Line 1: Wages, salaries, tips, etc.

If you work for an employer (because you haven’t started your small business yet), you’ll receive a Form W-2, “Wage and Tax Statement,” which your employer is required to mail to you no later than January 31 (unless that’s a weekend day, in which case the deadline is the next business day after the weekend) of the year your tax return is due. This form helps you find out what you earned during the year and how much your employer withheld from your wages for taxes.

You may notice that there are multiple copies of the W-2. That’s because if you use regular mail to file your tax return, one copy goes with your federal return and another copy goes with your state return. You keep one copy and any other copies your employer gave you with your neat and organized tax records. If you file electronically, keep all the copies in your files with a copy of your completed tax return. In case you’re wondering, your employer has already sent the information on the W-2 to the Social Security Administration. If you look at the lower-left corner of your W-2s, you see what to do with each copy.

If you’re self-employed and you don’t receive a W-2, you get to skip this line, but you’ll end up doing much more work completing Schedule C so you can also fill in line 12 of the Form 1040 Schedule 1. (Chapter 8 has details on filling out Schedule C; I discuss line 12 later in this chapter.) For farmers, it’s Schedule F; see the later section “Line 18: Farm income (or loss)” for details.

Line 2a: Tax-exempt interest

In the distant past, because municipal bond interest wasn’t taxable, you didn’t receive a 1099 showing the tax-exempt interest you received. Now box 8 of Form 1099-INT lists the municipal bond interest paid to you, and box 9 gives you the portion of the box 8 number that comes from so-called private activity bonds, or municipal bonds that are actually funding joint public-private projects, such as privately owned utilities or football stadiums.

Even though you may not have to pay tax on tax-exempt interest, these numbers are important in figuring out how much of your Social Security benefits may be subject to tax and in allocating itemized deductions between taxable and tax-exempt income. Interest from private activity bonds is listed because it’s taxable under the dreaded alternative minimum tax (described later in this chapter).

Surprisingly, some people who invest money in tax-exempt bonds actually shouldn’t. These people often aren’t in a high enough income tax bracket to benefit. You’d be better off moving at least some of your money into taxable bonds or stocks (where longer-term capital gains are taxed at lower rates than ordinary income). See the latest edition of my book Investing For Dummies (Wiley) for more information on investing strategies.

Line 2b: Taxable interest

Add up all your interest income from boxes 1 and 3 of all your Form 1099-INTs and boxes 1, 2, and 6 of any Form 1099-OIDs you may have (for any so-called zero coupon bonds you may own). If the total is $1,500 or less, enter that amount on this line. If this amount is more than $1,500, you must complete Schedule B (or Schedule 1, if you file Form 1040A). No biggie! Schedule B and Schedule 1 are both easy to complete and are essentially identical, with the exception of a couple of questions regarding foreign accounts at the bottom of Schedule B. When you get the total, come back and fill it in.

Except for interest from municipal bonds, all the interest you earn is taxable. If you need examples, the IRS publications have pages of them. But don’t report the interest you earn inside your IRA or other retirement accounts; that interest is taxed (possibly) only when you withdraw the funds (a Roth IRA allows for tax-free investment returns, even at withdrawal).

If you keep lots of your money in bank accounts, you may be missing out on free opportunities to earn higher interest rates. Check out money market funds, a higher-yielding alternative to bank accounts. For longer-term investment ideas and the basics of retirement accounts, see Chapter 3.

Lines 3a and 3b: Ordinary dividends and qualified dividends

Just as long-term capital gains are taxed at lower rates, so too are corporate dividends paid out from stock holdings.

Box 1a of your Form 1099-DIV includes the amount of all the ordinary dividends (not capital gains), whether qualified for the lower rate or not. If you have more than one 1099-DIV, add together all the amounts in box 1a and plop the total on line 3a of your Form 1040. If you’re using Schedule B (because your total dividend income is greater than $1,500), carry the number from line 6 of those schedules over to line 3a of your Form 1040.

