During tax season the words, "It's deductible," are often music to our ears. But just because something is tax deductible doesn't mean it's in your best financial interest. A tax deduction is not a rubber stamp of approval on how to spend your money or what debt to incur.
One of my self-employed clients, Tom, recently called me for some advice. Tom had just received $10,000 in windfall profits. He needed to know if he should pay off his credit cards or his car loan with the money. The car loan was costing him 9.7 percent interest. But the car was owned by his small business and, therefore, the payments were deductible. The credit card was charging 2.9 percent interest on his debt, but would go up to 15 percent in January 2012.
I did some quick calculations and figured that the car loan, after the tax deduction, was still costing Tom about 6 percent. Tom is in the 40 percent tax bracket. So, if the total interest on the car loan was $1000, he writes $1000 off of his taxable income, and that saves him $400 in taxes. As a result, the car loan is still costing Tom $600, even after the $400 in tax savings.
I asked Tom if he could pay off the credit card by January if he paid off the car loan now. He said he could. I therefore suggested that he pay off the car loan immediately and then work to pay off the credit card balance before the rate skyrocketed to 15 percent next January. We did the math together and I explained how the car loan was still costing him more than the credit card was-even after the tax benefit.
It's very nice to get a tax deduction. But you need to stay focused on the after-tax cost rather than simply looking at the tax savings. Let's say you have a home mortgage that costs you 4 percent. If you are in the 40 percent tax bracket, your after-tax cost is actually 2.6 percent. This is a very low cost to borrow money and it's a nice tax deduction. But if you earn less than 2.6 percent on your money after-tax, you are better off if you pay that mortgage off. Having the least-cost debt that you can afford or having no debt at all if you can is also the best way to have a good credit score.
Monday, February 28, 2011
Ten Factors to Remember About Capital Gains and Losses
Did you know almost everything you own, be it for personal or investment purposes, is a capital asset? Capital assets include your home, furnishings, stocks and bonds, and many other assets held for personal use. When a capital asset is sold, the difference between the amount you paid for the asset and the amount for which you sold it is generally a capital gain or capital loss.
As tax season approaches, here are ten factors to remember about gains and losses and how they can affect your Federal income tax return.
1. Almost everything you own and use for personal purposes, whether for pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis - which is usually what you paid for it - is a generally a capital gain or a capital loss.
3. All capital gains must be reported.
4. You may deduct capital losses only on investment property, not on property held for personal use.
5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain! Special types of net capital gain can be taxed at 25 percent or 28 percent.
8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. Personal capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
As tax season approaches, here are ten factors to remember about gains and losses and how they can affect your Federal income tax return.
1. Almost everything you own and use for personal purposes, whether for pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis - which is usually what you paid for it - is a generally a capital gain or a capital loss.
3. All capital gains must be reported.
4. You may deduct capital losses only on investment property, not on property held for personal use.
5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain! Special types of net capital gain can be taxed at 25 percent or 28 percent.
8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. Personal capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
Friday, February 25, 2011
Tax preparers don't always get FAFSAs right: They can blow it with financial aid
When in doubt, people go to experts.
But beware if you turn to an expert with your FAFSA, or the college financial aid form that many parents are now rushing to complete before February and March deadlines.
The typical tax professional that helps you with your tax return may not be equipped to maximize your financial aid. In fact, your tax preparer might inadvertently undermine your chances of getting aid.
This seems improbable to many people because tax preparers try to show Uncle Sam that you have a low income so you can get a refund. Seemingly that would be the same strategy for winning financial aid for college. Afterall, we know that aid is based on our income and so having a lower income should increase our chances of getting aid.
Unfortunately, however, the complex formula built into the questions you answer on your FAFSA, calculates your income and family expenses differently than the formula built into your tax return. And the result: people who think both tax returns and FAFSAs operate the same, can end up shooting themselves in the foot when it comes to aid for college.
If your tax preparer gets you a state tax refund, you will have to report it on next year's tax form as part of your adjusted gross income. If you collect an average state and local refund of $1,600 each year over the four college years, you may have cost yourself as much as $3,000 in grant money. Also, certain strategies for cutting income on tax forms fail to reflect expenses you have incurred like Social Security and Medicare. While that's fine for taxes, on your FAFSA form, this might leave you looking like you are in better shape financially than you are. Converting an IRA to a Roth IRA might also make sense for taxes, but could hurt you when applying for financial aid. In addition, putting money into 401(k)s and IRAs can help boost a tax refund, but won't help you with financial aid.
Meanwhile, if you are getting help on your taxes and you are also applying for financial aid this year, choose a tax professional that also understands the quirky financial aid formula.
But beware if you turn to an expert with your FAFSA, or the college financial aid form that many parents are now rushing to complete before February and March deadlines.
The typical tax professional that helps you with your tax return may not be equipped to maximize your financial aid. In fact, your tax preparer might inadvertently undermine your chances of getting aid.
This seems improbable to many people because tax preparers try to show Uncle Sam that you have a low income so you can get a refund. Seemingly that would be the same strategy for winning financial aid for college. Afterall, we know that aid is based on our income and so having a lower income should increase our chances of getting aid.
Unfortunately, however, the complex formula built into the questions you answer on your FAFSA, calculates your income and family expenses differently than the formula built into your tax return. And the result: people who think both tax returns and FAFSAs operate the same, can end up shooting themselves in the foot when it comes to aid for college.
If your tax preparer gets you a state tax refund, you will have to report it on next year's tax form as part of your adjusted gross income. If you collect an average state and local refund of $1,600 each year over the four college years, you may have cost yourself as much as $3,000 in grant money. Also, certain strategies for cutting income on tax forms fail to reflect expenses you have incurred like Social Security and Medicare. While that's fine for taxes, on your FAFSA form, this might leave you looking like you are in better shape financially than you are. Converting an IRA to a Roth IRA might also make sense for taxes, but could hurt you when applying for financial aid. In addition, putting money into 401(k)s and IRAs can help boost a tax refund, but won't help you with financial aid.
Meanwhile, if you are getting help on your taxes and you are also applying for financial aid this year, choose a tax professional that also understands the quirky financial aid formula.
IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process
In its latest effort to help struggling taxpayers, the Internal Revenue Service today announced a series of new steps to help people get a fresh start with their tax liabilities.
The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.
“We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start,” IRS Commissioner Doug Shulman said. “These steps are good for people facing tough times, and they reflect a responsible approach for the tax system.”
Today’s announcement centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:
This is another in a series of steps to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. And last year, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency.
Today’s announcement comes after a review of collection operations which Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.
Tax Lien Thresholds
The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.
The IRS plans to review the results and impact of the lien threshold change in about a year.
A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.
A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer's credit rating, so it is critical to arrange the payment of taxes as quickly as possible.
“Raising the lien threshold keeps pace with inflation and makes sense for the tax system,” Shulman said. “These changes mean tens of thousands of people won’t be burdened by liens, and this step will take place without significantly increasing the financial risk to the government.”
Tax Lien Withdrawals
The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.
Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.
In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.
Direct Debit Installment Agreements and Liens
The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:
In addition, this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.
“We are trying to minimize burden on taxpayers while collecting the proper amount of tax,” Shulman said. “We believe taking away taxpayer burden makes sense when a taxpayer has taken the proactive step of entering a direct debit agreement.”
Installment Agreements and Small Businesses
The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.
Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.
The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.
Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.
“Small businesses are an important part of the nation’s economy, and the IRS should help them when we can,” Shulman said. “By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations.”
Offers in Compromise
The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.
This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.
OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.
“We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start,” IRS Commissioner Doug Shulman said. “These steps are good for people facing tough times, and they reflect a responsible approach for the tax system.”
Today’s announcement centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:
- Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
- Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
- Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
- Creating easier access to Installment Agreements for more struggling small businesses.
- Expanding a streamlined Offer in Compromise program to cover more taxpayers.
This is another in a series of steps to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. And last year, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency.
Today’s announcement comes after a review of collection operations which Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.
Tax Lien Thresholds
The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.
The IRS plans to review the results and impact of the lien threshold change in about a year.
A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.
A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer's credit rating, so it is critical to arrange the payment of taxes as quickly as possible.
“Raising the lien threshold keeps pace with inflation and makes sense for the tax system,” Shulman said. “These changes mean tens of thousands of people won’t be burdened by liens, and this step will take place without significantly increasing the financial risk to the government.”
Tax Lien Withdrawals
The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.
Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.
In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.
Direct Debit Installment Agreements and Liens
The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:
- Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
- The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
- The IRS will also withdraw liens on existing Direct Debit Installment greements upon taxpayer request.
In addition, this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.
“We are trying to minimize burden on taxpayers while collecting the proper amount of tax,” Shulman said. “We believe taking away taxpayer burden makes sense when a taxpayer has taken the proactive step of entering a direct debit agreement.”
Installment Agreements and Small Businesses
The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.
Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.
The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.
Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.
“Small businesses are an important part of the nation’s economy, and the IRS should help them when we can,” Shulman said. “By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations.”
Offers in Compromise
The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.
This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.
OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
Wednesday, February 23, 2011
Tax Breaks for the Disabled Often Overlooked
Many of the millions of people with disabilities may be paying more in taxes than necessary. There are important steps that can help people with disabilities minimize their taxes. “People with disabilities often aren’t aware of tax credits and deductions that could help them save money,” said Terrence Rice, CPA. “In fact, certain credits are refundable, meaning you can get money back even if you owe no taxes.”
1. Know how SSDI and other benefits are taxed.
• Monthly SSDI benefits. Up to 50 percent of SSDI benefits are taxable each year. The amount is determined by adding one-half of your SSDI benefits to all of your other income sources. For 2010, taxes are owed on any amount above $32,000 for couples filing jointly and $25,000 for individuals. “The average monthly SSDI benefit for 2010 was $1,064, or $12,768 for the year. As a result, many people relying on SSDI will not owe taxes,” Rice said. “However, they still should consider filing a tax return if credits could mean a refund.”
• Lump-sum SSDI benefits. Because it can take years to receive disability benefits, most people initially receive a lump-sum amount, which includes back payments. Paying taxes on this amount in one year is a mistake and could be financially costly, pushing you into a higher tax bracket. The IRS allows taxes on this lump-sum payment to be spread over previous tax years using the current-year tax return. This means recipients do not have to go through the time or expense of filing amended returns. However, the calculations are complex, and Rice advises seeking tax assistance.
