10 things to do now to take control of your taxes next year

This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.

If you’ve recently finished filing a tax return, a recommendation to start preparing for next year’s taxes might sound a little irritating.

After all, there’s a reason why many taxpayers wait until April to file their returns each year. Even with help from free online tax-preparation services like Credit Karma Tax®, filing your taxes can be aggravating.

But if you own a business, plan to itemize your deductions, or simply want to maximize your tax refund, thinking about your taxes now may pay off next year when you have to file this year’s taxes. Here are 10 tips that can help you in preparing for your taxes.


10 things to help you with preparing for taxes

“Taxes are not a once-a-year event,” says Micah Fraim, CPA, a Virginia-based tax advisor. “Your tax return is a reflection of the totality of what was done throughout the year.”

1. Review your filing status

Your filing status can affect how much you owe in taxes each year, and whether or not you have to file at all. Consider whether your filing status will change during the year.

For example, if you’re single but planning to get married by Dec. 31 of the current tax year, you may choose to file a joint or separate return with your future spouse when you file your taxes next year.

Alternatively, you may be filing as a single taxpayer if you expect to get divorced during the year, or as head of household if you’re single and having a child or taking on another dependent.

2. Look back to last year’s return

Hopefully by now you’ve filed your tax return for last year, or filed for an extension. If you’ve already filed your taxes for the current tax year, look back and think about areas that were problematic or extra stressful. Then think about how you can alleviate that stress for next year.

For example, if you did your own taxes and had trouble with the math, consider using a free online tax-preparation service like Credit Karma Tax® next year. If you had trouble verifying contributions you made to charity, plan how you’ll keep better records so it’s easier to claim a charitable deduction.

3. Decide how much tax you want withheld

If you received a big refund on your tax return last year, it may mean your employer is withholding too much tax from your paychecks.

Decreasing those withholdings might “[give] you access to more of your money throughout the year to invest or pay down debt,” says Fraim, “assuming you have the discipline to actually save the funds.”

If you’d rather have a bigger paycheck to work toward your financial goals, instead of that potentially big refund next year, meet with your payroll manager to review your withholding allowances on your W-4 form. Just be careful not to reduce your withholding by too much. Overly reducing your withholding may result in having too little tax withheld throughout the year, and could mean a big tax bill in April and potentially a penalty for failing to properly estimate your taxes as well.

Filing out your W-4 to optimize your refund

4. Set up your system

There’s more than one way to organize your tax records, but having some kind of filing system will help you keep everything in one place. Don’t wait until January to start organizing important documents. While many important tax documents will arrive in the beginning of the year, some — such as receipts for deductible expenses — will crop up throughout the year.

5. Save documentation for deductible items

If you own a business or plan to itemize your deductions, you should hold onto your receipts and other documents for eligible expenses. You won’t need to submit your receipts with your tax return, but you may need to substantiate your expenses if the IRS audits your return.

Do the same for home improvements, especially if you’re planning to sell your home. The amount you spent on home improvements increases your adjusted basis on your home, which is what the IRS uses to determine how much tax you owe when you sell it.

6. Keep track of your charitable contributions

When you do good for others, you deserve to get some tax benefits. While you can include charitable contributions to qualified organizations in your itemized deductions, doing so may require a little extra documentation. For example, you can’t deduct a contribution of more than $250 unless you have a written acknowledgment from the organization.

Also, noncash contributions may require different records, such as a description of what you donated and its fair market value. Be sure to get the full tax benefit of your generosity by keeping good records of all your charitable contributions to qualified organizations throughout the year.

7. Consider saving more for retirement

If you have a 401(k) or traditional IRA, you may get a tax break by contributing more money to your retirement account. That’s because contributions you make to these accounts are typically deductible on your tax return.

Keep in mind, though, there are income restrictions and contribution limits that determine how much you can put in an IRA, and deferral limits on how much you can put into your 401(k). Be sure you understand what those limits are, and how much you’re able to contribute for the year.

8. Plan for estimated taxes

As we mentioned before, seriously underpaying your taxes throughout the year can have very negative consequences. If you expect to owe at least $1,000 in taxes when you file, the IRS generally requires that you make estimated tax payments throughout the year. This is especially important for business owners or self-employed individuals who generally don’t pay income taxes on their earnings.

Note that you may need to work with a tax accountant to determine how much to set aside and pay each quarter.

9. Don’t make financial decisions based on potential tax breaks

The IRS offers a slew of tax credits and deductions that have the potential to reduce your tax liability. But if you’re spending money strictly for the tax break, you may end up losing money on the deal.

For example, you can deduct charitable contributions you make throughout the year if you itemize your deductions and donate to qualified charitable organizations. But if you donate $1,000 solely to get a tax deduction, and don’t first ensure your contribution meets deduction requirements, you could be out $1,000 with no tax break to show for your donation.

10. Familiarize yourself with new tax rules

The Tax Cuts and Jobs Act that took effect in December 2017 made big changes to the U.S. tax code.

The tax reform means two things for you.

1. Some of the tax breaks you might have taken advantage of in the past are gone.
2. There may be some new tax breaks you can use when preparing your taxes.

Check out our tax reform review to see the biggest changes and start thinking about things you can do to take advantage of them.

How could tax reform affect your paycheck in 2018?


Bottom line

Many taxpayers consider filing taxes a stressful experience, but it doesn’t have to be. Preparing for your taxes throughout the year can make the process of filing in April go much more smoothly.

And don’t forget, when it’s time to file, Credit Karma Tax® can walk you through your return step by step and help you find ways to maximize your refund along the way.


Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Cr… Read more.

Car leasing and taxes: Things to know before you sign

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2020 tax year.

As a way to score some shiny new wheels, car leasing has a lot going for it.

Generally, monthly payments and down payments for a lease are lower than monthly payments on a loan for a vehicle. And at the end of the lease term, you don’t have the hassle of trying to sell the vehicle if you don’t want to keep it. You can return it and buy or lease something newer.

Car leasing may fit your lifestyle if you’ve got a lower monthly budget for a car payment and want more car for your money, or you like having a new vehicle every few years.

However, leasing a car doesn’t get you out of vehicle-related tax obligations. On the other hand, it also doesn’t automatically disqualify you from any car-related tax deductions you might be eligible for.

Let’s check out some tax implications of car leasing.


  • Leasing 101
  • Car leasing and sales tax
  • Deducting sales tax on a car lease
  • Car leasing as a business owner

Leasing 101

First thing to consider: Do you fully understand the difference between car leasing and buying a car?

When you buy a car, you’re paying the full cost that you and the seller agreed upon. You’re paying to own the vehicle.

If you buy it outright with cash (way to go!) the car is yours when you pay and drive it off the lot. Finance it, and you’ll have a monthly loan payment. You’ll “own” the vehicle, but the finance company or bank that loaned you the money for the purchase will have a claim on the vehicle until you finish repaying the loan.

If you decide to lease a car, you’re not paying for the car — you’re paying for the use of the vehicle for the length of your lease term. New cars are generally depreciating assets, so the leasing company that owns the car can reasonably expect the vehicle will be worth less at the end of your lease than it was when you started. So during the lease term, you’re essentially paying the cost of that depreciation, plus charges, fees, and yes, taxes.

At the end of the lease term, you return the car — or buy it if your lease agreement allows.

Those are the basics of leasing versus buying a car, but there’s a lot more to know, including the need to negotiate the best possible terms for your lease agreement.

Car leasing and sales tax

Unless you live in one of the five states that currently don’t charge sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon), you’ll have to pay state sales tax to acquire a vehicle. This is true whether you pay cash, take out a loan or lease the vehicle. Depending on where you live, your vehicle purchase or lease may also be subject to county or municipal sales taxes.