Form 1099-DIV includes all kinds of dividends and distributions from all sorts of companies, credit unions, real estate investment entities, and so forth. Some of these may qualify for the special qualified dividends tax rates; others don’t. Box 1b of Form 1099-DIV shows you the amount of qualified dividends.

Although you aren’t required to file 1040 Schedule B or 1040A Schedule 1 when your dividend income is less than $1,500, if you have more than a couple of Form 1099-DIVs arriving in your mailbox, you may want to anyway. One of the most common reasons for the IRS to contact you is because what you report on your return doesn’t match the information it has gathered about you from other sources. The more detail you can give on your return, the easier it is to find the discrepancies when they occur. These schedules are probably the easiest IRS forms ever devised, and you’ll have absolutely no problems completing them.

Lines 4a and 4b: Total pensions and annuities

Here’s where you report your retirement benefits paid out from your taxable pension, profit-sharing, 401(k), SEP, or Keogh plans. How these plans are taxed depends on whether you receive the funds in the form of an annuity (paid over your lifetime) or in a lump sum.

The amounts you fill in on lines 4a and 4b are reported on a Form 1099-R that you receive from your employer or your plan’s custodian. If the amount that you receive is fully taxable, complete only line 4b and leave line 4a blank.

If you didn’t pay or contribute to your pension or annuity using money you already paid tax on — or if your employer didn’t withhold part of the cost from your pay while you worked — then the amount that you receive each year is fully taxable. The amount that you contributed, for which you received a deduction — such as tax-deductible contributions to a 401(k), SEP, IRA, or Keogh — isn’t considered part of your cost.

If you paid part of the cost (that is, if you made nondeductible contributions or contributions that were then added to your taxable income on your W-2), you aren’t taxed on the part that you contributed because it represents a tax-free return of your investment. The rest of the amount that you receive is taxable.

Lines 5a and 5b: Social Security benefits

Politicians don’t want to do away with Social Security; they just want to pay fewer benefits and to tax more of it. As a result, they’ve made retirement (and the taxes associated with it) more complicated.

Don’t forget that if you’re married and file a joint return, you and your spouse must combine your incomes and your benefits when figuring whether any of your combined benefits are taxable. Even if your spouse didn’t receive any benefits, you must add your spouse’s income to yours when figuring whether any of your benefits are taxable.

Every person who receives Social Security benefits receives a Form SSA-1099, even if the benefit is combined with another person’s in a single check. If you receive benefits on more than one Social Security record, you may receive more than one Form SSA-1099. Your gross benefits are shown in box 3 of Form SSA-1099, and your repayments are shown in box 4. The amount in box 5 shows your net benefits for the tax year (box 3 – box 4). This is the amount you use to figure whether any of your benefits are taxable. If you misplace Form SSA-1099, you can order a duplicate at the Social Security website (www.ssa.gov/1099) or by phone at 800-772-1213.

To determine the taxable portion of your Social Security income, add one half of your Social Security income to all your other income, including tax-exempt interest. You must also include the following: interest from qualified U.S. savings bonds, employer-provided adoption benefits, foreign earned income or housing, and income earned by bona fide residents of American Samoa or Puerto Rico.

IRS Publication 17 gives you the worksheets you need to figure out what part, if any, of your Social Security benefits you need to include on line 20b of your Form 1040. To get this publication, call 800-829-3676 or visit www.irs.gov.

Line 7: Adjusted gross income

The next step is subtracting the amount in line 36 (which are your total adjustments) from line 6 (total income). The result is your adjusted gross income (AGI).

This number is used to determine a host of deductions and tax credits. So, elsewhere in this chapter as well as in other chapters, I refer to this line.