• Other benefit sources. People with disabilities may rely on additional benefits for income. Generally, workers’ compensation benefits and compensatory damages for injuries aren’t taxed. Additionally, long-term disability insurance benefits are not included in taxable income if you paid the premiums with after-tax dollars. However, they are taxable and must be included in your income if you paid LTD premiums with pre-tax dollars as part of a cafeteria plan, for example, or your employer paid your premiums.
2. Claim tax credits for which you are eligible.
Tax credits offer one of the most effective ways to lower taxes because they provide a dollar-for-dollar tax reduction or refund. Some important tax credits people with disabilities are commonly eligible for include:
• Earned income tax credit (up to $5,666). The EITC is a refundable credit, meaning that when it is applied—any amount higher than a person’s tax bill can result in a tax refund. To be eligible, you or your spouse had to be employed for part of 2010, earned below $13,460 to $48,362 (depending upon filing status and the number of children claimed) and had investment income of no more than $3,100.
“Many people with disabilities who don’t file a tax return because their income is so low could be losing out on thousands of dollars from the EITC,” said Rice.
• Credit for the disabled (up to $7,500). You are eligible for this credit if you receive taxable disability income from a former employer’s accident, health or pension plan and meet income requirements. Your 2010 adjusted gross income must be under $17,500 for single filers, under $20,000 for joint filers with one spouse eligible for the credit or under $25,000 for joint filers with both spouses eligible.
• Dependent care credit. If you pay someone to care for a dependent or spouse with physical or mental impairments, you may be able to take a credit of up to 35 percent of day care costs while you are working or looking for work.
3. Use deductions to reduce taxes.
• Increased standard tax deduction. A higher standard tax deduction may be available to you if you are blind or visually impaired.
• Medical deductions. If you itemize, you can deduct medical costs if they exceed 7.5 percent of your adjusted gross income. Deductible expenses include medical and dental costs, travel expenses for treatment, long-term care insurance, medical insurance premiums and costs for certain equipment for those with visual, hearing and physical disabilities. If you, your spouse or your child has a chronic illness, costs for attending conferences related to that illness also may be deducted as a medical expense.
• Deduct the costs of seeking SSDI benefits. If you hired a representative to help you get your SSDI benefits and you itemize, you can deduct the fee that you paid your representative when figuring out the taxability of a lump-sum SSDI payment you received.
1. Know how SSDI and other benefits are taxed.
• Monthly SSDI benefits. Up to 50 percent of SSDI benefits are taxable each year. The amount is determined by adding one-half of your SSDI benefits to all of your other income sources. For 2010, taxes are owed on any amount above $32,000 for couples filing jointly and $25,000 for individuals. “The average monthly SSDI benefit for 2010 was $1,064, or $12,768 for the year. As a result, many people relying on SSDI will not owe taxes,” Rice said. “However, they still should consider filing a tax return if credits could mean a refund.”
• Lump-sum SSDI benefits. Because it can take years to receive disability benefits, most people initially receive a lump-sum amount, which includes back payments. Paying taxes on this amount in one year is a mistake and could be financially costly, pushing you into a higher tax bracket. The IRS allows taxes on this lump-sum payment to be spread over previous tax years using the current-year tax return. This means recipients do not have to go through the time or expense of filing amended returns. However, the calculations are complex, and Rice advises seeking tax assistance.
• Other benefit sources. People with disabilities may rely on additional benefits for income. Generally, workers’ compensation benefits and compensatory damages for injuries aren’t taxed. Additionally, long-term disability insurance benefits are not included in taxable income if you paid the premiums with after-tax dollars. However, they are taxable and must be included in your income if you paid LTD premiums with pre-tax dollars as part of a cafeteria plan, for example, or your employer paid your premiums.
2. Claim tax credits for which you are eligible.
Tax credits offer one of the most effective ways to lower taxes because they provide a dollar-for-dollar tax reduction or refund. Some important tax credits people with disabilities are commonly eligible for include:
• Earned income tax credit (up to $5,666). The EITC is a refundable credit, meaning that when it is applied—any amount higher than a person’s tax bill can result in a tax refund. To be eligible, you or your spouse had to be employed for part of 2010, earned below $13,460 to $48,362 (depending upon filing status and the number of children claimed) and had investment income of no more than $3,100.
“Many people with disabilities who don’t file a tax return because their income is so low could be losing out on thousands of dollars from the EITC,” said Rice.
• Credit for the disabled (up to $7,500). You are eligible for this credit if you receive taxable disability income from a former employer’s accident, health or pension plan and meet income requirements. Your 2010 adjusted gross income must be under $17,500 for single filers, under $20,000 for joint filers with one spouse eligible for the credit or under $25,000 for joint filers with both spouses eligible.
• Dependent care credit. If you pay someone to care for a dependent or spouse with physical or mental impairments, you may be able to take a credit of up to 35 percent of day care costs while you are working or looking for work.
3. Use deductions to reduce taxes.
• Increased standard tax deduction. A higher standard tax deduction may be available to you if you are blind or visually impaired.
• Medical deductions. If you itemize, you can deduct medical costs if they exceed 7.5 percent of your adjusted gross income. Deductible expenses include medical and dental costs, travel expenses for treatment, long-term care insurance, medical insurance premiums and costs for certain equipment for those with visual, hearing and physical disabilities. If you, your spouse or your child has a chronic illness, costs for attending conferences related to that illness also may be deducted as a medical expense.
• Deduct the costs of seeking SSDI benefits. If you hired a representative to help you get your SSDI benefits and you itemize, you can deduct the fee that you paid your representative when figuring out the taxability of a lump-sum SSDI payment you received.
Tuesday, February 22, 2011
10 Hidden Tax Deductions Exposed
The thousands of pages in the U.S. tax code get more confusing each year, but the big question on most Americans' minds remains very simple: How can I reduce my taxable income? With tax season is in full swing, make tax deductions and tax credits your best friends for the next few months. Many people probably don't realize how many expenses are tax deductible, and don't want to spend hundreds of dollars hiring a CPA to figure it out.
If you're a seasoned tax filer, you don't ever overlook tax deductions like mortgage interest, student loan interest, real estate property taxes, and state taxes. Still, plenty of little-known tax deductions hide deep in the tax code, tricking you into leaving tax refund money on the table.
This list of commonly overlooked personal tax deductions will help beginners and experts alike discover major savings this tax year.
1. Dependent parents. More and more often, middle-aged people take care of their aging parents, including paying some or all of their medical expenses. If you're providing more than 50 percent of your parents' financial support, and their expenses exceed 7.5 percent of your adjusted gross income, you may qualify for a big deduction.
2. Mortgage loan discount and origination fees. If you bought a house in 2010, make sure you check your Good Faith Statement and deduct any mortgage origination fees or discount points that you paid. The IRS considers all of these expenses prepaid mortgage interest, and mortgage interest is always deductible for primary residences.
3. Sales tax on a new vehicle. This deduction comes with a lot of restrictions and stipulations--buying a used car doesn't count, for example--but if you purchased a new car in 2010, you may be able to deduct the sales tax on the purchase, even if you don't itemize your deductions. Depending on your filing status (i.e. single, married filing jointly versus married filing separately) and income, your deduction might be a little lower, and if you make more than $135,000, this deduction is not applicable.
4. Home energy efficiency improvements. If you make qualifying energy-efficient home improvements to your primary residence, like installing doors, windows, a water heater, furnace, or air conditioner, you may be able to deduct up to $1,500 off your 2010 tax bill.
5. Mileage for volunteer work. If you travel a long way to volunteer for a charity, you can deduct the IRS-determined mileage allowance for your commute back and forth. While the reimbursement rate fell a bit for business expenses this year, fortunately the 14 cents per mile for charity-related travel held steady.
6. Childcare expenses when volunteering. If you paid a babysitter to watch the kids while you volunteered for your church or other non-profit organization, you can deduct that expense on your taxes.
7. Expenses for mentoring programs. Many volunteers for programs such as Big Brothers Big Sisters, Young Life, and youth groups end up spending a lot of their own funds on children by paying for meals and event tickets. You can't deduct the money you spent on yourself, but you can deduct the cash spent on the child.
8. Business meals and entertainment. If you're a small-business owner or a self-employed freelancer who takes prospective or current clients out often, you're incurring a great deal of expenses for meals and entertainment. Make sure you keep these expenses separate, because you can deduct 100 percent of the cost of entertainment and 50 percent of what you spend on meals (since you need to eat anyway).
9. Continuing education deductions. If you itemize your deductions, don't miss out on these miscellaneous itemized tax deductions: Subscriptions to professional publications, dues paid to professional associations, investment advisory fees, costs of a safety deposit box, and tax-preparation fees (even if you used online tax preparation software like TurboTax).
10. Jury duty pay. If you received jury duty pay, the IRS considers it like any other taxable income. But if you had to return jury duty compensation because you still had a salary from your employer while at jury duty, then you can deduct the pay from your tax return.
You don't have to be a CPA or a math whiz to figure out that many activities, tasks, and everyday situations can be money-saving tax deductions. But of course fine print can always get in the way, so if you're unsure about itemizing or taking certain deductions, consult a tax professional. The last thing you want to do is claim a deduction and pay it back later on during an audit.
If you're a seasoned tax filer, you don't ever overlook tax deductions like mortgage interest, student loan interest, real estate property taxes, and state taxes. Still, plenty of little-known tax deductions hide deep in the tax code, tricking you into leaving tax refund money on the table.
This list of commonly overlooked personal tax deductions will help beginners and experts alike discover major savings this tax year.
1. Dependent parents. More and more often, middle-aged people take care of their aging parents, including paying some or all of their medical expenses. If you're providing more than 50 percent of your parents' financial support, and their expenses exceed 7.5 percent of your adjusted gross income, you may qualify for a big deduction.
2. Mortgage loan discount and origination fees. If you bought a house in 2010, make sure you check your Good Faith Statement and deduct any mortgage origination fees or discount points that you paid. The IRS considers all of these expenses prepaid mortgage interest, and mortgage interest is always deductible for primary residences.
3. Sales tax on a new vehicle. This deduction comes with a lot of restrictions and stipulations--buying a used car doesn't count, for example--but if you purchased a new car in 2010, you may be able to deduct the sales tax on the purchase, even if you don't itemize your deductions. Depending on your filing status (i.e. single, married filing jointly versus married filing separately) and income, your deduction might be a little lower, and if you make more than $135,000, this deduction is not applicable.
