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Earned income credit

Question: What is the earned income credit? Answer: The earned income tax credit (EITC) is a refundable tax credit available to working low-income individuals and families. Eligible taxpayers can get a refund check even it they owe no taxes. The amount of the credit depends on an individual’s income (both taxable and nontaxable) and the…

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Disaster losses

Question: What tax breaks are available if I suffer a loss due to a natural disaster? Answer: If the federal government declares your area to be a major disaster area, the tax law allows individuals and businesses to get a faster refund by claiming disaster losses on their prior years’ return. This is done by…

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Disability income

Question: Is my disability income taxable? Answer: Money received from worker’s compensation for sickness or illness is not subject to income tax. Amounts received under a private accident policy for which you pay the premiums are also nontaxable. To the extent your employer pays the insurance premiums, your benefits will be subject to tax. The…

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Dependents

Question: Who can I claim as my dependent? Answer: You must generally pass five tests in order to claim someone as a dependent, including the member of household/relationship test, the support test, the gross income test, the joint return test, and the citizenship test. The rules are complicated. Also, just because you can claim someone…

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Dependent care

Question: I pay someone to care for my child while I work? Can I deduct this expense? Answer: No, but you may be able to claim a tax credit, which is more valuable than a tax deduction because it reduces your tax liability dollar for dollar. You can take the child care credit if you…

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Deductions

Question: What is an above-the-line deduction? Answer: The federal tax law allows certain items to be deducted “above-the-line” to arrive at adjusted gross income (AGI). Contributions to a regular IRA and any amount of alimony paid are examples of above-the-line deductions. These deductions are allowed whether or not you use the standard deduction or itemize…

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Credit vs. deduction

Question: What is the difference between a tax deduction and a tax credit? Answer: A deduction reduces your taxable income, and a credit is a dollar for dollar offset against your computed tax liability. Some credits are refundable, meaning that if your credit is larger than your tax liability, the IRS will pay you the…

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Capital gain distributions

Question: What is a capital gain distribution? I didn’t sell any shares of my mutual fund, but I received a year-end statement from the company reporting a capital gain distribution. Answer: Typically mutual funds buy and sell stocks or bonds throughout the year. Each time the fund sells an investment, its owners owe tax on…

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Capital gain

Question: What is a capital gain? Answer: A capital gain is what results when you sell certain property at a profit. In general, everything you own for personal or investment purposes is a capital asset, including your home, stocks, bonds, and collectibles. Capital assets do not include business property, such as inventories, notes, and accounts…

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Cancellation of debt

Question: If a debt I owe is cancelled, is that income to me? Answer: Cancelled debt is includible in income unless it is specifically excluded by some provision in the tax law. Certain types of debt forgiveness are generally excluded from income (e.g., discharge in bankruptcy under Title 11, a discharge when the taxpayer is…

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