Line 8: Standard deduction or itemized deductions (from Schedule A)

This section refers to what can be a critical choice, so don’t make a quick decision between the two choices the IRS offers for deductions. Either choice is good in the sense that the result reduces your taxable income — the income that you owe tax on. However — and note, this is a big however — you may be cheating yourself if you automatically jump into the easier of the two choices and take the standard deduction.

The standard deduction is tempting to take because, without any complicated figuring, you simply take the deduction that corresponds to your filing status and that amount was greatly increased in 2018 thanks to the recently passed Congressional tax bill. If you’re filing as a single, you can take a standard deduction of $12,000; married couples filing jointly can take $24,000.

Itemizing your deductions on Schedule A (refer to Chapter 9) requires more work than just claiming the standard deduction, but if the total of your itemized deductions adds up to more than your standard deduction, don’t waste them.

If you’re in doubt about whether itemizing saves you money or what expenses you may actually itemize, examine the line items on Schedule A. Even if itemizing can’t save you money for this year’s return, educating yourself about deductions that are available is a good idea for the future. The major expenses that you may itemize include

• Some homeownership expenses, which includes mortgage interest, property taxes, and in some cases, private mortgage insurance (for mortgages originated after December 15, 2017, interest on up to $750,000 of mortgage debt may be deducted, down from the prior $1,000,000 for mortgages originated before that date)
• State income or sales taxes (state and local taxes now including property taxes are limited to a $10,000 annual deduction limit)
• Medical and dental expenses that exceed 10 percent of your AGI beginning in 2019, up from 7.5 percent
• Gifts to charity
• Casualty and theft losses, in a federally declared disaster area, that exceed 10 percent of your AGI

You may have noticed that this list has gotten shorter and stingier. That’s correct. However, some higher earners may benefit from getting rid of the overall phase out of a portion of itemized deductions for high income earners.

Line 12: Business income (or loss)

If you’re self-employed, you must complete Schedule C to report your business income and expenses. If you just receive an occasional fee and don’t have any business expenses, you can report that fee on line 21 (Schedule 1) as other income. And keep in mind that if you’re a statutory employee (a life insurance salesperson, agent, commission driver, or traveling salesperson, for example), report the wages shown in box 1 of your W-2 form on Schedule C along with your expenses. How do you know whether you’re a statutory employee? Simple: Box 13 of your W-2 will be checked.

As a general rule, you’re better off reporting your self-employment income on Schedule C, if you’re eligible. You can deduct business-related expenses against your income on Schedule C, and that can lower your income and the tax that you have to pay.

The amount that you enter on line 12 (of Schedule 1) is the result of the figuring and jumbling you do on Schedule C or C-EZ, which is a shorter version. See Chapter 8 for more information on those schedules.

Line 13: Capital gain (or loss)

You have a capital gain (or loss) when you sell stocks, bonds, or investment property for a profit (or loss). Losses on investments such as stocks, bonds, and mutual funds made outside of retirement accounts are generally deductible.

You report capital gains and losses on Schedule D, putting the net result on line 13. If all you have are capital gain distributions from a mutual fund, you can skip Schedule D and enter your capital gain distribution(s) on line 13. If you fall into this category, don’t forget to check that little box to the left of the amount you entered on line 13.

Line 14: Other gains (or losses)

You guessed it, grab another form — Form 4797, “Sales of Business Property.” (Check it out at www.irs.gov/pub/irs-pdf/f4797.pdf.) Fill out that form and enter the final figure on line 14. Use Form 4797 when you sell property that you’ve used in your business or that you’ve been depreciating (such as a two-family house that you’ve been renting out).

Line 17: Rental real estate, royalties, partnerships, S corporations, trusts, etc.

This line is an important one for all you self-starters who are landlords, business owners, authors, taxpayers collecting royalties, and those people lucky enough to have someone set up a trust fund for them. Schedule E, “Supplemental Income and Loss,” is the necessary form to wrestle with for this line (see Chapter 2).