4. Home energy efficiency improvements. If you make qualifying energy-efficient home improvements to your primary residence, like installing doors, windows, a water heater, furnace, or air conditioner, you may be able to deduct up to $1,500 off your 2010 tax bill.
5. Mileage for volunteer work. If you travel a long way to volunteer for a charity, you can deduct the IRS-determined mileage allowance for your commute back and forth. While the reimbursement rate fell a bit for business expenses this year, fortunately the 14 cents per mile for charity-related travel held steady.
6. Childcare expenses when volunteering. If you paid a babysitter to watch the kids while you volunteered for your church or other non-profit organization, you can deduct that expense on your taxes.
7. Expenses for mentoring programs. Many volunteers for programs such as Big Brothers Big Sisters, Young Life, and youth groups end up spending a lot of their own funds on children by paying for meals and event tickets. You can't deduct the money you spent on yourself, but you can deduct the cash spent on the child.
8. Business meals and entertainment. If you're a small-business owner or a self-employed freelancer who takes prospective or current clients out often, you're incurring a great deal of expenses for meals and entertainment. Make sure you keep these expenses separate, because you can deduct 100 percent of the cost of entertainment and 50 percent of what you spend on meals (since you need to eat anyway).
9. Continuing education deductions. If you itemize your deductions, don't miss out on these miscellaneous itemized tax deductions: Subscriptions to professional publications, dues paid to professional associations, investment advisory fees, costs of a safety deposit box, and tax-preparation fees (even if you used online tax preparation software like TurboTax).
10. Jury duty pay. If you received jury duty pay, the IRS considers it like any other taxable income. But if you had to return jury duty compensation because you still had a salary from your employer while at jury duty, then you can deduct the pay from your tax return.
You don't have to be a CPA or a math whiz to figure out that many activities, tasks, and everyday situations can be money-saving tax deductions. But of course fine print can always get in the way, so if you're unsure about itemizing or taking certain deductions, consult a tax professional. The last thing you want to do is claim a deduction and pay it back later on during an audit.
Sunday, February 20, 2011
2010 Roth IRA Contribution Limits
The Roth IRA contribution deadline for 2010 isn’t as fast approaching as you might think. You’re allowed to contribute towards the 2010 limit until you file your taxes or April 15, 2011, whichever comes first.
Your individual Roth IRA contribution limit varies according to...
Nevertheless, these aren't the maximum limits for everyone.
Why?
Because your maximum 2010 Roth IRA contribution limit phases out as your income rises above the threshold for making the maximum contribution.
To find out how much you're eligible to contribute in 2010, look for your tax filing status in the sub-headings below:
For instance, if you're 48 years old with a combined income of $171,000, then your contribution limit is 50% of what it would be if you earned $167,000 or less.
Why?
Because $171,000 is the midpoint between $167,000 and $176,000, and the 2010 Roth IRA contribution limit phases out on a percentage basis related to where your income falls within that range.
So if your maximum contribution limit is $5,000 at $167,000 in earned income, it's $2,500 at $171,000 in earned income.
Likewise, if your maximum limit is $6,000 at $167,000, then it's $3,000 at $171,000.
Does that make sense?
The phase out provision is the same as for someone who is married and filing a joint tax return. Your contribution limit simply phases out on a percentage basis depending on where you income level falls within the $105,001 to $120,000 range.
You lived with your spouse for any part the year, you can contribute a maximum of...
The phase out provision is the same for everyone, regardless of tax filing status. Under the phase out rules, your contribution limit phases out on a percentage basis depending on where you income level falls within the $1 to $10,000 range.
2010 Roth IRA contributions are still subject to income limitations, but...
Income limits on Roth IRA conversions do disappear in 2010.
So what does that mean?
It means you can NOT contribute to your Roth IRA in 2010 if your Modified Adjusted Gross Income (MAGI) exceeds the IRS limit for your tax filing status.
So the idea that Roth IRA income limits disappear in 2010 is false.
However...
The income limits on Roth IRA conversions do disappear in 2010, and that means Roth IRA income limits effectively disappear.
Why do they effectively disappear?
Because contributions to your Traditional IRA are NOT subject to income limits. Whether or not your contributions are deductible is subject to a cap, but not the contributions themselves.
So...
If you earn too much to contribute to your Roth IRA, you can make non-tax deductible contributions to your Traditional IRA
How is this possible?
Remember, the income limits on conversions disappear in 2010.
So making a non-deductible contribution to a Traditional IRA and following that with a conversion to a Roth IRA is essentially serves the same purpose as making a Roth IRA contribution.
For example...
Let's say you're single, 40 years old, and earn $250,000 per year.
Due to IRS income restrictions on Roth IRA contributions, you're ineligible to contribute to your Roth IRA.
Why?
Because the income limit for a single person is $120,000. If you earn more than $120,000 per year, you're ineligible to contribute to your Roth IRA.
You're also ineligible to make tax deductible contributions to your Traditional IRA.
However, you CAN make non-tax deductible contributions to your Traditional IRA.
So you do exactly that, making a $5,000 non-deductible Traditional IRA contribution.
Now, since the income limits on Roth IRA conversions disappear in 2010, you're eligible to convert your Traditional IRA to a Roth IRA.
Normally, a conversion triggers a tax liability on the original Traditional IRA contributions (assuming they were tax deductible when made), but since the contributions you made are non-deductible (just like Roth IRA contributions), you don't trigger a tax liability.
Instead, you end up with $5,000 in your Roth IRA...
See how that works? It's easy, right?
Yes, but...
Don't get overly confident. Proceed with caution.
Why?
Because if this is the route you choose, you need to make sure you understand the Roth IRA conversion rules. Otherwise, you might trigger unexpected taxes or penalties. In fact, it's probably a good idea to consult a tax attorney or an accountant before doing this.
Why?
Because the Roth IRA conversion rules are very specific.
For instance, let's say you have two brokerage accounts, one funded with deductible IRA contributions and the other one funded with non-deductible IRA contributions.
If you convert the non-deductible brokerage account to a Roth IRA, the IRS only treats a percentage of your conversion as non-deductible.
Why?
Because the IRS views all of your IRA accounts as a single IRA.
So when you convert the non-deductible brokerage account, the IRS views this as a conversion of a percentage of your Traditional IRA. And that percentage is based on the total value of the assets in all your accounts designated as a Traditional IRA.
So if you have equal amounts of money in both accounts, and only convert the non-deductible account, the IRS treats only 50% of those funds as non-deductible.
See why it's probably a good idea to seek professional advice?
Taking advantage of 2010 Roth IRA conversions is relatively simple for someone who doesn't have existing Traditional IRA accounts, but for someone who does, it can be quite complicated.
So don't be afraid to seek help if you need it.. After you do that, you simply convert your Traditional IRA to a Roth IRA, andPresto! You just funded your Roth IRA!
Also, despite the Internet rumors, Roth IRA contribution income limits remain in full effect for the 2010 tax year. What does change is the income limit on making a Roth IRA conversion.
Don't make the mistake of confusing the two. While the change in law effectively eliminates the income restrictions on making a Roth IRA contribution, if your income exceeds the Roth IRA limit, you can NOT directly fund your Roth IRA.
Why?
Because you're still ineligible to contribute to your Roth IRA. What you can do is make a Traditional IRA contribution and then convert your Traditional IRA to a Roth IRA.
Make sure you know the difference, or you might get an unwanted knock on the door from the IRS!
If you file for an extension, the Roth IRA deadline for 2010 is still April 15, 2011. The deadline isn’t extended.
2010 Roth IRA Contribution Limits
What are the 2010 Roth IRA contribution limits?Your individual Roth IRA contribution limit varies according to...
- Your tax filing status
- Your income level
- Your age
2010 Roth IRA Maximum Contribution
Unless you earn too much to qualify, the maximum 2010 Roth IRA contribution limits are...- $5,000 if you're under age 50
- $6,000 if you're over age 50
Nevertheless, these aren't the maximum limits for everyone.
Why?
Because your maximum 2010 Roth IRA contribution limit phases out as your income rises above the threshold for making the maximum contribution.
2010 Roth IRA Income Limits
Your ability to make a 2010 Roth IRA contribution as well as the limit of that contribution also depend on your income level as related to your tax filing status.To find out how much you're eligible to contribute in 2010, look for your tax filing status in the sub-headings below:
Married Filing Jointly
If you're married and filing a joint tax return, you can contribute a maximum of...- $6,000 if you're over 50 and your combined earned income is $167,000 or less
- $5,000 if you're under 50 and your combined earned income is $167,000 or less
- $0 regardless of age if your combined earned income is more than $176,000
For instance, if you're 48 years old with a combined income of $171,000, then your contribution limit is 50% of what it would be if you earned $167,000 or less.
Why?
Because $171,000 is the midpoint between $167,000 and $176,000, and the 2010 Roth IRA contribution limit phases out on a percentage basis related to where your income falls within that range.
So if your maximum contribution limit is $5,000 at $167,000 in earned income, it's $2,500 at $171,000 in earned income.
Likewise, if your maximum limit is $6,000 at $167,000, then it's $3,000 at $171,000.
Does that make sense?
Single, Head of Household, or Married Filing Separately (And Didn't Live With Your Spouse)
If you're single, head of household, or married filing separately (and didn't live with your spouse for any part of the year), you can contribute a maximum of...- $6,000 if you're over 50 and your earned income is $105,000 or less
- $5,000 if you're under 50 and your earned income is $105,000 or less
- $0 regardless of age if your earned income is $120,000 or more
The phase out provision is the same as for someone who is married and filing a joint tax return. Your contribution limit simply phases out on a percentage basis depending on where you income level falls within the $105,001 to $120,000 range.
Married Filing Separately (And Lived With Your Spouse)
If you're married filing separately, and...You lived with your spouse for any part the year, you can contribute a maximum of...
- $6,000 if you're over 50 and your earned income is $0
- $5,000 if you're under 50 and your earned income is $0
- $0 regardless of age if your earned income is $10,000 or more
The phase out provision is the same for everyone, regardless of tax filing status. Under the phase out rules, your contribution limit phases out on a percentage basis depending on where you income level falls within the $1 to $10,000 range.
Do Roth IRA Income Limits Disappear in 2010?
Unfortunately, no.2010 Roth IRA contributions are still subject to income limitations, but...