Keep in mind, sales tax is different from all the state fees you may have to pay to register, title or inspect a vehicle you lease or buy. For example, even though Delaware has no state sales tax, it currently charges a document fee of 4.25% of the purchase price of a vehicle or the NADA book value, whichever is more. And depending on where you live, your vehicle may be subject to a yearly state property tax.

If your vehicle lease is subject to state sales tax, how much you have to pay and when you must pay it will vary by state.

Some states may charge sales tax on any down payment you make for your car lease. Some might tax the full amount of the vehicle while others may only levy a sales tax on the depreciation you’re paying during the lease term.

Depending on the state, you may be able to roll the sales tax into your monthly lease payment (a common tactic). Or you may have to pay the full tax at the beginning of the lease, which could make the cost of leasing comparable to buying.

With so many variables, it’s crucial to understand how sales tax will be attached to your lease, how much you’ll have to pay, and when you’ll need to pay it. Be sure to get a full explanation from the leasing company or dealer, or check out your state’s department of motor vehicles website.

Deducting sales tax on a car lease

If you pay sales tax on your car lease, you may be able to take a deduction for it on your federal income taxes. The so-called SALT deduction has been around for a while, and it allows eligible taxpayers to deduct certain state and local taxes, such as property tax and income tax or sales tax.

In December 2017, Congress passed tax reform legislation that capped the SALT deduction at $10,000. The change took effect starting with the 2018 tax year. You can now deduct either state, local and foreign property taxes, state and local real estate taxes, and either state, local and foreign income taxes or state and local sales tax. However, you can’t have it all. You must choose either sales tax or income taxes to deduct. And you must itemize in order to take the deduction.

Which option is best for you — deducting state, local and foreign property tax, in addition to income tax or sales tax, or taking the standard deduction in lieu of any qualifying SALT deductions — will depend on multiple factors.

For example, if you own a home and live in a state with high property taxes, you may decide that itemizing makes sense for you. And while you’re deducting state and local property taxes, you may opt for deducting sales tax as well, especially if you live in a state that doesn’t have a personal income tax.

However, if your total itemized deductions don’t exceed the standard deduction ($12,200 for single filers and $24,400 for those married filing jointly), you may choose not to itemize at all — in which case you can’t deduct the sales tax you pay on your vehicle lease or purchase.


Car leasing as a business owner

Leasing a car if you’re self-employed can have a different effect on your taxes. If you use your leased vehicle for your business, you may be able to deduct some or even all the vehicle’s operating costs. This will depend on how much of the vehicle’s use is for business purposes and how you deduct business expenses.

When you use your leased car for business, you can either use the standard mileage rate deduction or deduct actual expenses. To deduct all or part of your lease payment, you must use the actual expense method. You can only deduct the part of your lease payments that are for the business use of the vehicle.

When you choose the actual expense method, you may also be able to deduct other vehicle-related costs, such as depreciation, maintenance, repairs, gas, insurance and registration fees.

But taking a business deduction for your leased vehicle isn’t quite as simple as it may sound.

If your lease term is for 30 days or more (and it probably is), and you use your vehicle for business, you may also have to reduce the deduction for your lease payment by an inclusion amount for each tax year of the lease.

If the fair market value of the vehicle when you began the lease exceeded a set amount, you’ll have to figure your inclusion amount using the fair market value (the capitalized cost when you signed the lease), and the IRS formula and tables for calculating the amount. You can learn more about this stipulation in IRS Publication 463.

Alternatively, you can simply take a business deduction using the standard mileage rate.

If you choose the standard mileage rate deduction, you can’t deduct any part of your lease payment or other actual business-related vehicle costs, like maintenance, repairs, gas, insurance or registration fees. And if you decide to use the standard mileage rate for your leased car, you’ll have to continue with that method for the duration of the lease.


Bottom line

If you’re leasing a car for personal use, the tax impact of leasing isn’t much different from that of buying a car. However, if you’re self-employed, leasing a car can offer additional tax advantages you may want to consider.

Just be aware that there are rules on how businesses can deduct vehicle-related expenses, including the cost of a car lease. If you’re not sure how to deduct business-related vehicle expenses, it might be a good idea to seek advice from a tax professional.

When you’re ready to file your income taxes, Credit Karma Tax® can help you file your federal and single-state income tax returns, and itemize deductions if you decide to do so.


Relevant sources: CFPB: Financing or Leasing a Car | Alaska Dept. of Revenue: Sales and Use Tax | Delaware Dept. of Revenue: Learn About Gross Receipts Taxes | Montana Dept. of Revenue: Businesses Purchasing Goods for Resale | New Hampshire Dept. of Revenue Administration: Frequently Asked Questions | Oregon Dept. of Revenue: About sales tax in Oregon | IRS: Press Release | U.S. House of Representatives: Tax Cuts and Jobs Act

Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Evelyn Pimplaskar is an assigning editor with Credit Karma, covering checking, savings, personal finance and taxes. With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s wri… Read more.

Challenging property taxes to help defray loss of SALT deduction

This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma Tax®.

Being able to deduct state and local property taxes from your federal income taxes has long been a big bonus of homeownership.

However, due to the 2017’s Tax Cuts and Jobs Act, you may no longer be able to deduct all the property taxes you pay from your federal income taxes.

When the Revenue Act of 1913 created the modern system for taxing income at the federal level, it contained a provision allowing taxpayers to deduct state, county, school and other local taxes they paid from their federal income taxes. Prior to the tax reform law passed at the end of 2017, you could deduct the amount you paid for state, local and foreign income taxes; state, local and foreign real property tax, and state and local personal property taxes. Or you could choose to deduct state and local sales taxes instead of state and local income taxes.

This meant that taxpayers who opted to take this deduction didn’t pay federal income tax on money paid to state, local and foreign governments for income or property taxes — but that’s no longer the case.


  • Impact of 2017 tax reform on SALT deduction
  • What does it mean to appeal your property taxes?
  • Grounds for appeal?
  • How to appeal property taxes

Impact of 2017 tax reform on SALT deduction

The Tax Cuts and Jobs Act of 2017 temporarily capped the deduction for state and local taxes — called the SALT deduction — at $10,000 starting Jan. 1, 2018, and ending on Dec. 31, 2025. It also eliminated the deduction for foreign real property taxes.

If your combined state income taxes, property taxes and other local taxes exceed $10,000 — which can easily happen if you live in a state with high income and property taxes like New York, New Jersey or California — you won’t be able to deduct all you paid, and your federal tax bill could increase.

In 2015, 44 million households claimed the SALT deduction, making this deduction more popular than either the mortgage interest deduction or deduction for charitable donations. While you must itemize to claim the SALT deduction (instead of taking the simpler standard deduction), around 30% of American taxpayers did just that in 2015, deducting state and local taxes on their federal returns.

Since deductions for state tax can reduce the amount of your taxable income, limits on the SALT deduction could mean your taxable income is higher — which in turn can lead to a higher federal income tax bill. However, if you have a high property tax bill, one option might help you offset the impact of the reduced SALT deduction: You could appeal to reduce your property tax assessment.

What does it mean to appeal your property taxes?

When you own a home — or any other type of real estate — you typically have to pay property taxes to a municipality, county or state. Sometimes, more than one governing body will tax your property.

The taxing authority calculates your property taxes based on the assessed value of your home multiplied by your local tax rate. While you probably can’t change your local tax rates, you may be able to challenge the assessment and ask for a reduction in the assessed value of your home.

Generally, taxing authorities set assessed values on homes and other properties within their jurisdiction. They typically employ an assessor, who reviews information about your property, such as sale prices of similar properties in the area, how much it might cost to replace your property, and your costs for maintenance and improvements.

Usually, a home’s assessed value is less than its fair market value (the amount you could reasonably expect to sell the house for in the current market).