Don’t let the term supplemental income throw you. That’s just IRS-speak for the income you receive from rental property or royalties, or through partnerships, S corporations (corporations that don’t pay tax; the owners report the corporation’s income or loss on their personal tax returns), trusts, and estates. To report your rental or royalty income, you use Schedule E, which is laid out in the form of a profit or loss statement (income and expenses). From your income, you subtract your expenses. The remainder is your net income, the income that you have to pay taxes on. If you have a loss, the rules get a little sticky as to whether you can deduct it; consult a qualified tax advisor for help.

Line 18: Farm income (or loss)

Schedule F, “Profit or Loss from Farming,” is the form that you use to report income and expenses from selling crops or livestock. (See this form at www.irs.gov/pub/irs-pdf/f1040sf.pdf.) All types of farms and farming income are included here, including farms that produce livestock, dairy, poultry, fish, aquaculture products, bee products, and fruit, as well as truck farms (because produce isn’t the only thing farmers raise and harvest). Even though Schedule F is titled “Profit or Loss from Farming,” you use this form to tell the IRS what you took in from operating a plantation, ranch, nursery, orchard, or oyster bed.

Schedule F isn’t as bad as it looks. In fact, it’s set up in exactly the same way as Schedule C, “Profit or Loss from Business” (see Chapter 8). Although a business is a business (and farming is certainly a business), the IRS clearly thought that enough tax items were peculiar to farming that it deserved its own schedule.

Before you even attempt to prepare your Schedule F, obtain a copy of IRS Publication 225 (“Farmer’s Tax Guide”) either by calling 800-829-3676 or from the Internet at www.irs.gov.

Line 19: Unemployment compensation

Losing your job is bad enough. And then you receive another nasty surprise — the news that the unemployment compensation you receive is taxable. The government should send you a Form 1099-G to summarize these taxable benefits that you receive. You enter the total compensation on line 19.

You can elect to have tax withheld at the rate of 10 percent on your unemployment, so you won’t be caught short next April 15. This is one offer most people are likely to refuse.

Line 21: Other income

Line 21 of Form 1040 is a catchall for reporting income that doesn’t fit the income categories listed on page one of Form 1040. Hey, even if you find some money, the IRS treats it as income! Just report all this miscellaneous income here. Don’t forget to write a description of these earnings on the dotted line next to the amount.

Here are some examples of stuff that goes on line 21:

• Bartering: Bartering is the trading of your services for goods or other services. You usually must declare the fair market value of goods you receive. If you participate in a barter exchange, you may get a Form 1099-B — and the IRS gets a copy, too.

• Canceled debt: A canceled debt, or a debt paid for you by another person, is generally income to you and must be reported. If you’re eligible for one of the many student loan forgiveness programs that seek to encourage recent college grads to go into less in-demand occupations, the loan amounts forgiven are taxable income for you to report! Another example is a discount offered by a financial institution for the prepaying of your mortgage is income from the cancellation of the debt. However, you have no income from the cancellation of a debt if the cancellation is a gift. For example, suppose you borrow $10,000 from a relative who tells you that you don’t have to repay it. It’s a gift!

  If you received a sweetheart deal on a loan, make sure that you read the IRS rules on below-market interest rates for loans. There is some relief for beleaguered homeowners who’ve lost their homes to foreclosure. When the bank forecloses on your home (as opposed to investment real estate), provided your mortgage was a nonrecourse loan, you realize no ordinary income. A nonrecourse loan is one where the lender can repossess the property held as collateral for that loan (that is to say, your home) but can’t come after you personally for additional money. If a debt is canceled as the result of bankruptcy or because you’re insolvent, the cancellation of the debt negates your having to pay tax on the income. And you don’t have to report it as income if your student loan is canceled because you agreed to certain conditions to obtain the loan and then performed the required services.

