Friday’s need-to-know money news

Today’s top story: Relax. The Reddit-Hedge Fund battle won’t tank your 401(k). Also in the news: How Medicare star ratings can help you choose a plan, the tax credit fix many can’t afford to miss, and what is Dogecoin and why are people buying it?

Relax. The Reddit-Hedge Fund Battle Won’t Tank Your 401(k)
The internet is aflame with stock market reactions. But if you invested for the long term, you’re likely insulated from any fallout.

Medicare Star Ratings: How They Can Help You Choose a Plan
Medicare star ratings (compiled by the government) help shoppers compare Medicare Advantage and Part D drug plans.

The Tax Credit Fix Many Can’t Afford to Miss
Working families could miss out on the refundable tax credits they need to make ends meet.

What is Dogecoin, and Why Are People Buying It?
The hottest meme crypto.

Wednesday’s need to know money news

Today’s top story: How insurers are mobilizing to help Hurricane Harvey victims. Also in the news: How to get relief from college costs after Hurricane Harvey, how small businesses can cope post-Harvey, and how to get a tax break for going back to school.

How Insurers Are Mobilizing to Help Harvey Victims
Covered losses are expected to be more than $1 billion dollars.

How to Get Relief From College Costs After Hurricane Harvey
What current students and student loan holders can do.

Your Small Business’s Post-Harvey Return Starts Now
Steps you can take to start the recovery process.

How to get a tax break for going back to school
Save on taxes while getting an education.

Q&A: American Opportunity Credit for college expenses

Dear Liz: I am confused regarding my ability to take advantage of the American Opportunity Credit for college expenses in filing my 2014 tax return.

My accountant told me I didn’t qualify because my adjusted gross income exceeds $80,000. Yet when I researched on the IRS website, I seem to qualify. I paid qualified education expenses for my son to get an MBA and am claiming him as a dependent on my return, since he is unemployed and I support him. My adjusted gross income was $84,905.

The IRS rules discuss modified adjusted gross income less than $90,000. Is my accountant thinking of another tax credit that I don’t qualify for? Can I take advantage of any credit for providing educational expenses for my son to obtain a graduate degree? I filed for an extension in order to resolve this issue.

Answer: Education tax breaks can be baffling because each has different income limits, eligibility requirements and qualifying expenses.

Three of them — the American Opportunity Credit, the Lifetime Learning Credit and the tuition and fees deduction — are mutually exclusive. That means you can take only one per year, and you can’t use any of them for expenses paid with a tax-free 529 plan withdrawal.

It’s no wonder that many people who may be eligible to take these breaks don’t take advantage of them, even though they could shave thousands of dollars off their tax bills.

The American Opportunity Credit is usually the most valuable credit. It reduces taxes by up to $2,500 per student and is 40% refundable, which means people can get up to $1,000 back even if they don’t have any taxes to offset.

But the credit can’t be claimed for more than four years, and any year in which the old Hope Credit was claimed counts toward that limit. Since your son was in graduate school, it’s possible you already used up your ability to claim the credit.

You can qualify for the full tax break if your modified adjusted gross income is below $80,000 as a single filer or $160,000 for a married couple filing jointly. The credit gets smaller as your income goes up. After $90,000 for singles — and $180,000 for a married couple filing jointly — the tax break is no longer available.

If you can’t take the credit, your son might be able to claim it — if he had taxable income last year and you opt not to take a dependency exemption for him. Discuss this possibility with your tax pro.

You make too much money for the other two options: the Lifetime Learning Credit and the tuition and fees deduction. The Lifetime Learning Credit offsets 20% of tuition and certain other required expenses up to $2,000 per tax return.

In 2014, the credit was gradually reduced for modified adjusted gross incomes between $54,000 and $64,000 for singles, and $108,000 and $128,000 for married couples filing jointly.

The tuition and fees deduction reduces taxable income by a maximum of $4,000 for incomes up to $65,000 for single filers and $130,000 for joint filers, and by up to $2,000 for incomes over $65,000 for singles and $130,000 for joint filers. There’s no deduction for incomes over $80,000 for singles and $160,000 for joint filers.