Income limits on Roth IRA conversions do disappear in 2010.
So what does that mean?
It means you can NOT contribute to your Roth IRA in 2010 if your Modified Adjusted Gross Income (MAGI) exceeds the IRS limit for your tax filing status.
So the idea that Roth IRA income limits disappear in 2010 is false.
However...
The income limits on Roth IRA conversions do disappear in 2010, and that means Roth IRA income limits effectively disappear.
Why do they effectively disappear?
Because contributions to your Traditional IRA are NOT subject to income limits. Whether or not your contributions are deductible is subject to a cap, but not the contributions themselves.
So...
If you earn too much to contribute to your Roth IRA, you can make non-tax deductible contributions to your Traditional IRA
How is this possible?
Remember, the income limits on conversions disappear in 2010.
So making a non-deductible contribution to a Traditional IRA and following that with a conversion to a Roth IRA is essentially serves the same purpose as making a Roth IRA contribution.
For example...
Let's say you're single, 40 years old, and earn $250,000 per year.
Due to IRS income restrictions on Roth IRA contributions, you're ineligible to contribute to your Roth IRA.
Why?
Because the income limit for a single person is $120,000. If you earn more than $120,000 per year, you're ineligible to contribute to your Roth IRA.
You're also ineligible to make tax deductible contributions to your Traditional IRA.
However, you CAN make non-tax deductible contributions to your Traditional IRA.
So you do exactly that, making a $5,000 non-deductible Traditional IRA contribution.
Now, since the income limits on Roth IRA conversions disappear in 2010, you're eligible to convert your Traditional IRA to a Roth IRA.
Normally, a conversion triggers a tax liability on the original Traditional IRA contributions (assuming they were tax deductible when made), but since the contributions you made are non-deductible (just like Roth IRA contributions), you don't trigger a tax liability.
Instead, you end up with $5,000 in your Roth IRA...
See how that works? It's easy, right?
Yes, but...
Don't get overly confident. Proceed with caution.
Why?
Because if this is the route you choose, you need to make sure you understand the Roth IRA conversion rules. Otherwise, you might trigger unexpected taxes or penalties. In fact, it's probably a good idea to consult a tax attorney or an accountant before doing this.
Why?
Because the Roth IRA conversion rules are very specific.
For instance, let's say you have two brokerage accounts, one funded with deductible IRA contributions and the other one funded with non-deductible IRA contributions.
If you convert the non-deductible brokerage account to a Roth IRA, the IRS only treats a percentage of your conversion as non-deductible.
Why?
Because the IRS views all of your IRA accounts as a single IRA.
So when you convert the non-deductible brokerage account, the IRS views this as a conversion of a percentage of your Traditional IRA. And that percentage is based on the total value of the assets in all your accounts designated as a Traditional IRA.
So if you have equal amounts of money in both accounts, and only convert the non-deductible account, the IRS treats only 50% of those funds as non-deductible.
See why it's probably a good idea to seek professional advice?
Taking advantage of 2010 Roth IRA conversions is relatively simple for someone who doesn't have existing Traditional IRA accounts, but for someone who does, it can be quite complicated.
So don't be afraid to seek help if you need it.. After you do that, you simply convert your Traditional IRA to a Roth IRA, andPresto! You just funded your Roth IRA!
Conclusion
The 2010 Roth IRA contribution limits are based on the following factors...- Your tax filing status
- Your income level
- Your age
Also, despite the Internet rumors, Roth IRA contribution income limits remain in full effect for the 2010 tax year. What does change is the income limit on making a Roth IRA conversion.
Don't make the mistake of confusing the two. While the change in law effectively eliminates the income restrictions on making a Roth IRA contribution, if your income exceeds the Roth IRA limit, you can NOT directly fund your Roth IRA.
Why?
Because you're still ineligible to contribute to your Roth IRA. What you can do is make a Traditional IRA contribution and then convert your Traditional IRA to a Roth IRA.
Make sure you know the difference, or you might get an unwanted knock on the door from the IRS!
If you file for an extension, the Roth IRA deadline for 2010 is still April 15, 2011. The deadline isn’t extended.
Keep a Business Mileage Log for the Tax Deduction
Business mileage deduction is an easy way for small businesses and their owners to save money on their taxes. The 2011 IRS standard mileage rate is 51¢ per mile. Over time, this amount adds up and helps offset the ever-rising cost of gas. To take advantage of this tax deduction, be sure to keep detailed records and research which trips count towards your business mileage.
Here are some common but frequently overlooked trips that apply toward your business mileage:
1. Driving from your home office to meet a client for business purposes.
2. Driving to make bank deposits or other business transactions.
3. Driving to pick up mail (from your P.O. Box or from your UPS store).
4. When you drive to the post office—to buy stamps (for your business of course) or send business mail.
5. When you drive to an office supply store to make purchases for your business.
6. Stops along the way during a business trip, such as for food or bathroom breaks (obviously within reason).
7. Just about any driving that involves your business can be counted, except for your commute to and from the office.
Here are some common but frequently overlooked trips that apply toward your business mileage:
1. Driving from your home office to meet a client for business purposes.
2. Driving to make bank deposits or other business transactions.
3. Driving to pick up mail (from your P.O. Box or from your UPS store).
4. When you drive to the post office—to buy stamps (for your business of course) or send business mail.
5. When you drive to an office supply store to make purchases for your business.
6. Stops along the way during a business trip, such as for food or bathroom breaks (obviously within reason).
7. Just about any driving that involves your business can be counted, except for your commute to and from the office.
Parents taking proper tax credits save thousands in taxes
Parents who pay attention to their tax return can often recover thousands of dollars for everything from raising children to sending them to day care or college. Yet, taxpayers leave billions of unclaimed credits on the table, according to federal figures.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
Child tax credit: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said Terrence Rice, CPA. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
Earned income tax credit: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless it's $457. To find out if you are eligible, use the table in IRS Publication 596.
Sending kids to college: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Rice notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
Adopted child: Recent tax changes have enhanced the credits available to parents who adopt children, said Rice. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
Child care expenses: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
Moving for a job: If you had to move at least 50 miles for a new job, you can deduct your moving expenses. Job-seeking expenses are also deductible. Use Publication 521.
Insuring the kids: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Rice. This is a result of health care overhaul. Dates matter, however. Rice notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
Child tax credit: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said Terrence Rice, CPA. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
Earned income tax credit: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless it's $457. To find out if you are eligible, use the table in IRS Publication 596.
Sending kids to college: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Rice notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
Adopted child: Recent tax changes have enhanced the credits available to parents who adopt children, said Rice. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
Child care expenses: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
Moving for a job: If you had to move at least 50 miles for a new job, you can deduct your moving expenses. Job-seeking expenses are also deductible. Use Publication 521.
Insuring the kids: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Rice. This is a result of health care overhaul. Dates matter, however. Rice notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Saturday, February 19, 2011
10 Ways to Maximize Your Tax Deductions Without Itemizing
With all the emphasis on itemized deductions at tax time, taxpayers tend to believe that claiming the standard deduction limits the potential to reduce the amount of tax due.
While it's true that many taxpayers rely on popular itemized deductions, those aren't the only deductions available. Taxpayers who file a form 1040 may also opt to claim a number of what the IRS calls "adjustments to income" -- that's another way of saying non-itemized deductions. Since deductions reduce your taxable income, they're a relatively painless way to chip away at your tax bill. Following are 10 ways to maximize your tax deductions -- without going through the trouble of itemizing:
1. Educator Expenses. Teachers (for grades K-12), instructors, counselors, principals or aides who worked in a school for at least 900 hours during the school year in 2010 can take a deduction of up to $250 for qualified expenses (if you and your spouse are filing jointly and both of you were eligible educators, you can claim up to $500). Expenses over the $250 can be taken as an itemized deduction on a Schedule A at line 21. Qualified expenses include those paid in connection with books, supplies, equipment (including computer equipment, software and services) and other materials used in the classroom. Qualified expenses don't include expenses for home schooling or for nonathletic supplies for courses in health or physical education.
2. Alimony. Payments that qualify as alimony can be deducted on your federal income tax return. To qualify, the payments must be "to or for a spouse or former spouse under a divorce or separation instrument." In other words, you must have an official agreement requiring the payment of support in cash or cash equivalent; noncash property settlements or voluntary payments don't qualify. Additionally, payments that can be characterized as child support don't count as alimony payments -- child support payments are tax neutral.
3. Student Loan Interest Deduction. For those of us still paying off those college and graduate school loans, it comes as a bit of a relief to be able to claim interest on a qualified student loan as a deduction. To qualify, you must have paid interest during the year for a student loan used solely to pay qualified higher education expenses; your filing status must not be married filing separately; your modified AGI must be less than $75,000 ($150,000 if married filing jointly); and you and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return. If times were tough and you couldn't make payments during the year so your parents made a payment on your behalf, the IRS may still allow you to deduct up to $2,500 of student loan interest.
4. Student Loan Interest Deduction -- For Someone Else. While it makes sense that you can take a deduction for your own student loan interest, you might not realize you may qualify for a deduction for student loan interest that you paid for someone else. For purposes of the deduction, a qualified student loan is any loan you took out to pay the qualified higher education expenses for not only you and your spouse but for any person who was your dependent when the loan was taken out -- as well as for any person you could have claimed as a dependent for the year the loan was taken out except that the person filed a joint return, the person had gross income equal to or more than the exemption amount for that year ($3,650 for 2010), or you (or your spouse if filing jointly) could be claimed as a dependent on someone else's return. If you qualify, you can deduct the interest even though someone else received the education.
5. Career-Related Moving Expenses. If you moved in 2010 for reasons related to your job or business or to start a new job, you may be able to deduct your moving expenses. Your new workplace must be at least 50 miles farther from your old home than your old workplace was from your old home; if you had no old workplace, your new workplace must be at least 50 miles from your old home. To claim the deduction, you'll need to complete federal form 3903, Moving Expenses.
6. Tuition and Fees Deduction. If you, your spouse or your dependent was a student in 2010, you may be able to deduct tuition and fees paid to an eligible school. An eligible school would include any college, university, vocational school or other post-secondary educational institution that participates in a student aid program administered by the Department of Education. The deduction is based on the amount of qualified education expenses you paid in 2010 for academic periods beginning in 2010 and the first three months of 2011. You cannot take the deduction if your filing status is married filing separately, you were a nonresident at any time during the year, you could be claimed as an exemption by any other person (even if they didn't actually claim you), if your modified AGI is more than $80,000 ($160,000 if filing a joint return) or if you were a nonresident alien for any part of the year. You may be able to take the American Opportunity credit or Lifetime Learning credit for your education expenses instead of the tuition and fees deduction but you may not take both in the same year. To figure your deduction, use federal form 8917, Tuition and Fees Deduction.