• Fees: Maybe you’re a corporate director or a notary public, and you made some extra cash. If these payments are $600 or more from a single source, you’ll receive Form 1099-MISC from the person or company that paid you. If you receive a fee or commission from an activity you’re not regularly engaged in for business, you report it instead on line 21. Fees are considered self-employment income, which means that you may owe Social Security tax on them. You compute the Social Security tax you owe on Schedule SE (“Self-Employment Tax”; see Chapter 10 for info). You then report the amount of Social Security tax you owe on line 57 of Form 1040, Schedule 4, “Other Taxes,” and you get a deduction for half of the tax on line 27 (discussed later in this chapter).
• Life insurance: The death benefit paid to the beneficiary of a life insurance contract is exempt from tax. It’s also possible to receive the death benefit prior to death (viatical settlements) as advance, or accelerated, payments, provided that the insured is terminally ill and has been certified by a physician as being expected to die within 24 months of that certification. If the payments are made to someone who has been certified as chronically ill, that person may exclude from her income the larger of $250 per day or the actual long-term care expenses incurred.
• Prizes and awards: If you get lucky and hit the lottery or win a prize in a contest, the winnings are taxable. Sorry! However, some employee achievement awards may be nontaxable. These include noncash awards, such as a watch, golf clubs, or a TV, given in recognition for length of service or safety achievement. The tax-free limit is $400 if given from a nonqualified employer plan and $1,600 from a qualified plan.

Line 23: Educator expenses

Teachers who spend their own money for items they supply for the classroom are entitled to deduct these expenses from their income. You can deduct up to $250 of these expenses on line 23. You can then deduct any remaining expenses on Schedule A as a miscellaneous itemized deduction. Expenses that qualify include books, supplies, computer software and equipment, and supplemental material used in the classroom. If you’re married filing jointly and both of you are educators, you may deduct up to $500.

To claim this deduction, you must be an educator, or more precisely, a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school who works a minimum of 900 hours during the school year. Educators who exclude U.S. savings bond interest from income that was used to pay college tuition or payments from a 529 plan, or made withdrawals from a Coverdell Education Savings Account, can claim this deduction only if the amount they paid for classroom supplies exceeds the amount that is tax-free under these other education tax breaks.

Line 24: Certain business expenses of reservists, performing artists, and fee-basis government officials

If you believe you fall into the category of an armed forces reservist, a performing artist, or a fee-basis government official, read up! You may be able to deduct certain business expenses from your total income on this line Before you can, though, you need to know whether your job and your expenses qualify.

• Armed forces reservists may deduct travel expenses if they travel more than 100 miles away from home in connection with their service.
• Performing artists may deduct all their employee business expenses on line 24, provided that they meet several requirements.
• Government officials paid on a fee basis may deduct all their employee business expenses on line 24 if they’re employed by state or local government and are paid in whole or in part on a fee basis ($5,000 to prepare a particular report, for example).

If you do qualify, you need to fill out Form 2106 or Form 2106-EZ before you fill in an amount on line 24. (I talk about these forms in more detail in Chapter 9.)

Line 25: Health savings account deduction

Health savings accounts (HSAs) may allow you to pay for unreimbursed medical expenses on a tax-free basis. You may establish an HSA if you’re covered by a qualified high-deductible health plan with annual deductibles of at least $1,350 for individuals and $2,700 for families for tax year 2018. You may not open or fund one of these accounts if you have other general health insurance (separate dental, accident-only, vision, workers’ comp, disability, or long-term care policies don’t count against you here). You also can’t be claimed as a dependent on someone else’s return.

An HSA works similarly to an individual retirement account (IRA). In this case, your HSA is invested and allowed to grow income tax–free until you need to access the money to pay for qualified medical expenses (medical insurance premiums are excluded). Payouts for qualified medical expenses are tax-free. Unlike flexible spending accounts that may be offered by your employer, there’s no “use it or lose it” feature here. Your money continues to grow from year to year until you need to use it. You may contribute a maximum of $3,450 for individuals and $6,900 for families for tax year 2018. If you’re age 55 or older, you may make an additional contribution of $1,000 (if married and both spouses are 55 or older, each can contribute an extra $1,000). After you enroll in Medicare at age 65, contributions are no longer allowed, although you may continue to take distributions.