If you can get your assessed value on your home reduced, you can lower your property taxes.

Grounds for appeal?

Of course, you can’t just get your property tax assessment reduced because you feel that it’s too high. Typically, you need to be able to demonstrate that your home’s assessed value is too high. Tax reform may give you more reason — and grounds — for appeal.

The cap on the SALT deduction may ultimately reduce home values by 4% nationwide, with bigger drops in value for higher-priced homes, Moody’s Analytics estimates. If home values fall, this could bolster appeal efforts of homeowners most likely to be affected by the new limit on SALT deductions.

Even if property values hold steady, millions of homeowners may still be able to successfully appeal property taxes, thus lowering their tax bills and reducing losses caused by the new limits on the property tax deduction. Researchers from Ball State University Center for Business and Economic Research analyzed assessments in Indiana and found that more homes were over-assessed than under-assessed since the 2008 recession, with low-value residential properties most likely to be over-assessed.

How to appeal property taxes

Every taxing authority sets its own appeals process. However, common steps for appealing property tax assessments can include the following:

  • Submitting an appeal by the deadline set by the county. Typically, property owners can appeal by a set date each year or within a limited period of time after purchasing a new home or receiving an assessment for a newly built house. Appeals typically must be submitted in writing and the county often has specific forms to use to submit the appeal.
  • Providing grounds for appeal. You’ll need to provide proof your home is over-assessed. This can come in the form of documentation showing recent sales of similar properties or in the form of a current appraisal prepared by a professional appraiser. You could also provide evidence of other reasons your property’s assessed value should be lowered, such as evidence of excessive deterioration of the property.
  • Attend a hearing. While some governing authorities adjust your assessment after submission of a written request — provided you have enough documentation to prove your home is assessed higher than other comparable homes in your area — others require you to attend a hearing. If your county doesn’t require a hearing, you’ll usually have the right to request one if your written appeal doesn’t result in your assessment being reduced.

Typically, you don’t have to pay anything to appeal your property tax assessment, although some governing authorities require a fee for data on comparable properties that you can use to demonstrate your property’s fair market value. You’d also need to pay for an appraisal if you want an expert opinion to present as evidence that your assessment should be lowered.

You can hire attorneys or other experts to help with the property tax appeals process if you aren’t comfortable going through the steps yourself. However, the process is typically straightforward. The most important step is to provide solid support for your case.


Bottom line

If the new cap on SALT deductions means you won’t be able to deduct all your property tax, you still might be able to help defray the cost of your property taxes. Provided you can demonstrate your home’s assessed value is too high, appealing your assessed value may help reduce your property tax bill, which could help offset some of the financial loss resulting from the new cap.

It’s also worth noting that some high-tax states are looking for additional ways to help home-owning taxpayers in those states, such as treating state taxes as charitable contributions. These state governments may or may not succeed; the IRS announced that it plans to issue proposed regulations addressing deductibility of state and local tax payments for federal income tax purposes. And it’s also important to remember that the SALT deduction cap is only temporary — unless the federal government extends the cap or otherwise reforms tax policy between now and Dec. 31, 2025.


A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.


About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher… Read more.

FSAs: A tax break for paying childcare and healthcare costs

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma Tax®.

You might have heard about the mysterious “dependent care account” or “flexible spending account” at work.

While you may understand how a health savings arrangement, or HSA, works, FSAs can be confusing. How do FSAs work? And what’s the difference between an FSA you use for healthcare costs and one you use for dependent care costs?
Let’s look at these accounts, how they work, and how they could help you pay for certain expenses — like childcare and some healthcare costs — tax-free.


  • The basics
  • How FSAs work
  • Using your dependent care FSA money
  • Using your healthcare FSA
  • A game plan for using your FSA
  • Estimating how much to save

The basics

The “A” in FSA actually stands for “arrangement,” not “account.” A flexible spending arrangement is a benefit that employers can choose to offer their employees.

Generally, FSAs can be used to reimburse costs for dependent care, adoption or medical care — but you can’t do all three with one FSA. A dependent care FSA is specifically intended to pay for dependent care expenses, while a healthcare FSA is for paying qualified medical costs.

FSAs are only available through an employer, and employers are not required to offer them. In fact, according to the Bureau of Labor Statistics, just 36% of workers in the private sector had access to a dependent care FSA in 2014. And in 2015, 59% of private-sector workers had healthcare FSAs.

Since you can’t shop around for an FSA the way you can with a bank account, it’s important to “choose your employer wisely,” advises Lesley Pearson, a CPA and blogger at Stronger Wallet.

“Make sure you understand the fringe benefits available to you from your employer,” Pearson advises.

How FSAs work

If your employer offers FSAs, you’ll need to speak with your benefits coordinator to set up deductions from each paycheck that will be funneled into your FSA account.

Here’s how the process typically works for both healthcare and dependent care FSAs.

  • Your employer offers a flexible spending arrangement as part of a “cafeteria plan” — a benefits plan maintained by your employer that meets specific requirements of the Internal Revenue Code.
  • You decide how much of your salary (within limits) you want to put into the arrangement and what type of FSA you want — healthcare or dependent care.
  • Your salary is reduced by the amount you decided, and instead of paying those wages, your employer puts the funds into your FSA. Because of this arrangement, neither you nor your employer has to pay federal taxes on that money.
  • You use the funds in your FSA to pay for qualified expenses.

Here’s an example of how FSA contributions could reduce your income — and, therefore, your tax obligations.

Imagine your annual salary is $50,000 per year. You elect to put $5,000 into your dependent care FSA. At the end of the year, when you get your W-2 from your employer, it will show taxable income of $45,000 and an FSA contribution of $5,000 — which you won’t pay taxes on.

If you’re married filing jointly and have three dependents, this would mean you could save $600 in federal income taxes!

To calculate how much you could save, you can use this calculator.

Using your dependent care FSA money

It’s important to understand what you can use your FSA funds for. It’s a good idea to talk to your benefits administrator for information about qualified expenses you can pay with your FSA, and how that payment will occur.

For example, some accounts allow you to use a special debit card, while others require you to spend the money first out of your own pocket and then file for a reimbursement.

Generally, you can use a dependent care FSA to pay for qualified expenses for …

  • A qualifying child younger than 13 who is your dependent
  • A disabled spouse who isn’t able to care for themselves
  • Any disabled person who can’t care for themselves and whom you claim as a dependent (provided they had gross income of less than $4,050, didn’t file a joint return, and neither of you can be claimed as a dependent on someone else’s return)

The types of expenses that can qualify for payment through a dependent care FSA include …

  • The costs of care for a child or other qualifying dependent while you worked or actively looked for work
  • Maid, housekeeper, cleaning person, babysitter or cook if part of their job included caring for a qualifying person (including your share of their employment taxes)
  • Daycare center costs
  • Day camp (but not sleep-away camp)

Limits on the amount you can contribute to a dependent care FSA are generally $5,000 per year ($2,500 for people who are married filing separately). However, you can’t contribute more than you (or your spouse, if you’re married) earned that year.

Using your healthcare FSA

When you sign up for an FSA, you’re required to pledge a certain amount of cash from each paycheck to go to the account. In 2018, you can save up to $2,650 per year in a healthcare FSA. That means if you’re paid biweekly, you can save up to $101.92 from each paycheck into this account.

One of the odd (but very nice) quirks of this account is that you will still have access to the full amount you elected to contribute for the year, even if you haven’t contributed enough to your healthcare FSA to cover the cost yet.

For example, let’s say you need to have a surgery done, but it’s only February and you’ve only got $400 saved so far. If you’ve elected to make a full contribution of $2,650 for that year, you can go ahead and receive up to $2,650 now to cover your qualifying surgical costs, while you continue to make your contributions throughout that year.