7. Health Savings Account Deduction. Health Savings Accounts (HSAs) are tax-favored accounts that allow taxpayers to save for medical expenses. You may be able to take a deduction for those contributions that you make to a HSA during the year; employer contributions, rollovers and qualified HSA funding distributions from an IRA don't count for purposes of a deduction. To be eligible, you must be covered under a high deductible health plan (HDHP) and have no other health coverage except permitted coverage. If you are eligible, anyone can contribute to your HSA. However, you cannot be enrolled in Medicare or be claimed as a dependent on another person's tax return. The maximum amount that can be contributed to your Health Savings Account depends on the type of High Deductible Health Plan (HDHP) coverage you have. For 2010, the maximum contribution for individual plans is $3,050 and the maximum contribution for family plans is $6,150. You'll report contributions and figure your deduction using a federal form 8889, Health Savings Accounts (HSAs).
8. IRA Contributions. Contributions to a traditional IRA may be deductible so long as they meet certain criteria; keep in mind that contributions to a Roth IRA will not be deductible but may still count toward the saver's credit. To qualify, you or your spouse (if filing a joint return) must have earned income during the year. For purposes of determining the IRA deduction, earned income would, in addition to wages and self-employment income, include alimony and nontaxable combat pay; earned income does not include rental income, interest and dividend income, or any amount received as pension or annuity income or as deferred compensation. Additionally, to qualify, you must be under the age of 70 1/2 by the end of 2010. The maximum contribution you can contribute to a traditional IRA is the smaller of $5,000 ($6,000 if age 50 or older) or the amount of your taxable income for 2010, though limits and phaseouts may apply. And unlike many deductions which require you to pay up before the end of the year, you can make an IRA contribution through April 18, 2011, and it will still qualify as a deduction on your 2010 return.
9. Self-Employment Tax Deduction. When you're self-employed, the bad news is that, in addition to federal income tax, you are subject to self-employment (SE) tax. SE tax is a self-employed person's version of payroll taxes: You pay the equivalent of the employee and the employer's contributions to Social Security and Medicare. The good news is that you can deduct one-half of your SE tax paid as a non-itemized deduction.
10. Self-Employed Health Insurance Deduction. Generally, paying out of pocket for health insurance would be considered an itemized deduction that you would claim on a Schedule A. However, self-employed persons who pay for their own plans (as well as for spouses and dependents) may be able to deduct the amounts paid without itemizing. In addition, under provisions in the new small business jobs legislation signed last fall, you can save on payroll taxes due to a move that makes calculating the deduction more advantageous.
These popular non-itemized deductions can dramatically reduce your taxable income, which means you'll pay less in taxes. If you don't itemize, don't automatically reach for the form 1040-EZ; to claim these non-itemized deductions, you'll need to file a form 1040 or, in some cases, a form 1040-A. If you're not sure whether these deductions apply to you, use the "interview style" format found in your tax software or ask your tax professional.
While it's true that many taxpayers rely on popular itemized deductions, those aren't the only deductions available. Taxpayers who file a form 1040 may also opt to claim a number of what the IRS calls "adjustments to income" -- that's another way of saying non-itemized deductions. Since deductions reduce your taxable income, they're a relatively painless way to chip away at your tax bill. Following are 10 ways to maximize your tax deductions -- without going through the trouble of itemizing:
1. Educator Expenses. Teachers (for grades K-12), instructors, counselors, principals or aides who worked in a school for at least 900 hours during the school year in 2010 can take a deduction of up to $250 for qualified expenses (if you and your spouse are filing jointly and both of you were eligible educators, you can claim up to $500). Expenses over the $250 can be taken as an itemized deduction on a Schedule A at line 21. Qualified expenses include those paid in connection with books, supplies, equipment (including computer equipment, software and services) and other materials used in the classroom. Qualified expenses don't include expenses for home schooling or for nonathletic supplies for courses in health or physical education.
2. Alimony. Payments that qualify as alimony can be deducted on your federal income tax return. To qualify, the payments must be "to or for a spouse or former spouse under a divorce or separation instrument." In other words, you must have an official agreement requiring the payment of support in cash or cash equivalent; noncash property settlements or voluntary payments don't qualify. Additionally, payments that can be characterized as child support don't count as alimony payments -- child support payments are tax neutral.
3. Student Loan Interest Deduction. For those of us still paying off those college and graduate school loans, it comes as a bit of a relief to be able to claim interest on a qualified student loan as a deduction. To qualify, you must have paid interest during the year for a student loan used solely to pay qualified higher education expenses; your filing status must not be married filing separately; your modified AGI must be less than $75,000 ($150,000 if married filing jointly); and you and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return. If times were tough and you couldn't make payments during the year so your parents made a payment on your behalf, the IRS may still allow you to deduct up to $2,500 of student loan interest.
4. Student Loan Interest Deduction -- For Someone Else. While it makes sense that you can take a deduction for your own student loan interest, you might not realize you may qualify for a deduction for student loan interest that you paid for someone else. For purposes of the deduction, a qualified student loan is any loan you took out to pay the qualified higher education expenses for not only you and your spouse but for any person who was your dependent when the loan was taken out -- as well as for any person you could have claimed as a dependent for the year the loan was taken out except that the person filed a joint return, the person had gross income equal to or more than the exemption amount for that year ($3,650 for 2010), or you (or your spouse if filing jointly) could be claimed as a dependent on someone else's return. If you qualify, you can deduct the interest even though someone else received the education.
5. Career-Related Moving Expenses. If you moved in 2010 for reasons related to your job or business or to start a new job, you may be able to deduct your moving expenses. Your new workplace must be at least 50 miles farther from your old home than your old workplace was from your old home; if you had no old workplace, your new workplace must be at least 50 miles from your old home. To claim the deduction, you'll need to complete federal form 3903, Moving Expenses.
6. Tuition and Fees Deduction. If you, your spouse or your dependent was a student in 2010, you may be able to deduct tuition and fees paid to an eligible school. An eligible school would include any college, university, vocational school or other post-secondary educational institution that participates in a student aid program administered by the Department of Education. The deduction is based on the amount of qualified education expenses you paid in 2010 for academic periods beginning in 2010 and the first three months of 2011. You cannot take the deduction if your filing status is married filing separately, you were a nonresident at any time during the year, you could be claimed as an exemption by any other person (even if they didn't actually claim you), if your modified AGI is more than $80,000 ($160,000 if filing a joint return) or if you were a nonresident alien for any part of the year. You may be able to take the American Opportunity credit or Lifetime Learning credit for your education expenses instead of the tuition and fees deduction but you may not take both in the same year. To figure your deduction, use federal form 8917, Tuition and Fees Deduction.
7. Health Savings Account Deduction. Health Savings Accounts (HSAs) are tax-favored accounts that allow taxpayers to save for medical expenses. You may be able to take a deduction for those contributions that you make to a HSA during the year; employer contributions, rollovers and qualified HSA funding distributions from an IRA don't count for purposes of a deduction. To be eligible, you must be covered under a high deductible health plan (HDHP) and have no other health coverage except permitted coverage. If you are eligible, anyone can contribute to your HSA. However, you cannot be enrolled in Medicare or be claimed as a dependent on another person's tax return. The maximum amount that can be contributed to your Health Savings Account depends on the type of High Deductible Health Plan (HDHP) coverage you have. For 2010, the maximum contribution for individual plans is $3,050 and the maximum contribution for family plans is $6,150. You'll report contributions and figure your deduction using a federal form 8889, Health Savings Accounts (HSAs).
8. IRA Contributions. Contributions to a traditional IRA may be deductible so long as they meet certain criteria; keep in mind that contributions to a Roth IRA will not be deductible but may still count toward the saver's credit. To qualify, you or your spouse (if filing a joint return) must have earned income during the year. For purposes of determining the IRA deduction, earned income would, in addition to wages and self-employment income, include alimony and nontaxable combat pay; earned income does not include rental income, interest and dividend income, or any amount received as pension or annuity income or as deferred compensation. Additionally, to qualify, you must be under the age of 70 1/2 by the end of 2010. The maximum contribution you can contribute to a traditional IRA is the smaller of $5,000 ($6,000 if age 50 or older) or the amount of your taxable income for 2010, though limits and phaseouts may apply. And unlike many deductions which require you to pay up before the end of the year, you can make an IRA contribution through April 18, 2011, and it will still qualify as a deduction on your 2010 return.
9. Self-Employment Tax Deduction. When you're self-employed, the bad news is that, in addition to federal income tax, you are subject to self-employment (SE) tax. SE tax is a self-employed person's version of payroll taxes: You pay the equivalent of the employee and the employer's contributions to Social Security and Medicare. The good news is that you can deduct one-half of your SE tax paid as a non-itemized deduction.
10. Self-Employed Health Insurance Deduction. Generally, paying out of pocket for health insurance would be considered an itemized deduction that you would claim on a Schedule A. However, self-employed persons who pay for their own plans (as well as for spouses and dependents) may be able to deduct the amounts paid without itemizing. In addition, under provisions in the new small business jobs legislation signed last fall, you can save on payroll taxes due to a move that makes calculating the deduction more advantageous.
These popular non-itemized deductions can dramatically reduce your taxable income, which means you'll pay less in taxes. If you don't itemize, don't automatically reach for the form 1040-EZ; to claim these non-itemized deductions, you'll need to file a form 1040 or, in some cases, a form 1040-A. If you're not sure whether these deductions apply to you, use the "interview style" format found in your tax software or ask your tax professional.
Friday, February 18, 2011
Are churches automatically tax exempt?
Churches that meet the requirements of section 501(c)(3) of the federal tax code are automatically considered tax-exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. Section 501(c)(3) imposes the following five requirements: (1) a church must be organized exclusively for exempt purposes; (2) a church must be operated exclusively for exempt purposes; (3) none of a church's resources can "inure" to the benefit of a private individual, other than reasonable compensation for services performed; (4) the church may not engage in substantial efforts to influence legislation; and (5) the church may not intervene or participate in any political campaign on behalf of or in opposition to a candidate for public office.