If you funded an HSA during the tax year, you need to complete Form 8889, “Health Savings Accounts (HSAs),” to figure out the amount to include on line 25. Check out Chapter 2 for an introduction to HSAs; flip to Chapter 10 for more information about Form 8889.

Line 27: Deductible part of self-employment tax

One of the great drawbacks of being self-employed is that you get hit not only with income tax on your earnings but also with self-employment tax. This wonderful invention combines the 7.65 percent ordinary wage earners pay for combined Social Security and Medicare contributions with the employer’s matching 7.65 percent. So because self-employed people are both the employer and the employee, they get stuck with both halves of this tax, or a whopping 15.3 percent of all earnings from self-employment up to $128,400, and 2.9 percent on all earnings above that.

If you’re subject to this additional tax, line 27 provides some tax relief. You’re generally allowed to deduct one half of your self-employment tax from your total income.

Line 28: Self-employed SEP, SIMPLE, and qualified plans

SEP-IRA or SIMPLE retirement accounts allow you to make substantial pretax contributions toward your retirement savings.

A SEP is a combination IRA/profit-sharing plan and is available only for self-employed individuals and their employees (but not corporations). With a SEP (simplified employee pension), you’re allowed to stash up to 20 percent of your net income from self-employment but not to exceed a $55,000 contribution (for tax year 2018). You can set up your plan and make this contribution for the most recent tax year up until the day, including extensions, that you file your income tax return. Your contributions to the plan are not only deductible but also exempt from tax until you start receiving benefits.

Note that if you have employees and want to contribute to a SEP plan for yourself, you can’t ignore your employees. Check out Chapter 3 for more details on all your small business retirement plan options, including SIMPLE plans.

Line 29: Self-employed health insurance deduction

If you’re self-employed, you may deduct 100 percent of your health and dental insurance premiums from your income, with one caveat: You may not deduct more than your net profit from your business. A general partner (but not a limited partner), an independent contractor, or a shareholder in an S corporation may also claim this deduction. The deduction is allowed for premiums paid for you, your spouse, and your dependents.

Subject to age-specific limits, your long-term care premiums also qualify for this deduction. These are the limits for tax year 2018:

• Age 40 and below: $420
• Age 41–50: $780
• Age 51–60: $1,560
• Age 61–70: $4,160
• Age 71 and over: $5,200

For more information, see IRS Publication 535, “Business Expenses.” To get this publication, call 800-829-3676 or visit www.irs.gov.

Line 32: IRA deduction

Saving for your eventual retirement is a good thing, which is why the tax laws are structured to give you all sorts of benefits if you do save for retirement. The IRA is one way that you may sock away some money for your golden years.

Line 32 is concerned only with the deduction you can take for a contribution to a traditional IRA. Even though you don’t get a deduction for the nondeductible IRA or Roth IRA, for some people, these accounts can be useful retirement planning tools. You can find out more about all retirement plans, including the amounts that you may contribute, in Chapter 3.

Nondeductible regular IRA contributions are reported to the IRS on Form 8606, even if you don’t have to file a tax return for the year. If you’re filing a Form 1040, you attach Form 8606 to your 1040. The penalty for not filing your Form 8606 is $50, and if your IRA contributions are more than the permissible amount, you must correct the overpayment; otherwise, you may be subject to a penalty.

Line 33: Student loan interest deduction

Although most types of personal interest are no longer deductible, you may deduct up to $2,500 of interest on a loan used to pay higher education and certain vocational school expenses (ask the vocational school whether it qualifies for this deduction if you have to borrow to pay the tab). You can claim this deduction as long as it takes to pay off the loan and as long as you’re paying interest on it.