In this way, “FSAs can be really helpful in cash flow planning” and avoiding medical debt, Pearson says.

You can use your healthcare FSA to pay for a wide range of medical expenses. Generally, anything that would be deductible as a medical expense under the Tax Code can be paid for with an FSA. Here’s just a small list of things that could qualify.

  • Doctor visits and procedures (including with dentists and eye doctors)
  • LASIK
  • Contact lenses and solution
  • Fertility treatment
  • Mental healthcare
  • Weight-loss programs (if a doctor prescribes it)
  • Over-the-counter medications only with a doctor’s prescription

It’s important to note that healthcare FSAs are not the same as health savings accounts. They are different in many ways, including that anyone with a high-deductible health insurance plan can open an HSA, while FSAs are only available through employers. You can read more about both types of accounts in IRS Publication 969.

FAST FACTS

What are some key differences between healthcare flexible spending arrangements and health savings accounts?

—FSAs are only available through employer benefits plans, but any qualified person with a high-deductible health insurance plan can set up an HSA for themselves. Employers often offer HSAs to workers with high-deductible plans.

—Anyone whose employer offers an FSA can open one, regardless of the type of health plan they have.

—FSAs reduce your total income before you have to pay taxes on it. However, the amount you contribute to an HSAs gets deducted from your taxes.

—If you change jobs, you can take your HSA with you. It’s not tied to your employer. Since an FSA is offered only through an employer, you can’t take it with you when you switch jobs.

—Contribution limits differ.

—HSAs are not “use-it-or-lose-it.” If you have money left in the account at the end of the year, you can carry it over to the next year. Generally, if you don’t use all your FSA money, you’ll lose it because it won’t carry over to the new year. Note that some employers may allow you to rollover up to $500 of your FSA from year to year.

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A game plan for using your FSA

The most important thing to know about FSAs is that they are “use-it-or-lose-it” accounts. If you don’t use up all the money in your account by the end of the year (with some exceptions), you forfeit the remaining money in the account.

However, some employers may allow you to carry over up to $500, or give you a two-and-a-half-month grace period to use remaining money at the end of the year.

At this point, you might be wondering if these accounts are even worth it, considering all the rules and the horrifying possibility that you could lose all your money at the end of the year. Don’t give up just yet!

FSAs can be beneficial if you understand how FSAs work and develop a game plan for using them.

First, you’ll need to make sure you understand how your FSA works. You can request your plan documents from your workplace benefits coordinator, or the company that administers your account. Take the time to read through the fine print.

Estimating how much to save

Next, consider how much you should save in your account.

“Most of us have some predictable, ongoing out-of-pocket expenses, and those recurring items can be used to determine how much you contribute to your FSA,” says Pearson.

For example, if you know your daycare center charges $150 a week, and that you’ll need care for 30 weeks in a year, you’ll want to put $4,500 (150 x 30) into your dependent care FSA. If you’re paid twice a month and you want to distribute your FSA withholdings throughout the whole year, you’ll need to elect to have $187.50 set aside from each paycheck ($4,500 / 24 paychecks = $187.50).

This approach can help ensure you spend all the money you save.

One thing’s for certain, says Pearson. “You don’t want to end up with unused funds at the end of the year.”

If you have a healthcare FSA and you still have some unused funds at the end of the year, you might be able to spend your funds through an online FSA store. Check with your benefits manager to see if you can do this.


Bottom line

Flexible spending arrangements can be a great way to reduce your taxable income — which means lower taxes — while saving money to pay for necessary expenses like childcare and healthcare costs. Just be sure you understand all the rules and requirements of your arrangement and have a game plan in place to ensure you use every dollar in your FSA before the deadline.


Jennifer Samuel, senior tax product specialist for Credit Karma Tax®, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.


About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee.… Read more.

IRS Gives Parents a Break When Adult Kids Return Home

The Millennial generation is moving back home in record numbers, and their parents are getting some sympathy from, of all people, the IRS.

The much-despised agency has a soft spot in its tax code for parents whose nests are no longer empty.

More than one-third of Millennials (ages 18 to 33) have come home to roost, rather than striking out on their own in the adult world. A Pew Center Research survey put the number at 21.6 million for 2012, and it’s trending up.

That is 3.1 million more adult children living at home since 2007. The struggling economy, as is the case for so many of America’s problems, is to blame. College graduates can’t find a job when they leave school, and paying back student loans is an issue for 70 percent of them. There also is a significant pool of young workers who either get laid off or fired and don’t have anywhere to turn.

So they knock on mom and dad’s door and ask if they can get their old room back, meals and use of the electric and water. And maybe some gas for their car and a few bucks for clothes and, well, pretty much everything they used to get when they were kids.

IRS Cuts Parents Some Slack

The IRS has compassion for that unenviable situation. They dole it out in the form of deductions and credits that can reduce a parent’s tax bill, sometimes considerably. Unfortunately, there is also a healthy dose of qualifications that your child must meet in order for you to receive the deductions and credits. After all, if this were simple, the IRS wouldn’t get involved.

For example, if your adult child was under 24, attended college in 2013, and came home because you would provide more than 50 percent of support for their expenses, then you can deduct $3,900 off your taxable income.

That’s a lot of ifs to overcome, but it’s probably an accurate description of what’s going on in many homes. Junior’s got a degree, but not a job, and you’re footing the bill while he worries about his next job interview.

Depending on what tax bracket the parents fall in, that could mean a savings anywhere from $585 to $1,287 less on your 2013 tax bill.

Passing the Qualifying Tests

That’s the good news. The bad news is that there are approximately 50 hypothetical situations for almost every break the IRS allows with your income tax.

They all start with making sure your child is either a qualifying dependent or qualifying relative, as defined in the IRS tax code.

A qualifying dependent must meet the IRS rules for age, relationship, support, residency and not be filing a joint return with a spouse. That means it’s possible you could deduct your child, even if he or she has married.

A qualifying relative must meet similar tests for relationship and support, but also not make more than $3,900 for the year. It is important to note that your child can’t qualify in both categories. In other words, you can’t deduct them as a qualifying dependent and a qualifying relative. It’s one or the other.

Credits, Deductions Have Definite Impact

If your child does pass the test for either qualifying dependent or qualifying relative, there are some nice credits and deductions available. Here are a few worth checking out:

  • American Opportunity Credit: This reduces your taxes by as much as $2,500 for tuition, books, supplies and necessary equipment the first four years your child attends college, as long as they are pursuing a degree.
  • Lifetime Learning Credit. You don’t have to be pursuing a degree for this credit, which can be as much as $2,000. Anyone who takes a course at a higher education institution can claim it as long as they make less than $63,000 on an individual return and $127,000 on a joint return.
  • If you make too much for the Lifetime Learning Credit, you can deduct up to $4,000 off your taxable income for paying their tuition and fees.
  • Child and Dependent Care Tax Credit.

There are plenty of nuances with each category, so it’s wise to read through the IRS explanation or consult an expert before making deductions. J. Alden Baker, a CPA who specializes in tax returns, offers this advice:

“There is a lot of ‘If this, then that’ in tax law. There are strings attached to almost everything, so you have to be careful before claiming your adult child as a dependent.”

Be careful. The IRS doesn’t give many people breaks, so if this works, take advantage of it.

Five Tax Tips for Beginners Filing on Their Own

Whether you’ve landed your first part-time job in high school or made your first career move after college, odds are that you haven’t taken a class on how to file your taxes.

It’s something everyone is not only expected, but required to do; however, we’re not often sat down and taught the basics.

If you’re feeling confused and overwhelmed, simply follow these guidelines and make your first tax season a walk in the park.