Churches that satisfy these five requirements are automatically exempt from federal income taxes. They are not required to obtain official recognition of exemption from the IRS by submitting an exemption application form (Form 1023) like most other public charities.
Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and donors that the church is recognized as exempt and qualifies for related tax benefits. For example, members who make charitable contributions to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible.
A church with a parent organization may wish to contact the parent to see if it has a group ruling. If the parent holds a group ruling, then the IRS may already recognize the church as tax exempt. Under the group exemption process, the parent organization becomes the holder of a group ruling that identifies other affiliated churches or other affiliated organizations. A church is recognized as tax exempt if it is included in a list provided by the parent organization. The parent is then required to submit an annual group exemption update to the IRS in which it provides additions, deletions, and changes within the group. If the church or other affiliated organization is included on such a list, it does not need to take further action to obtain recognition of tax-exempt status.
Wednesday, February 16, 2011
10 Small Business Tax Mistakes That Will Cost You
There’s not an entrepreneur on the planet who likes thinking about taxes. I know, it’s only February, so you’re likely still in deep denial about March 15. But it’s time to get organized! Almost every aspect of your business has tax ramifications and if you don’t know what they are, you’re inviting trouble down the road (can you say “audit?”).
I will share 10 common tax misconceptions that both fledgling and experienced small business owners are guilty of. How many of these phrases have you uttered?
1. “I can do it myself.” “Most small business owners do not have the tax knowledge they need to stay out of trouble, but they won’t pay for planning,” says Rice. “They’re cheap so they use TurboTax. But TurboTax won’t represent them if they get into trouble.” . Maybe you really are capable of doing your own tax planning. Maybe you can also rewire your office, build your own website, and represent yourself in court. That doesn’t mean you should. Just sayin’.
2. “I keep my receipts so I don’t need a tax diary.“ Every small business owner must keep an accurate tax organizer, and it’s not the same thing as an expense log. “A tax organizer has all the questions that the IRS requires you to answer about travel, entertainment, and other expenses. It will bulletproof your records and eliminate procrastination, and if you’re audited, it shifts the burden of proof to the IRS,” Rice says. Anything that allows you to feel smug in the presence of an auditor has got to be worth its price, which is not cheap in this case. You’ll spend over $100 for a decent tax organizer/diary.
3. “Yay! A big fat refund.“ Many people are thrilled when they get a big check from the IRS. Wrong reaction. “A refund means you’ve given the government interest-free money for a long time,” Rice says. “If you have withholding, you want to adjust it to the point where you get very little refund.”
4. “I’ll just borrow a little from employee withholding.“ When they’re short on cash, it’s often tempting for small business owners to dip into the trust fund that’s used for employee withholding and Social Security. “Many employers think ‘ this is my money,’” says Rice. “It isn’t. If they borrow from withholding or Social Security, they are personally liable, with huge potential penalties.”
5. “Let’s make everyone an independent contractor.“ Employees are expensive. Independent contractors, not so much. So why not make everyone independent contractor? It’s not that easy, says Rice. “If you’re going to designate a worker as independent you have to treat him as independent,” says Rice. Typically, independent contractors can make their own hours and have control over where, when, and how work is completed. If the IRS determines that you incorrectly designated an employee as independent, you may be subject to penalties for not collecting Social Security taxes, and for more than 40% of workers compensation for the specified time period.
6. “I can pay myself whatever I please.“ If you’re incorporated, not really. Say you typically pay yourself $100,000 a year. After a good year, you decide to increase that to $300,000. “You have to substantiate a reason for the increase, or part of the money can be disallowed by the IRS as unreasonable compensation,” says Rice. “Then it can be taxed at the corporate level, and distributed as a dividend. And then you’ll pay tax on the dividend.” Ouch!
7. “My bookkeeper would never steal from me.” “It’s vital for every small business person to have one person who writes the checks and another person doing the accounting, and never the two shall meet,” says Rice. So unless you have a trusted family member handling all your finances, make sure that you have different people handling accounting and accounts payable. Nope, this isn’t a tax tip per se, but drop the ball on this one and you won’t have to worry about paying taxes because you may not have a business.
8. “That can’t possibly be deductible.“ Not so fast! The dry cleaning for the suits you wore at that business conference in Duluth? If you were away overnight, it’s deductible, says Rice. A movie and dinner with friends, with whom you also talked business? Also deductible he says, even if your business discussion didn’t occur at dinner, but within the same 24-hour period as the social engagement. Just make sure it’s all documented in your tax diary (see #2). Educate yourself on all the juicy deductions you may be missing out on.
9. “This isn’t a hobby, it’s a business.“ Say the “business” you started, selling seashell picture frames online, consistently loses money (those trips to Cape Cod are expensive, after all). The IRS may decide that you don’t have a business at all, but merely a hobby. In that case, you’ll no longer be entitled to the same deductions. “They’ll also disallow your losses,” says Rice. “The government is the biggest bookie — they’ll subsidize your losses, but they want part of your profits.”
10. “I can’t afford to hire my kids.“ Well, sure you can. Especially your kids who are in college. Pay them a reasonable wage for the work they perform, and you’ll be able to deduct their wages as a business expense. Then, have them use the wages to pay for college. Voila! You’ve just made college tuition deductible. Also, remember that up to $5,800 in income is tax-free for your children.
I will share 10 common tax misconceptions that both fledgling and experienced small business owners are guilty of. How many of these phrases have you uttered?
1. “I can do it myself.” “Most small business owners do not have the tax knowledge they need to stay out of trouble, but they won’t pay for planning,” says Rice. “They’re cheap so they use TurboTax. But TurboTax won’t represent them if they get into trouble.” . Maybe you really are capable of doing your own tax planning. Maybe you can also rewire your office, build your own website, and represent yourself in court. That doesn’t mean you should. Just sayin’.
2. “I keep my receipts so I don’t need a tax diary.“ Every small business owner must keep an accurate tax organizer, and it’s not the same thing as an expense log. “A tax organizer has all the questions that the IRS requires you to answer about travel, entertainment, and other expenses. It will bulletproof your records and eliminate procrastination, and if you’re audited, it shifts the burden of proof to the IRS,” Rice says. Anything that allows you to feel smug in the presence of an auditor has got to be worth its price, which is not cheap in this case. You’ll spend over $100 for a decent tax organizer/diary.
3. “Yay! A big fat refund.“ Many people are thrilled when they get a big check from the IRS. Wrong reaction. “A refund means you’ve given the government interest-free money for a long time,” Rice says. “If you have withholding, you want to adjust it to the point where you get very little refund.”
4. “I’ll just borrow a little from employee withholding.“ When they’re short on cash, it’s often tempting for small business owners to dip into the trust fund that’s used for employee withholding and Social Security. “Many employers think ‘ this is my money,’” says Rice. “It isn’t. If they borrow from withholding or Social Security, they are personally liable, with huge potential penalties.”
5. “Let’s make everyone an independent contractor.“ Employees are expensive. Independent contractors, not so much. So why not make everyone independent contractor? It’s not that easy, says Rice. “If you’re going to designate a worker as independent you have to treat him as independent,” says Rice. Typically, independent contractors can make their own hours and have control over where, when, and how work is completed. If the IRS determines that you incorrectly designated an employee as independent, you may be subject to penalties for not collecting Social Security taxes, and for more than 40% of workers compensation for the specified time period.
6. “I can pay myself whatever I please.“ If you’re incorporated, not really. Say you typically pay yourself $100,000 a year. After a good year, you decide to increase that to $300,000. “You have to substantiate a reason for the increase, or part of the money can be disallowed by the IRS as unreasonable compensation,” says Rice. “Then it can be taxed at the corporate level, and distributed as a dividend. And then you’ll pay tax on the dividend.” Ouch!
7. “My bookkeeper would never steal from me.” “It’s vital for every small business person to have one person who writes the checks and another person doing the accounting, and never the two shall meet,” says Rice. So unless you have a trusted family member handling all your finances, make sure that you have different people handling accounting and accounts payable. Nope, this isn’t a tax tip per se, but drop the ball on this one and you won’t have to worry about paying taxes because you may not have a business.
8. “That can’t possibly be deductible.“ Not so fast! The dry cleaning for the suits you wore at that business conference in Duluth? If you were away overnight, it’s deductible, says Rice. A movie and dinner with friends, with whom you also talked business? Also deductible he says, even if your business discussion didn’t occur at dinner, but within the same 24-hour period as the social engagement. Just make sure it’s all documented in your tax diary (see #2). Educate yourself on all the juicy deductions you may be missing out on.
9. “This isn’t a hobby, it’s a business.“ Say the “business” you started, selling seashell picture frames online, consistently loses money (those trips to Cape Cod are expensive, after all). The IRS may decide that you don’t have a business at all, but merely a hobby. In that case, you’ll no longer be entitled to the same deductions. “They’ll also disallow your losses,” says Rice. “The government is the biggest bookie — they’ll subsidize your losses, but they want part of your profits.”
10. “I can’t afford to hire my kids.“ Well, sure you can. Especially your kids who are in college. Pay them a reasonable wage for the work they perform, and you’ll be able to deduct their wages as a business expense. Then, have them use the wages to pay for college. Voila! You’ve just made college tuition deductible. Also, remember that up to $5,800 in income is tax-free for your children.
Tuesday, February 15, 2011
Tax Breaks Could Inspire you to do your Taxes!
When it comes to tax filing season, there are two kinds of people: those who file their tax returns right after they receive their W-2s, and those who toss their tax documents into a drawer, quietly hoping that a jolly old accountant will slide down the chimney on the night before Tax Day and complete their 1040s.If you fall into the second group, you have even more reason to dither this year. The deadline for filing your tax return is April 18 — three days later than usual because Emancipation Day, a holiday in Washington, D.C., will be observed on April 15.In addition, the IRS announced earlier this year that it wouldn't process returns from taxpayers who claim itemized deductions until mid-February. The IRS said it needed time to program its systems to accommodate several tax breaks included in the tax compromise bill signed into law late last year.