Students usually take out these loans because they can obtain lower interest rates, but their parents aren’t able to claim the deduction, even if they make all the payments. That’s because the parents didn’t borrow the money. If the student is liable for the loan, the student can’t claim the interest deduction if he can be claimed as a dependent on someone else’s return. But in an interesting twist, if a nondependent student takes the loan but the parents make the payments, the student may be allowed to take the interest deduction on his return.

For single filers, the deduction doesn’t start to get eliminated until income hits $65,000 and doesn’t completely disappear until $80,000. For joint filers, the phaseout of the deduction starts at the $135,000 income level, with the deduction getting wiped out at $165,000.

The beauty of the student loan interest deduction is that you don’t have to itemize your deductions to claim it. You can claim both the standard deduction and the student loan deduction. This deduction should be of great benefit to recent graduates and folks wanting to further their education.

To take this deduction, you must meet the following requirements:

• You’re not filing as married filing separately, and no one else can claim you as a dependent.
• You must incur the loan to pay the higher education expenses of you, your spouse, or anyone you claimed as a dependent when you took out the loan.
• You must pay the expenses within a reasonable amount of time after the loan is taken out. I want I could tell you what’s “reasonable,” but you know how it is: The IRS knows what’s reasonable when it sees it. One way the IRS views as reasonable is when you use the loan proceeds within 60 days before the start or end of an academic semester to pay your allowable higher education expenses.
• You must be the person primarily responsible for the loan.
• The student must carry at least half the normal workload of a full-time student or be attributable to a period during which she met this requirement.
• You must take out the loan to pay higher education expenses for tuition, fees, room and board, books, supplies, and other necessary expenses, such as transportation.
• Loans from related family members don’t qualify for the deduction.
• Revolving lines of credit don’t qualify unless you agree that the line will be used only to pay for education expenses.

With these rules, high-income taxpayers may be able to do better with home equity loans, although interest on loans secured by your home whose proceeds are used to pay non-home related expenses isn’t deductible under the alternative minimum tax. You may want to check with a tax advisor before you head down this road.

Line 34: Tuition and fees

For 2018, Congress has extended the tuition and fees deduction, which allows you to deduct up to $4,000 of qualified tuition and fees paid to an eligible educational institution of higher education for yourself, your spouse, or your dependent. You may not claim this credit if you’re already claiming an American Opportunity or Lifetime Learning Credit for the same student (see the later section “Line 50: Education credits”), and you may not file as married filing separately. Tuition paid for part-time students qualifies; however, income limits apply. The deduction is eliminated for single taxpayers who earn more than $80,000 and for married-filing-jointly taxpayers who earn more than $160,000.

Sport, hobby, and noncredit courses don’t qualify for the deduction, unless the course is required as part of a degree program or you take it to improve job skills. If someone else can claim you as a dependent on his return, you can’t claim the deduction. As a result, if your income prohibits you from claiming the deduction, your child on whose behalf the expense was incurred can’t claim the deduction either.

This higher education deduction, which you can claim even if you don’t itemize your deductions, enables taxpayers to deduct education expenses without having to substantiate that those expenses are job-related. You can claim education expenses above $4,000 as a miscellaneous itemized deduction if they’re employment-related.

Line 48: Foreign tax credit

If you paid tax to a foreign country on income earned in that country, you’re allowed to take a credit for it if you also paid U.S. income tax on that same income. Use Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust),” to figure this credit. (This form is at www.irs.gov/pub/irs-pdf/f1116.pdf.) If you don’t itemize your deductions, you have to claim the foreign tax that you paid as a credit if you want to use it to reduce your tax.

You don’t have to be a multinational corporation to pay foreign taxes. With more and more people investing in international mutual funds, the foreign tax credit is being used more than ever before to reduce investors’ U.S. tax bills for their share of the foreign taxes paid by the funds that they own.