1. Know Your Filing and Dependent Status

Your tax rate is largely determined on whether you are single or married, and if you can claim any dependents in your household. The Internal Revenue Service (IRS) defines a dependent as someone who is supported by the taxpayer, such as a child or an elderly relative. If you’re still in school, you will likely have to identify yourself as being claimed as a dependent on your parent or guardian’s behalf.

2. Gather Required Documents and Forms

Staying organized is key to simplifying the tax process. Throughout the year, keep track of your pay stubs and any receipts for tax-deductible items (more on that below). Look out for your W-2s arriving via mail by February. Your company may allow you electronic access, as well. If you’re currently paying back student loans, you should tally up your payments and, if you’ve paid an annual total of $600 or more in interest, you may receive a 1098-E form in the mail. First-time filers will likely be able to use the 1040EZ form, which is generally for single and joint filers with no dependents. Using tools like TurboTax or consulting a certified public accountant (CPA) will help you determine what forms you’ll need and what information is most relevant to your return.

3. Take Advantage of Deductions and Tax Credits

It’s helpful to know the difference between deductions and tax credits: Deductions reduce your taxable income, and credits are a sum deducted from the total amount of taxes you owe. Money spent on recognized charities, for example, can be counted as a deduction. Always save any deduction-related receipts throughout the year to ensure taking advantage of all tax credits and deductions. Visit the IRS website to discover other deductions and credits that may apply to you.

4. Decide How to File

If you’re a first-timer with a straightforward return, you can probably file on your own using a program like TurboTax or H&R Block at Home. As long as you use accredited software, it’ll be safe, simple and offer step-by-step guidelines. Plus, filing electronically will result in a faster refund. If your tax return is somewhat complicated, you may want to look into hiring outside help, such as a CPA. If you can afford a CPA, you’ll have the added benefits of discovering other deductions or credits you didn’t know about, as well as minimizing any chances of making mistakes.

5. Visit IRS.gov

It may not sound exciting, but the IRS website is actually incredibly easy to navigate. It’s a fantastic resource for any questions that may still arise. You can find a multitude of articles, tutorials, and laid-out guidelines, as well as any of the forms you may need. Plus, becoming familiar with the website will provide you with a simple way to remain aware of any changes to the tax code and how you may be affected.

File for free with Credit Karma Tax®

Tying the knot this year? Check out these tax benefits of marriage

This article was fact-checked by our editors and reviewed by Jennifer Samuel, senior product specialist for Credit Karma Tax®.

Getting married transforms virtually every aspect of your life — including your taxes.

You and your partner might not have even considered the tax benefits of marriage when you decided to exchange “I do’s.” Yet your taxes — and the credits, deductions and other tax breaks couples enjoy when they’re married filing jointly — can have a big impact on your financial future together.

Your taxes will almost certainly change after you get married, and that can affect everything from your student loans to how much money you’re able to save for a house or retirement.

Here are some things to know about the tax benefits of marriage, and other ways getting married can affect your obligations to Uncle Sam.


Things to do first

In 2017, May, June, October and September were top months for getting married, according to wedding website The Knot. And for 2018, the website says August and October will be big months for weddings.

When it comes to filing your taxes, the IRS won’t care if you wed on the first day of May or the last day of December — it will consider you married for the entire year as long as you’re married by Dec. 31 of the tax year. So a spring wedding will mean you have almost the whole year to prepare for filing your federal income taxes as married filing jointly (or separately) for the first time. A fall or holiday wedding will mean you have a little less time to prepare.

Here are three things you should consider doing soon after you get married.

  • If you and/or your spouse are planning on a name change, head to your local Social Security office to record it ASAP. You’ll need to bring your marriage certificate to show evidence that you can change your name due to marriage. When you receive your new Social Security card, it’ll have your new name on it. This is important because the name on your tax return must match the name the Social Security Administration has on record for you.
  • Whether you’re moving in with your new spouse, they’re moving in with you or you’re moving together into a new home, notify the IRS of your new address. You can file Form 8822 to update your mailing address with the IRS. The IRS always mails refunds (if you’re due one) to your last-known address. Not updating your address could mean your refund check gets returned to the IRS.
  • Update your W-4 with your employer. This is the form your employer uses to calculate the amount of tax they withhold from your paycheck throughout the year. When you were single, you probably only took one allowance, for yourself, but now that you’re married you can take one for yourself and your spouse (provided you’ll be filing jointly). Adjusting your allowances could help you avoid overpaying taxes throughout the year. Check out the IRS withholding calculator for insight into how much tax you should have withheld.

Did an old mailing address leave you with a missing refund? Learn about unclaimed tax refunds

Things to know about “married filing jointly”

When you get married, you can no longer file your taxes as single or as head of household. You’ll need to choose between “married filing jointly” and “married filing separately.”

Generally, it’s better to file jointly, says Mike Zeiter, a CPA and PFS with Foundations Financial Planning.

“If you were filing ‘single’ and are now going to be ‘married filing jointly,’ most of the calculation amounts are doubled,” Zeiter says. “Under the new tax code, there is virtually no situation where you are able to file separate and pay less in taxes.”

One reason for this is because the dreaded “marriage penalty” has been largely eliminated for most people, according to Zeiter.

To understand how the marriage penalty works, consider this: One of the oddities of the old tax code was that there were unequal income-tax-bracket cutoff points for people earning money separately versus together. While this mostly affected mid- and high-income earners with similar incomes, lower-income people could be affected too if their new joint income made them ineligible for certain tax credits for lower-income folks.

The new tax code has greatly equalized these tax brackets for most people because they’re essentially just doubled versions of what you’d pay as a single filer. In other words, tax reform has smoothed out the unequal tax brackets for married and single filers earning the same income for all but the folks in the highest income tax bracket who earn more than $600,000 per year.

When should you file separately?

One situation in which you may want to consider filing separately from your spouse is if you have a ton of student loan debt and earn a much smaller income than your spouse.

That’s because if you have federal student loans and file for an income-driven repayment plan to ease the burden a bit, the government bases your new payment off the income reported on your tax return, including any jointly reported income.

Let’s say you earn $15,000 per year and your spouse earns $150,000. If you were to file jointly with your spouse, the government would calculate your payment based on an income of $165,000. If you were to file separately, the government may count your income as $15,000 per year, as it would not take your spouse’s income into account, and may be more likely to cut you a break.

The difference can be significant, Zeiter says.

“I will see some calculations where the payment is $400 less each month.”

In that scenario, your annual savings would be about $4,800.

If you’re on the public service loan forgiveness plan, according to Zeiter, the benefits of filing separately are even greater.

“The tax savings from filing jointly for 10 years can be insignificant compared to getting the entire loan amount forgiven after 10 years,” he says. “This is a scenario that I see where filing separately creates more wealth for a couple overall.”

The tax downsides of getting married

The so-called marriage penalty used to be one of the biggest downsides of getting married, at least in terms of your taxes. Now there are fewer tax disadvantages to getting married, but they do still exist.

A big one is that when you file your taxes as married filing jointly with your spouse, you can be equally at fault for any errors and intentional omissions, as well as any additional tax, penalties and interest that arise from those mistakes.

For example, imagine your spouse forgets to report some investment income or intentionally pads deductions. When the IRS catches the discrepancy on your joint return, you’ll both be held liable. You might have had no idea it was happening, but you may still be on the hook for the outstanding balance plus interest and penalties.

In fact, the IRS can come after you for the outstanding balance for the years that you filed with your spouse even if you end up divorcing later. It may be possible to get the IRS to drop your liability for tax fraud committed by your spouse, but you’ll need to file for Innocent Spouse Relief — a process in and of itself.


Bottom line

From potentially greater financial security to sharing life with someone you love, marriage has many benefits. The tax benefits of marriage may never be a driving factor in people’s decision to wed, but understanding those benefits and how to maximize them could help you feel even more blissful in your new life together.