Now, though, that reason for procrastination is gone. The IRS started accepting returns Monday from taxpayers who itemize. Here are some money-saving tax breaks that could give you the nudge you need to get started:
•Adoption tax credit. The health care reform act increased the maximum adoption tax credit to $13,170. The tax credit is refundable, so if the amount of the credit exceeds your tax bill, you'll receive a check for the balance.The amount of the credit is limited to the cost of adopting a child, up to the maximum credit. Eligible expenses include adoption fees, court costs, attorney fees and travel expenses, including meals and lodging.Taxpayers who claim this credit are required to attach documents certifying the adoption, such as a court order or decree, to IRS Form 8839.Because of that requirement, taxpayers who claim the adoption credit must file a paper return.
Deduction for corrosive drywall damage. Thousands of homeowners have filed complaints with regulators because their homes were built with Chinese-made drywall that emits corrosive sulfur gases. Last year, the IRS issued a special ruling that allows taxpayers to deduct the cost of repairing the damage to their homes or appliances as a casualty loss. Ordinarily, taxpayers can't deduct a casualty loss unless it's caused by a "sudden disruption," such as a fire or tornado".Damage or loss resulting from progressive deterioration of property is not considered a casualty loss under traditional rules," .You can't claim the loss if your insurance company has reimbursed you for the cost of repairs. If you have a pending claim, you're eligible to deduct 75% of the amount you spent on repairs last year. The ruling is limited to defective drywall installed between 2001 and 2008.
•You installed energy-efficient windows or doors, or bought a new furnace or air conditioner. If you made your home more energy efficient last year, you may be eligible for a tax credit for up to 30% of the cost, up to a maximum of $1,500. A tax credit is a dollar-for-dollar reduction in your tax bill, making a credit more valuable than a deduction.Keep in mind, though, that $1,500 is a lifetime maximum. If you claimed the full credit on your 2009 tax return, you can't claim it in 2010, even if you made more home improvements last year, Rice says.If you're not sure whether your energy-efficient improvements qualify, check the paperwork.
Most manufacturers will certify that their products meet the standards for the credit. Your contractor should also be able to help.You don't need to include the certification when you file your tax return, but you should file it with your tax records in case the IRS has questions about your return.
•You bought an energy-efficient vehicle. Some taxpayers who purchased hybrid cars in 2010 may be eligible for a tax credit for up to $2,200. However, the credit phases out after the manufacturer has sold 60,000 vehicles.Toyota and Honda hybrids aren't eligible for the credit. Ford hybrids purchased after March 31, 2010, aren't eligible, either.Taxpayers who purchased a plug-in, electric-drive vehicle, such as the Chevy Volt or Nissan Leaf, are eligible for a tax credit of up to $7,500.
Sunday, February 13, 2011
Tasting Three Flavors of Tax Software
TAX-PREPARATION software usually makes an onerous task easier. It doesn’t make doing a tax return fun, but it does make it far less frustrating and time-consuming.
Tax-prep programs guide you through the minutiae of the tax law. That’s no small feat: reading the Internal Revenue Code may seem like trying to decode a cipher written solely for the benefit of lawyers and lobbyists. If deciding whether to use software is simple, picking among the three leading programs is tougher.
For people with straightforward finances — a salary and some investment income, a mortgage and common deductions — any of the leading ones should work. All three — TurboTax, H&R Block at Home and TaxAct — use a question-and-answer format to guide you through your return and then plug your responses into the appropriate places on the I.R.S.’s many forms.
Each has its advantages. TurboTax offers the best overall experience — the easiest and speediest — but, with nagging about buying additional software and services, it occasionally annoys. Block at Home is just as good at handling the basics and gives an unbeatable guarantee. TaxAct is the cheapest.
TurboTax can retrieve data from more than 250,000 employers, banks and investment companies, and Intuit, its maker, continues to add more. The most confusing pitch embedded in TurboTax is the one that pops up once you finish the federal section: “It says, ‘Would you like a professional preparer to look over your return?’ For a fee of $39.95, of course. Didn’t I buy the software so I don’t have to worry about that? Doesn’t this suggest that TurboTax doesn’t believe that I should be doing my own return?”
If you don’t want to pay extra, the program offers gratis guidance via pop-up boxes and links. Users can also pose questions online through TurboTax’s Live Community. Intuit staff members and TurboTax users provide the answers. It’s like a Facebook page for tax nerds — and a test of one’s belief in the wisdom of crowds. Would you take the home-office deduction because “Volvogirl” or “Texas Roger” explained it online?
Block at Home works just as well as TurboTax — in most cases. Most of its explanations are just as clear, and its interview process is just as efficient. If you have your paperwork ready and you’re a filer with common deductions, you can probably complete your return using either brand in less than two hours.
Block isn’t able to pull in as much financial information as TurboTax. It fails to grab statements from investment accounts. In theory, the program has that ability, and Block has links with the bigger companies.
When it’s time to file, Block does offer up a reminder of a difference between it and TurboTax: Block users are entitled to in-person audit support. A Block enrolled agent will advise you if you’re audited and accompany you if you have to appear at the I.R.S. It’s as if Block is kicking in an insurance policy at no extra charge.
TaxAct is the Wal-Mart of tax software; its virtue is price.
Prices for all three brands can vary, depending on where and when you buy. But in general, the online versions, where you prepare your return via a Web browser, are cheaper than the CD and downloadable ones, which you copy onto your computer. But the CD’s and downloadables allow completion of multiple returns.
At $34.99 in the store, TaxAct Premier Federal + State was less than half the price of TurboTax Premier, which cost $79.99. H&R Block at Home Premium was $59.99.
TaxAct even offers a free federal return online to anyone, regardless of income or age.
People who use TaxAct’s free service shouldn’t expect the same level of guidance that they’d get from the company’s paid offerings. For that, they have to upgrade, with the cost rising with the level of guidance.
But don’t discount the quality of TaxAct’s offerings.
Tax-prep programs guide you through the minutiae of the tax law. That’s no small feat: reading the Internal Revenue Code may seem like trying to decode a cipher written solely for the benefit of lawyers and lobbyists. If deciding whether to use software is simple, picking among the three leading programs is tougher.
For people with straightforward finances — a salary and some investment income, a mortgage and common deductions — any of the leading ones should work. All three — TurboTax, H&R Block at Home and TaxAct — use a question-and-answer format to guide you through your return and then plug your responses into the appropriate places on the I.R.S.’s many forms.
Each has its advantages. TurboTax offers the best overall experience — the easiest and speediest — but, with nagging about buying additional software and services, it occasionally annoys. Block at Home is just as good at handling the basics and gives an unbeatable guarantee. TaxAct is the cheapest.
TurboTax can retrieve data from more than 250,000 employers, banks and investment companies, and Intuit, its maker, continues to add more. The most confusing pitch embedded in TurboTax is the one that pops up once you finish the federal section: “It says, ‘Would you like a professional preparer to look over your return?’ For a fee of $39.95, of course. Didn’t I buy the software so I don’t have to worry about that? Doesn’t this suggest that TurboTax doesn’t believe that I should be doing my own return?”
If you don’t want to pay extra, the program offers gratis guidance via pop-up boxes and links. Users can also pose questions online through TurboTax’s Live Community. Intuit staff members and TurboTax users provide the answers. It’s like a Facebook page for tax nerds — and a test of one’s belief in the wisdom of crowds. Would you take the home-office deduction because “Volvogirl” or “Texas Roger” explained it online?
Block at Home works just as well as TurboTax — in most cases. Most of its explanations are just as clear, and its interview process is just as efficient. If you have your paperwork ready and you’re a filer with common deductions, you can probably complete your return using either brand in less than two hours.
Block isn’t able to pull in as much financial information as TurboTax. It fails to grab statements from investment accounts. In theory, the program has that ability, and Block has links with the bigger companies.
When it’s time to file, Block does offer up a reminder of a difference between it and TurboTax: Block users are entitled to in-person audit support. A Block enrolled agent will advise you if you’re audited and accompany you if you have to appear at the I.R.S. It’s as if Block is kicking in an insurance policy at no extra charge.
TaxAct is the Wal-Mart of tax software; its virtue is price.
Prices for all three brands can vary, depending on where and when you buy. But in general, the online versions, where you prepare your return via a Web browser, are cheaper than the CD and downloadable ones, which you copy onto your computer. But the CD’s and downloadables allow completion of multiple returns.
At $34.99 in the store, TaxAct Premier Federal + State was less than half the price of TurboTax Premier, which cost $79.99. H&R Block at Home Premium was $59.99.
TaxAct even offers a free federal return online to anyone, regardless of income or age.
People who use TaxAct’s free service shouldn’t expect the same level of guidance that they’d get from the company’s paid offerings. For that, they have to upgrade, with the cost rising with the level of guidance.
But don’t discount the quality of TaxAct’s offerings.
Saturday, February 12, 2011
4 questions to ask before hiring a tax preparer
To take advantage of all the tax breaks available, preparers must keep up with changes in the tax code. Late last year, for example, Congress extended several deductions that had expired in 2009.
In most states, anyone can prepare taxes for a fee. There are no training or licensing requirements. Some individuals use the promise of low-cost tax preparation to sell dubious products, such as high-cost refund-anticipation loans.
That's changing, though. Last year, the IRS announced that tax preparers will be required to register with the government, pass a competency test and take continuing-education courses. The IRS plans to phase in the program over several years.
Starting this year, all paid preparers must obtain a Preparer Tax Identification Number from the IRS and include it on all returns they file. At this point, all a PTIN signifies is that the individual has registered with the IRS. Still, you should make sure a preparer has a PTIN. Someone who hasn't gone to the trouble to comply with this requirement may be slipshod in other areas.
Before hiring a preparer, check with your local Better Business Bureau to find out if there have been any complaints against the individual or company. Once you've done that, be prepared to ask some questions, including:
•Do you have any professional designations?CPAs, enrolled agents and attorneys must fulfill continuing-education and licensing requirements and are bound by ethical standards. They're also authorized to represent taxpayers before the IRS in all matters, including audits, collections and appeals. If the preparer doesn't have one of those designations, ask him if he belongs to any professional organizations that have continuing-education requirements.
•How much experience do you have with my type of return? Everyone has to learn the ropes somehow, but you probably don't want someone learning them on your tax return. Ask the preparer how long they have been preparing tax returns and whether they are familiar with your type of return.
•How do you determine your fees? Many reputable preparers charge a flat fee based on the complexity of your tax return. For example, someone with a 1040EZ will usually pay less than someone who has income from rental property and investments, she says. Ask the preparer to put the billing and payment terms in writing.
Steer clear of any preparer who bases fees on a percentage of your refund. Likewise, avoid preparers who claim they can get you a bigger refund than the guy down the street. No one can estimate your refund without first reviewing your financial information.
