This was originally published on Monday, February 10, 2014, in the Pacific Daily News. Click here to subscribe to the PDN.
Getting started on your taxes is always overwhelming, but once you collect and organize the necessary documents and decide if you will be itemizing or taking the standard deduction, then you are halfway there.
The next step is to start thinking about any major life changes that you experienced during 2013. Did you get married or divorced? Did you have a baby? Retired or start a new job? Did you or a family member start college? Or did you buy or sell a house?
The Internal Revenue Service, IRS, usually has a tax break or payment associated with major life moments.
Here are some deductions to think about:
• Extra income/winnings. When filling your taxes, you must include not just your wages, tips or interest you made on bank or stocks, you may have to report other types of miscellaneous income as well. If you won a prize through a raffle, contest, drawing or an award, the cash value of the prize is taxable. Also, the winnings from poker tournaments, lotteries, bingo and other gambling income must be taxed.
• Other income, such as child support, inheritance, welfare benefits or gifts are usually tax-free.
• Court. If you appeared in court and are instructed to pay for punitive damages, this most likely will be taxable. On the other hand, if you were awarded money or won a settlement for personal injury or sickness, you most likely will not have to pay taxes on them.
• IRAs. Also if you took money out of an IRA, you most likely will have to pay taxes. Money taken out of a Roth IRA is usually tax-free. Although your IRA contributions must be deducted from your paycheck before the end of 2013, you can still make contributions to your IRA through April 15, 2014, and it will count on your 2013 tax return.
For more information on whether you are to pay taxes on your extra income, go to the IRS website, www.irs.gov, and download IRS Publication 525, Taxable and Nontaxable Income.
• College. If you or your child(ren) attended college in 2013, you may get up to $2,500 from the American Opportunity Tax Credit or up to $2,000 from the Lifetime Learning Credit. Most universities or colleges will send you Form 1098-T. Note that you can only report the amounts that you actually paid in education expenses throughout 2013. To help you, go to the IRS website and find the Interactive Tax Assistant for step-by-step assistance.
• Social Security. If your only income during 2013 was your Social Security benefits, your payments are not taxable. If you had other income during 2013, you may have to include your Social Security payments as income.
According to the IRS, here is how you decide if your benefits are taxable:
• Take one half of your Social Security payments you received during the year and add it to your other income(s) such as pensions, wages, interest, dividends and capital gains. If you are married and filing jointly, perform the same calculations for you and your spouse’s income using one half of both of your incomes and adding it to your other incomes.
• If you are single and your total comes to more than $25,000, then your benefits may be taxable.
• If you are married and filing jointly and your sum is more than $32,000, your benefits may be taxable.
• If you are married and filing separately, your Social Security payments may be taxable no matter what the sum is.
To learn more if your Social Security payments are taxable, use Publication 915.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.