Relevant sources: Seven Tax Tips for Recently Married Taxpayers | SSA: Program Operations Manual System (POMS) | IRS: Does the IRS Have Money Waiting for You? | Politifact: Eliminate the Marriage Penalty | U.S. Dept. of Education Blog: Something Borrowed: How Marriage Impacts Your Student Loans | IRS: Topic No. 205 Innocent Spouse Relief

Jennifer Samuel, senior tax product specialist for Credit Karma Tax®, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.


About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee.… Read more.

Benefits of making nondeductible IRA contributions

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2019 tax year.

Saving for retirement can be a win-win situation: You build your nest egg and maybe get some tax benefits, too.

For example, the contributions you make to an individual retirement arrangement (or IRA) may be tax deductible, provided you meet requirements. But what should you do when you don’t meet requirements for deducting IRA contributions?

Short answer: Even if you can’t deduct your IRA contributions from your federal income taxes, it might still be worth making them anyway.


  • What is an IRA?
  • What are traditional IRA deduction limits?
  • What are the Roth IRA contribution limits?
  • What are nondeductible IRA contributions?
  • How should I track nondeductible IRA contributions?

What is an IRA?

An IRA is a type of investment or savings account that comes with tax benefits to help you save for retirement. Two basic types of IRAs are available.

  • Traditional IRA — This type of account offers a tax deduction for the year in which the contribution was made. Contributions and earnings are taxable income when withdrawn in retirement.
  • Roth IRA — There is no available tax deduction associated with Roth IRA contributions. Instead, contributions and earnings can generally be withdrawn tax-free in retirement via qualified distributions.

For 2019, your total IRA contributions are limited to $6,000 (or $7,000 if you’re 50 or older) or your total taxable compensation for the year (whichever is less). So your total contribution limit ends up being whichever of those two amounts is lower.

This limit applies to all of your traditional and Roth IRAs. And it means that your total contributions can’t exceed the $6,000 limit ($7,000 if you’re 50 or older) — even if you have more than one IRA account. It’s a cumulative limit, not a per-account limit.

Each type of IRA has limitations that help dictate which type of account you choose to open. Read on to learn more.

What are traditional IRA deduction limits?

If you (and your spouse, if married) don’t have access to an employer-sponsored retirement plan — like a 401(k) — your contributions to a traditional IRA may be deductible on your federal income tax return. If you or your spouse do have access to a retirement plan at work, your deduction may be limited.

How much of your traditional IRA contributions is deductible is based on your filing status and your modified adjusted gross income, (or MAGI).

Here are the deduction limits for 2019 for those covered by a retirement plan at work. Just keep in mind that if you can take the full deduction, it’s limited by the amount of your contribution limit.

Filing status MAGI Deduction
Single or head of household

$64,000 or less

Fully deductible (up to limit)
$64,001–$73,999 Partially deductible
$74,000 or more Not deductible
Married filing jointly or qualifying widow(er) $103,000 or less Fully deductible (up to limit)
$103,001–$122,999 Partially deductible
$123,000 or more Not deductible
Married filing separately Less than $10,000 Partially deductible
$10,000 or more Not deductible

If you’re not covered by a retirement plan at work, here are the deduction limits for 2019 (again, if you can take the full deduction, it’s limited by the amount of your contribution limit).

Filing status MAGI Deduction
Single, head of household or qualifying widow(er) Any amount Fully deductible (up to limit)
Married filing jointly or separately with a spouse not covered by a work plan< Any amount Fully deductible (up to limit)
Married filing jointly with a spouse who is covered by a work plan $193,000 or less Fully deductible (up to limit)
$193,001–$202,999 Partially deductible
$203,000 or more No deduction
Married filing separately with a spouse who is covered by a work plan Less than $10,000 Partially deductible
$10,000 or more No deduction

If your contribution is partially deductible, IRS Publication 590-A contains a worksheet that can help you figure your reduced deduction.

What are the Roth IRA contribution limits?

Contributions to a Roth IRA are never tax deductible, but in return, your retirement distributions are tax-free. But you may not be eligible to contribute to a Roth if your income exceeds certain thresholds. Here are the income limits for 2019.

Filing status MAGI Contribution
Single, head of household or married filing separately and did not live with your spouse during the year $121,999 or less Up to the annual limit
$122,000–$136,999 Limited amount
$137,000 or more None allowed
Married filing jointly or qualifying widow(er) $192,999 or less Up to the annual limit
$193,000–$202,999 Limited amount
$203,000 or more None allowed
Married filing separately (and you lived with your spouse at any time during the year) $9,999 or less Limited amount
$10,000 or more None allowed

If your contribution to a Roth IRA is limited, use the worksheet in IRS Publication 590-A to help you determine your contribution limit.

What are nondeductible IRA contributions?

If you earn too much to contribute to a Roth IRA or to make deductible contributions to a traditional IRA, you can still make nondeductible contributions to a traditional IRA.

Generally people make nondeductible IRA contributions when they’ve maxed out their contributions to an employer-sponsored retirement plan and their income exceeds the phaseout limit to use a Roth IRA or make a deductible IRA contribution, says Justin Stevens, a Certified Financial Planner and President of O’Keefe Stevens Advisory Inc. in Rochester, New York.

“In these circumstances,” Stevens says, “it may still be advantageous to contribute more money to an IRA, even though they won’t receive a tax deduction in the current year.”

Because nondeductible IRA contributions are made with after-tax dollars, they come out tax-free in retirement. In this case, you are only taxed on the earnings portion of your retirement distributions.

For young taxpayers who aren’t eligible to contribute to a Roth IRA, “these deferral benefits may be significant over many years,” say Stevens.

But take care: unless you carefully track your nondeductible contributions and report them to the IRS, you could wind up paying taxes twice on the money you contribute — once when it’s earned and again when it’s taken out in retirement.

The problem is that deductible IRA contributions and nondeductible IRA contributions are often made to the same account, and your IRA custodian (the bank or brokerage where you have the account) isn’t required to track whether the contributions are deductible or not. Once you start taking distributions in retirement, the custodian simply reports the full amount of the distribution to the IRS using Form 1099-R. It’s up to you to calculate the tax-free portion.

How should I track nondeductible IRA contributions?

Every year that you make nondeductible IRA contributions, you are supposed to report those contributions to the IRS using Form 8606. The form establishes your nondeductible contribution basis in the IRA. It is also used to track any subsequent disbursements from your IRA after making nondeductible contributions.

Problems can occur when taxpayers prepare their own tax returns and aren’t aware of Form 8606. Even paid tax preparers may miss the form or be unaware that it was filed in a prior year. Credit Karma Tax®, supports Form 8606, and the free tax filing service can help users track nondeductible IRA contributions.

Without Form 8606, the IRS has no record of how much after-tax contributions you’ve made. The burden is on you to prove that you made them.

You can also be penalized for failing to file Form 8606 to report a nondeductible contribution. The penalty is $50 unless you can show reasonable cause for your failure to file. If you overstate your nondeductible contributions on Form 8606, you may be fined $100 unless you can show reasonable cause.


Bottom line

When you can’t deduct your contributions to a traditional IRA, there may still be future tax benefits for making nondeductible contributions. Just remember, all your IRA contributions — whether deductible or nondeductible, to a traditional or Roth IRA — can’t exceed a total of $6,000 per year ($7,000 if you’re 50 or older) for 2019.

If you’ve made nondeductible contributions in the past but forgotten to file Form 8606, it’s a good idea to file it now. Gather proof of prior IRA contributions, as well as copies of previously filed Forms 1040 to prove that you did not claim a deduction for the contribution in that year.