Q&A: Tax credit for Roth IRA contributions

Dear Liz: You told a reader that “contributions to a Roth are never deductible.” This statement is a common misconception and is not correct. You can get a tax credit for Roth IRA contributions as long as you fall under the income limits and itemize on your taxes. The credit phases out at $30,000 for singles and $60,000 for married couples.

Answer: A credit is different from a deduction, but thank you for pointing out a tax benefit that many people don’t know exists.

This non-refundable credit, sometimes called a Saver’s Credit, can slice up to $1,000 per person off the tax bill of eligible taxpayers. The credit is available to people 18 and older who aren’t students or claimed as a dependent on someone else’s return. The lowest income taxpayers — those with adjusted gross incomes under $36,000 for marrieds filing jointly or $18,000 for singles in 2014 — can get a tax credit of 50% of up to $2,000 per person ($4,000 for married couples) contributed to retirement plans. Those plans can include traditional or Roth IRAs, 401(k)s or 403(b)s, 457(b)s and SIMPLE IRAs, among others. The credit drops to 20% and then 10% before phasing out. The average amount saved isn’t spectacular: The IRS said credits averaged $205 for joint filers in 2012 and $127 for single filers, but every bit helps.

One of the problems with this tax break, besides so few people knowing about it, is that many low-income people don’t owe income taxes, so they have nothing to offset with this credit. Another issue is that taxpayers need to file a 1040 or 1040A and use Form 8880 to claim it. Low-income taxpayers often use the 1040EZ form, which doesn’t allow them to claim the credit or alert them that it exists.

Who pays for tax pro’s mistake?

Dear Liz: Last year I bought an electric vehicle, motivated in part by the $7,500 federal tax credit. I consulted with my tax preparer, a CPA, to ensure I would generate enough income to fully use the one-time, use-it-or-lose-it credit. In December 2011, I informed her of the exact type of that year’s income (earned income, capital gains, dividends, interest and so on) and detailed all my deductions. She assured me that based on those numbers my tax burden was $8,600, more than sufficient to use the credit. It was enough, in fact, that I could use more deductions and losses, so I made some charitable contributions and sold a losing investment. The final numbers were very close to the estimates she received from me in December. Now that she has completed my federal tax return, however, my tax burden turns out to be far less than she estimated. In fact, it’s zero. Ordinarily I’d be delighted, but I specifically consulted with her to ensure I had a large-enough tax burden to use up the credit. I could have sold some winning investments to generate a bigger tax burden, but have now lost that credit forever. So far she has not responded fully to questions about what happened, and I now suspect she may simply have guessed at the tax burden and not run the numbers through any tax preparation software. I feel that she has in effect cost me $7,500. Am I right to be aggrieved and do I have any recourse?

Answer: Of course you’re right to be aggrieved. One of the reasons to hire a tax professional is to get good advice about managing your tax bill.

Human beings make errors, of course. No one is perfect. But it’s disturbing that your CPA hasn’t told you clearly why she made the mistake she did or, apparently, offered any kind of recompense.

When tax pro mistakes cost you money, it’s typically because the preparer underestimated your tax burden and the IRS catches the error. In that case, your tax pro shouldn’t be expected to pay the extra tax, since you would have owed the money anyway if she’d done the return correctly. But many tax preparers will offer to pay any penalties or interest the taxpayer owes because of their errors, said Eva Rosenberg, an enrolled agent who runs the TaxMama.com site.

In this case, of course, your pro overestimated your tax burden, ultimately costing you a valuable credit. You could always ask her to compensate you for some or all of that lost credit. At the very least, she should be willing to refund any fee she charged you for her advice, Rosenberg said.

You may want to review your own behavior to make sure you didn’t contribute to this situation. Given the amount at stake, you should have called to set up a formal appointment in which the two of you could go over the numbers and your previous year’s tax return, if she didn’t prepare it. That would ensure she had enough information to make a reasonable prediction. If instead you called her up with a “quick question” — tax questions are rarely quick, by the way, and the answers almost never are — then you helped set yourself up for a disappointing outcome.

In any case, you should find another tax pro, since this incident — and her handling of it — indicates she’s not quite up to the job of being your advisor.