Unfortunately, the computation of this credit is a nightmare. If you hate number-crunching, a computer tax software program can help, or see a tax advisor. Attach Form 1116 to your return and bid it good riddance! You can either claim the foreign tax that you paid as a credit here on line 48 or as an itemized deduction on Schedule A (see Chapter 9).

As a general rule, taking the credit produces a larger savings. You can also use the foreign tax credit for foreign taxes paid on income earned overseas that exceeds the $104,100 exclusion and the housing allowance. You can ignore the fiendish Form 1116 if the foreign tax you paid is $300 or less ($600 for joint filers). Simply enter the foreign tax you paid on line 48 if your foreign tax is less than these amounts. This simplified method of claiming the credit is available if the only type of foreign income you had was from dividends, interest, rent, royalties, annuities, or the sale of an asset.

Line 49: Credit for child and dependent care expenses

If you hire someone to take care of your children so that you can work for income (doing housework and errands don’t cut it), you’re entitled to the credit that you figure on Form 2441, “Child and Dependent Care Expenses.” This credit may save you several hundred dollars. To be eligible, your child must be younger than 13 or a dependent of any age who is physically or mentally handicapped. (See this form at www.irs.gov/pub/irs-pdf/f2441.pdf.)

The maximum credit for one child or other qualifying individual in 2018 is $1,050 (based on a maximum $3,000 of qualifying expenses) and $2,100 (based on a maximum $6,000 of qualifying expenses) for two or more children or other qualifying individuals. Employers who provide child care for their employees are allowed a tax credit for a percentage of their expenses.

The cost of your baby sitter, day care, or after-school care counts toward this credit (but not after-school activities, such as dance, music, and sports); options like summer day camps (overnight camps don’t make the grade) do, too. Note that if you weren’t sending your child to that camp in the summer, you’d need to hire a sitter or day care instead.

Line 50: Education credits

On this line you claim the American opportunity credit and the lifetime learning credit. Keep in mind that credits reduce your tax, dollar for dollar. You claim both credits on Form 8863, “Education Credits (American Opportunity and Lifetime Learning Credits).” Here are snapshots of how these credits work:

• The American opportunity credit provides a credit of $2,500 per student per year for up to four years of college. The credit is equal to 100 percent of the first $2,000 of tuition expenses (but not room, board, or books) and 25 percent of the next $2,000 of tuition paid. A student must carry at least one-half the normal course load. The credit can be claimed for you, your spouse, and your dependents. But if you earn too much, you aren’t eligible. For married taxpayers (filing jointly only), the credit starts to phase out at $160,000 of income and is gone at $180,000. For single taxpayers, the phaseout starts at $80,000 and is done at $90,000.
• The lifetime learning credit is a 20 percent credit on up to $10,000 of tuition expenses (but not room, board, or books). This credit doesn’t have a limit on the number of years you may claim it. This credit phases out for single taxpayers with $56,000 of income and is gone completely at $66,000. For married taxpayers filing jointly, the income phase-out range is $112,000 to $132,000. Any course to acquire or improve job skills qualifies, but not courses involving sports or hobbies.

You can claim the American opportunity credit for one child and the lifetime credit for another, but you can’t claim both credits for the same student. Families with more than one child can use both credits in concert, but doing so requires careful planning. You need to make sure tuition payments are made in the correct tax year for the correct student.

Line 51: Retirement savings contributions credit

The retirement savings contribution credit encourages joint filers with adjusted gross incomes of less than $63,000 (single filers below $31,500) to save for retirement by enabling them to claim a tax credit tax for a percentage of up to the first $2,000 that they contribute to Roth or traditional IRAs, 401(k)s, or elective deferrals to their employer’s retirement plan.

To claim the credit, you need to fill out yet another form, Form 8880, “Credit for Qualified Retirement Savings Contributions”. (See this form at www.irs.gov/pub/irs-pdf/f8880.pdf. For an introduction to retirement accounts, check out Chapter 3.)