Form 8606 can be sent to the IRS as a freestanding form. Just be prepared to pay the $50 penalty unless you have a good explanation for why it wasn’t filed with your original tax return.

Once you report your nondeductible contributions, it’s a good idea to continue filing Form 8606 with your individual tax return every year. Even if you don’t have any reportable contributions or distributions in the current year, the form is a convenient way to document the makeup of your traditional IRA.


Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Janet Berry-Johnson is a freelance writer with a background in accounting and insurance. She has a bachelor’s degree in accounting from Morrison University. Her writing has appeared in C… Read more.

Is unemployment taxable during the coronavirus pandemic?

This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma Tax®. It has been updated for the 2019 tax year.

If you’re counting on unemployment to help you stay afloat financially through the coronavirus crisis, next year’s tax bill may not be front-of-mind for you right now.

But it’s important to understand that even though federal and many state governments have expanded unemployment programs in response to the pandemic, unemployment compensation is generally taxable.


  • How COVID-19 has affected unemployment benefits
  • Your tax responsibilities when you’re unemployed
  • Paying taxes when you are unemployed
  • Tax deductions and credits when you’re unemployed
  • Finding some help
  • If you can’t pay your taxes on time

How COVID-19 has affected unemployment benefits

The federal stimulus package includes several provisions aimed at making unemployment benefits more accessible and helpful to Americans struggling financially because of the pandemic. They include …

  • Radically broadening the range of people who can qualify for unemployment, including self-employed individuals
  • Extending to 39 weeks the total time that someone can receive unemployment (most state programs previously maxed at 26 weeks)
  • Allowing states to waive the usual waiting period to receive benefits
  • Creating an additional $600 per-week Federal Pandemic Unemployment Compensation amount. Note that while the start date for this benefit is state-specific, it expires on July 31, 2020.

You can find information on unemployment benefit changes due to COVID-19 as well as links to each state’s unemployment programs on the U.S. Department of Labor’s CareerOneStop website.

State and federal efforts to expand unemployment benefits aside, unemployment compensation is generally still subject to income tax. And if you don’t pay enough toward your income tax obligations throughout 2020, you could end up with a tax bill — and possibly penalties and interest — when you file your tax returns in 2021.

So keep in mind: The additional $600 per week that the Coronavirus Aid, Relief and Economic Security Act provides for qualifying state unemployment insurance beneficiaries is considered taxable income — and it adds up fast. For example, the extra $600 alone adds up to $9,600 in income if you collect this additional benefit for a 16-week period. That’s income taxpayers will have to pay taxes on for the 2020 tax year. Those who fail to have taxes withheld from their unemployment benefits should consider setting up estimated quarterly payments with the IRS, or setting aside a portion of their weekly checks to put toward their taxes next year.

Your tax responsibilities when you’re unemployed

When you’re out of work, unemployment benefits can help keep you going financially — hopefully until you can find another job.

Unemployment benefits can come from multiple sources, including the following:

  • The Federal Unemployment Trust Fund
  • State unemployment insurance
  • A company-financed fund (which may not be taxable)
  • A private fund to which you voluntarily contributed

Generally, unemployment income is taxable as income at the federal level and may be at the state level, too, depending on where you live. But if you receive unemployment benefits from a private fund that you voluntarily contribute to, it’s only federally taxable if the benefits you receive exceed the amount you paid into the fund.

In addition to paying tax on unemployment benefits, if you worked part of the year before losing your job, you may also be responsible for paying federal income tax on those wages, as well.

Typically, employers withhold federal and state taxes from wages, based on how much you earned and information you provided on your W-4 form(s). Whether you owe any additional tax on those wages will depend on the selection you made on your W-4 form(s) and whether your former employer withheld enough federal income tax (and state income tax, if applicable) from your paycheck. If they took out too little, you could owe taxes on that income when you file your returns.

Paying taxes when you are unemployed

Unless the federal and/or state governments act to change the law, you’ll likely have to pay federal income tax (and possibly state income tax) on the unemployment compensation you receive while out of work because of COVID-19.

You have multiple options for paying your taxes when you’re unemployed.

You can choose to have federal income taxes withheld from your unemployment compensation when you apply for unemployment benefits, or you can choose not to do so and just pay estimated taxes each quarter to avoid a tax bill when you file your return.

Of course, you could also wait until you file your taxes and pay any tax you owe at that time. But you may want to think long and hard before choosing that option, especially if you’re worried you may continue to struggle financially even after the COVID-19 crisis subsides. The federal tax system is pay-as-you-go, so you’re supposed to pay taxes on income as you receive it throughout the year. If you don’t pay enough throughout the year, a big tax bill in April might not be your only worry. You could also face a penalty for underpaying your estimated taxes.

“If your total income for the year — including wages, unemployment benefits, interest, retirement distributions and all other income you made — is less than the standard deduction for your filing status, you normally aren’t required to file a tax return,” says Christina Taylor, senior manager of tax operations for Credit Karma Tax®. “In that case, you might not need to have tax withheld from your unemployment.”

“But if your total income exceeds your standard deduction amount, you’ll likely need to file and pay tax on your income,” she adds. “In that case, it’s best to have tax withheld from your unemployment income as you receive it. And if you’re not sure, err on the side of caution, so you won’t get an unpleasant surprise by owing on your next tax return.”

Tax deductions and credits when you’re unemployed

You may be required to file a tax return when you’re unemployed, depending on your situation — and doing so can have benefits. If you’re eligible for any refundable tax credits, the only way to get them is to file a tax return. And itemizing deductions may allow you to recoup certain expenses incurred while you were unemployed.

Earned income tax credit

The earned income tax credit, or EITC, is a federal income tax credit for working people with low to moderate income. If you earned money through wages or self-employment work before losing your job, you might qualify for this credit in the tax year in which you had eligible income.

But unemployment benefits don’t count as earned income for the purpose of the EITC, so if you didn’t have any earned income in the tax year, you won’t be able to claim this credit. Eligibility also depends on other factors, including your filing status, the number of qualifying children you can claim, and the amount of your earned income.

The credit is refundable, meaning that, in addition to reducing the amount you owe, it could give you a refund over the amount of tax you paid in.

Dependent care and child tax credits

If you have children, you may qualify for the child tax credit, which is $2,000 per qualifying child. And if your child tax credit amount exceeds your tax obligation for the year, you may be able to claim the Additional Child Tax Credit of $1,400 per qualifying child.

If you had to pay someone to watch your child or other dependent while you looked for work, you may also be able to claim the nonrefundable child and dependent care tax credit. For 2019 taxes, the amount of credit is between 20% and 35% of allowable expenses, which maxes out at $3,000 for one qualifying person or dependent, or $6,000 for two or more qualifying persons or dependents.

The percentage is based on your adjusted gross income, and you (and your spouse, if married filing jointly) must have earned income in order to claim the credit. This means that if your only source of income in a year was unearned — from unemployment benefits, for example — you would not be eligible to claim this credit.

Retirement savings credit

In addition to certain IRA contributions being tax deductible, you may also be able to take a credit for eligible contributions to your IRA or employer-sponsored retirement plan. The amount of the saver’s credit for 2019 taxes ranges from 10% to 50% of contributions, up to $2,000 for single filers and $4,000 for those married filing jointly, depending on your income.

For example, if you’re single and your adjusted gross income is less than $18,500, you could get a 50% credit — up to $1,000 if you contributed $2,000 or more to your IRA. But if you’re married filing jointly and have an adjusted gross income of more than $62,000, you can’t get the credit.

Finding some help

When you’re unemployed, meeting your daily obligations — let alone tax responsibilities — can be difficult. So if you need additional help, consider taking advantage of any government assistance programs that can offset some everyday living expenses, like the cost of food, health insurance and utilities. Use the Benefit Finder on USA.gov to answer a few questions and find out which benefits you may qualify for.

