capital gains. But what if your losses exceed your gains? You can deduct as much as $3,000 a year ($1,500 for married taxpayers filing separately) of net losses against your wages and other ordinary income. Carry over excess losses into future years. Warning: You can’t deduct a loss on the sale of your personal residence.

IRA CHARITABLE TRANSFERS. Late last year, lawmakers revived a provision that allowed many people age 70½ or older to transfer as much as $100,000 directly from an IRA to charity, tax-free, during 2014. The transfer counted toward the taxpayer’s required minimum distribution. You’re supposed to report your “qualified charitable distribution” on your return even if it’s tax-free. Just make sure you don’t put it on the wrong line. For example, if you file Form 1040, report your “QCD” on Line 15a. Don’t include any of that distribution on the line for ‘taxable amount’ (Line 15b). Instead, write “QCD” next to the line.

HIGHER STANDARD. About two out of every three returns typically claim the standard deduction. For 2014, the basic standard deduction is $12,400 for those married and filing jointly, or $6,200 if single or married and filing separately. There are additional amounts for people who were 65 or older, or blind. Before taking the standard deduction, check to see if you might be better off itemizing.

SALES TAXES. Late last year, Congress revived a law that gives taxpayers who itemize an important choice: They can deduct either state and local income taxes paid in 2014—or their state and local sales taxes. (But they can’t deduct both.) The sales-tax option offers welcome relief for people in states with no income tax, such as Texas and Florida. But taxpayers in other states may benefit from taking the sales-tax deduction, says Mr. Luscombe, including those who paid large amounts of sales tax on major purchases such as cars or boats or those who reside in states with high sales tax rates.

HOME OFFICE. Many people who work at home don’t bother deducting their home-office expenses because the rules can be fiendishly complex and because of fears, it would increase their chances of getting audited. But if you qualify to deduct home-office expenses, you may benefit from a simplified calculation method allowed by the IRS. Multiply the square footage of the home used for your home office (but not more than 300 square feet) by an IRS-approved rate of $5 a square foot. Thus, the maximum deduction, in this case, would be $1,500.