If you can’t pay your taxes on time

If you do end up owing the government money and can’t pay your taxes on time, the IRS offers several payment plan options that can help you.

But be aware that not paying the full amount you owe by the filing deadline will mean you’ll pay interest and possibly penalties on the unpaid amount — even if you arrange a payment plan with the IRS.


Bottom line

Being unemployed is upsetting for many people, and this year it could feel especially scary. But help is available for people left jobless because of COVID-19.

Just remember that, even when you’re unemployed, you’ll likely have tax obligations. If you don’t have taxes withheld from your unemployment compensation, you should pay estimated taxes on this income throughout the year. If you don’t pay throughout the year, the IRS will expect you to pay the full tax you owe by the filing deadline, and you may face an underpayment penalty. You may also be subject to additional tax on the income you earned while working if you didn’t withhold enough.

Relevant sources: Department of Labor News Release: Unemployment Insurance Weekly Claims | IRS: Unemployment Compensation | 1040 and 1040-SR Instructions Tax Year 2019 | IRS Form 1040 U.S. Individual Income Tax Return 2019 | Coronavirus Aid, Relief and Economic Security Act | U.S. Department of Labor Unemployment Insurance Fact Sheet


A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.


Janet Berry-Johnson

5 tax tips every farmer should know

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2020 tax year.

If city folks view farming life as simple, it may just be because they know nothing about filing taxes for a farm business.

Operating a farm often involves several different income sources and expenses, deductions and credits, all of which can complicate things when it’s time to file your taxes. While the average age for farmers as of 2012 was 58.3, first-time farmers are still entering the business — including millennials.

According to the USDA’s 2012 Agricultural Census, the number of farmers ages 25 to 34 increased nearly 2.2% between 2007 and 2012. What’s more, more than 469,000 farmers have been farming fewer than 10 years, and more than 171,000 have been farming for fewer than five years.

If you’re filing your taxes as a farmer for the first time — or are a long-time farmer who’s still confused about how farms get taxed — these five tax tips for farmers may help shed a little light on how it all works.


  1. Know whether your farming activity counts
  2. Know what you must claim as income
  3. Know what expenses you can and can’t deduct
  4. Take advantage of other tax breaks
  5. Get help with filing if you need it

1. Know whether your farming activity counts

Who does the IRS consider a farmer? If you grow veggies in your backyard garden on the side and sell them at a roadside farm stand, does that qualify you as a farmer?

The IRS says you’re a farmer if you “cultivate, operate or manage a farm for profit, either as an owner or a tenant.” Farms include plantations, ranches, ranges, orchards and groves, and you can raise livestock, fish or poultry, or grow fruits and vegetables.

But your backyard produce sales probably won’t qualify you as a farmer for tax purposes — especially if you also work a full-time job that’s not farming-related. Instead, the IRS would likely consider the money you make from your victory garden as hobby income, since you don’t depend on that income for your livelihood.

As a result, you wouldn’t have access to the tax breaks the IRS affords farmers.

2. Know what you must claim as income

As a farmer, you’re likely to have multiple streams of income, and there may be some income sources that you didn’t know you needed to report.

To help, here’s a quick list of farming income you may have to report.

  • Sales of livestock and other resale items
  • Sales of livestock, produce, grains and other products you raised
  • Distributions from a cooperative
  • Agricultural program payments
  • Commodity Credit Corporation loan proceeds (you can choose to count this as income if you pledge part or all your production to secure the loan)
  • Crop insurance proceeds
  • Federal crop disaster payments
  • Income you received for custom hire or machine work
  • Gasoline or fuel tax credit or refunds

If you own a farm operated by a tenant and you didn’t materially participate in the farm’s management or operation, you’ll also need to report rental income based on crop or livestock shares the tenant produces. But you won’t have to pay self-employment tax on the rental income.

As a farmer, you may have many sources of taxable income — including bartering, cancelled debt, prizes from livestock competitions and more. See IRS Publication 225 to learn more about farm income. Because there are so many different income sources you must report, it’s important to keep meticulous records throughout the year to make it easier to file your return correctly. You’ll report the income, along with your expenses, on Schedule F of Form 1040.

3. Know what expenses you can and can’t deduct

Farmers get a lot of deductions for the expenses they incur, but that doesn’t mean you can deduct everything. Here are the five expenses you can’t deduct.

  • Personal or living expenses that don’t produce farm income (e.g., the cost of repairing your home)
  • Expenses of raising anything you or your family used (e.g., if your farm business is growing vegetables, but you raise hens for your family, the costs of raising those chickens is nondeductible)
  • The value of raised animals that died
  • Inventory losses
  • Personal losses

Fortunately, the list of expenses you can deduct is much longer. Here are some examples.

  • Seeds and plants
  • Veterinary costs for livestock
  • Depreciation
  • Chemicals
  • Feed
  • Fertilizers and lime
  • Insurance (other than health)
  • Mortgage interest
  • Storage and warehousing

See Part II of Schedule F for a comprehensive list of deductible farm expenses.

4. Take advantage of other tax breaks

In addition to deducting your expenses, there may be other deductions and credits you can take as a farmer.

Home office deduction

You may be able to deduct certain expenses using the home office deduction if you used your home to conduct farming business. In order to qualify, you must have used part of your home exclusively and regularly as the principal place of business for your farming operation, and you cannot have another fixed location from which you managed and administered your business.

Check out IRS Publication 225 to learn more about business use of your home when you’re a farmer.

Deducting net operating loss

Farming can be an unpredictable business. One year you may have a bumper crop and make a tidy profit, while the next year sees drought and disease eroding your income. When deductible losses from operating your farm exceed your other income from the year, or you experience a personal or business loss that was more than your income, you can see a net operating loss.

When that happens, you may be able to carry the loss back up to two years and deduct it from income you had in those years. If you carry the loss back, you may be able to get a refund for all or some of the income tax you paid for that past year. Alternatively, you can choose to carry the net operating loss forward for up to 20 years.

Claiming fuel credits

If you used gasoline or other fuels for farming purposes, you might be able to claim a credit or refund on the excise taxes you paid. Note, however, that you can’t get a credit or refund for taxes paid on dyed diesel fuel and dyed kerosene.

Before you claim a fuel credit, be sure you understand the rules, requirements and limitations for doing so. Check out IRS Publication 225 to learn more.

Earned income tax credit

Although it’s not specifically designed for farmers, the earned income tax credit may be available to you if you meet the qualifications.

The credit is designed for working people with low to moderate income, so you may not be eligible if your net farm profit exceeds a certain amount. Check out the IRS publication on the EITC for more information.

5. Get help with filing if you need it

Credit Karma Tax® offers free filing for everyone, and supports some of the most-common tax forms used by business people, including Schedule F Profit or Loss from Farming. But depending on the complexity of your farm’s finances, you may want to get help from a tax professional. This may be especially important if you’re new to farming or you haven’t done your own taxes in the past.

In the end, the most important thing is that you properly report all income and expenses for your farming business, and get the most tax breaks that you’re eligible for. These tax tips for farmers may be a good start, but if you have questions regarding filing taxes as a farmer, check out the IRS website or consider consulting a tax professional.


Bottom line

Owning and operating a farm is hard work, but the government provides special tax benefits to those who go into the business of farming. As a farmer, it’s critical that you stay organized throughout the year, so that you’re not scrambling come tax time.

Also, it may be wise to work with a tax professional who specializes in farming and can help you maximize your eligible tax deductions and credits to reduce your tax liability as much as possible.

Relevant sources:

United States Department of Agriculture: National Agricultural Statistics Service | IRS: FAQ How Do You Distinguish Between a Business and a Hobby? | IRS: 2019 Instructions for Schedule F


Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Cr… Read more.