•Have you represented many clients in IRS audits? A preparer who has experience with IRS audits could provide valuable assistance if your return is scrutinized. But be wary of someone who has been through the process numerous times. That may be a sign he claims a lot of questionable deductions.
Keep in mind that you're responsible for the information on your tax return. Ideally, your tax preparer should e-mail or call with questions before completing your return. And you should always review and sign your return before it's filed with the IRS.
Desperate for tax deductions? Consider an IRA
You can't deduct food as a medical expense, even though you get sick if you don't eat. And your dogs may be like children to you, but you can't claim them as exemptions. Knock it off. There's little you can do now to reduce your 2010 taxes. But you can do plenty to reduce your 2011 taxes, if you start now. At some point while doing taxes, people start getting frantic for deductions. "I had a client ask if he could use the time he spent helping his dad remodel his basement as a charitable contribution," says Terrence Rice, a CPA in Milwaukee. He also had one client try to deduct the cost of four boxes of Girl Scout cookies. (No, says the Girl Scouts, you can't deduct the cookies unless you donate them to charity. And come on: four boxes of Thin Mints?)
The only thing you can do now to reduce your 2010 taxes is contribute to a deductible individual retirement account. You have until April 15 to make your 2010 contribution. If you're not covered by a retirement plan at work, you can make a fully deductible contribution.
Tax law limits your ability to contribute to a deductible IRA if you do have a retirement plan available. It also limits how much you can contribute. A person under age 50 at the end of 2010 can contribute up to $5,000 to an IRA. If you're 50 or older, you can contribute $6,000. Your contribution reduces your taxable income, which, in turn, reduces your taxes.
If you can't open a deductible IRA, you're pretty much limited to scrounging around for additional deductions if you want to reduce your 2010 taxes.
As long as you have your finances spread out on the table around you, however, why not look to see what steps you can take to reduce this year's taxes?
Start with the proposition that the higher your tax rate, the less you're going to like anything taxed at the same rate as income. True, the taxes on interest from a CD wouldn't buy a rivet on an aircraft carrier, but sooner or later, rates will go up.
So make sure that most of your income-generating investments, such as CDs, bonds and money market funds, are in tax-sheltered accounts, such as IRAs and 401(k)s. As much as possible, keep stocks and stock mutual funds in taxable accounts. "It would be foolish to put stocks in retirement accounts and bonds in a taxable account," says Rice. "You'd be passing on spectacular opportunities that our tax code offers."
You normally don't hear "spectacular opportunities" and "tax code" in the same sentence, but Rice has a great point. If you put your stocks in a retirement account, such as a 401(k), your withdrawals will be taxed at ordinary income tax rates.
But, as any CEO knows, long-term capital gains are taxed at a maximum 15%, as are most dividends. Someone who makes $1 million in profit from a stock sale pays 15% on his gains if he has held them for a year; someone who gets income of $1 million pays a maximum 37.5%. Furthermore, stocks offer multiple ways to reduce your tax bill.
Losses. You can use a capital loss to offset any amount of gains. If you have more losses than gains, you can deduct up to $3,000 of your losses from your income and carry forward any unused losses to the next tax year.
If you're sitting on a big loss, but are hoping the stock market will turn around, you can buy another fund the same day, provided it's not substantially similar. For example, you could sell an equity-income fund and buy an S&P 500 index fund and get the loss. If you buy a substantially similar fund within 30 days, the IRS will disallow your losses.
Gains. You won't owe any taxes on a winning fund until you sell it. (The one exception is the annoying capital gains distribution that most funds make late in the year, but you can use losses to eliminate the taxes on those.)
Taxable accounts offer other ways to get rid of gains. If you donate appreciated stock to charity, you can deduct the market value of the stock and pay no taxes on the gains. If you're especially tax-averse, you can die. Your heirs will be able to calculate their gains based on the stock's price when you die — which, one hopes, is higher than when you bought it. Not that you'll care. True, you could put your stocks in a Roth IRA, in which case withdrawals won't be taxed. But you still won't be able to take advantage of your losses.
As always, don't let the tax tail wag the dog. If your employer offers a 401(k) match, contribute at least as much as the match, even if your overall allocation dictates that some of that money be invested in stocks. You'll reduce your taxable income and get free money — which certainly beats trying to find extra deductions in your shoebox.
Wednesday, February 9, 2011
Top 10 Smartest Things You Can Do With Your Tax Refund
- Not get one at all – The money you loan the government interest-free, could be earning you interest somewhere else.
- Pay off/down your debt – The absolutely smartest thing you can do in your life is eliminate your debt.
- Build your emergency fund – Hint: Imagine you had 6 months of expenses saved up. Now imagine the economy tanking. How does it feel to be recession-proof?
- Grow your nest egg for retirement – Taking your retirement in your own hands instead of relying on social insecurity will make you look like a genius!
- Use it to pay 100% down on a reliable used car…if you need one – Buying a good used car can save you lots of money in terms of depreciation and interest.
- Prepare it yourself using Turbo Tax – We have NEVER been disappointed with this option. Now you can even do your Federal return for free online. For us – $50 versus WAY TOO MUCH $$ anywhere else. Way worth it!
- Give it to someone in need – If your financial situation is solid, why not give it to someone who is struggling if you can?
- Use it to help fund your kids college – It will be time for your kids to go to college before you know it. Wouldn’t it be nice to bless them with a nice education without the debt that usually comes with it?
- Use it to pay down your mortgage – If you have no debt, except for your mortgage, imagine how nice it would be to owe NO ONE!! Your income is COMPLETELY yours! What a feeling!
- Donate a portion of it.
Top 10 Dumbest Things You Can Do With Your Tax Refund
- Pay for a refund anticipation loan – Pay hundreds of dollars to get your refund faster? Hmmm. You may as well pay the Government to cash out your retirement fund while you’re at it?
- Buy lottery tickets – Instead just give it to me. I’ll give you 30% back, while making you believe there is a chance you could win big.
- Waste it on a new car – New cars lose value as soon as you drive them off the lot…duh!
- NOT use it to pay down/off your debt – Continuing to pay interest on your debt while you waste it away on something meaningless is quite frankly immature.
- Have it prepared by H&R Block –
- Loan it to your broke relative – Just give it to them because chances are you will never see it again.
- Ignore the fact that you have ZERO dollars in your emergency fund – Hint: unemployment, medical emergencies, a bad economy, and that little thing called life will happen. It’s just a matter of when.
- Buy something that you think will impress your friends – The Joneses are not going to help you when your life comes crashing down. They will probably laugh at you though.
- Blow it all by throwing a party – Perhaps the most fun way, but definitely the dumbest if you have not prepared for your future.
- Drive down the interstate throwing it out the window $100 at a time – Believe it or not, a lot of people do this — I certainly used to!
Tuesday, February 8, 2011
Biggest Tax Changes for This Season
There are many important new tax breaks for U.S. individuals on the 2010 Form 1040, and several more have been eliminated, noted one tax expert.
Some of the new tax breaks are straightforward, others are complex, and some present choices,” said Terrence Rice, CPA. “But they all provide an opportunity to save money.”
1. Roth IRA rollovers no longer restricted. You can now make a qualified rollover contribution to a Roth IRA, regardless of the amount of your modified AGI.
2. Income from Roth rollover can be spread out. Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010. Normally, deferral is the better choice. However, if you have deductions or losses that could offset the income, or credits that could wipe out the tax on it, including it on your 2010 return may be the better choice.
3. Limits on personal exemptions and itemized deductions ended. For 2010, you will no longer lose part of your deduction for personal exemptions and itemized deductions, regardless of the amount of your adjusted gross income.
4. Personal casualty and theft loss limit reduced. Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of the $500 limit that applied for 2009). This yields larger deductions and thus greater tax savings for affected individuals.
5. Corrosive drywall damage. A taxpayer who paid for repairs to his personal residence or household appliances because of corrosive drywall that was installed between 2001 and 2008 may be able to deduct those amounts as casualty losses under a special safe harbor from the IRS. Without the safe harbor, a casualty loss might not be allowed because long-standing rules bar deductions for damage resulting from progressive deterioration of property through a steadily operating cause. The safe harbor treats the corrosive drywall damage as a casualty loss and includes a formula for determining the amount of the loss.
6. Homebuyer credit. An eligible first-time homebuyer (and a long-term resident treated as a first time homebuyer) may be able to claim a first time homebuyer credit for a home that was purchased in 2010. To qualify, the home must have cost $800,000 or less. You generally cannot claim the credit for a home you bought after April 30, 2010. However, you may be able to claim the credit if you entered into a written binding contract before May 1, 2010, to buy the home before July 1, 2010, and actually bought the home before October 1, 2010.
7. Adoption credit. For tax years beginning after December 31, 2009, the maximum adoption credit is increased to $13,170 per eligible child for both non-special needs adoptions and special needs adoptions. In addition, the adoption credit is refundable, i.e., you get the credit even if it exceeds your taxes.
8. Gifts to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an Individual Retirement Account) has been extended. If you elect, a qualified charitable distribution made in January 2011 will be treated as made in 2010.
For businesses:
1. Luxury auto limits. First-year luxury auto limits for vehicles first placed in service in 2010 are $11,060 for autos and $11,160 for light trucks or vans (for vehicles ineligible for bonus depreciation, or if taxpayer elects out, $3,060 and $3,160, respectively).
2. Self-employed health insurance deduction. Effective March 30, 2010, a self-employed person who paid for health insurance may be able to include in his self-employed health insurance deduction any premiums he paid to cover his child who was under age 27 at the end of 2010, even if the child was not his dependent. Also, health insurance costs for a taxpayer and his family are deductible in computing 2010 self-employment tax.
3. Small business health insurance credit. For tax years beginning after December 31, 2009, there is a new tax credit for an eligible small business employer who makes qualifying contributions to buy health insurance for his employees. This credit is very complex but it can yield substantial tax savings. In general, the credit is 35 percent of premiums paid and can be taken against regular and alternative minimum tax.
4. Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under legislation enacted in the fall of 2010, for tax years beginning in 2010 (and 2011), the $250,000 limit is increased to $500,000 and the investment limit is increased to $2,000,000. The $500,000 amount can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
5. Special depreciation allowance. Businesses that acquire and place qualified property into service after September 8, 2010, can now claim a depreciation allowance in the placed-in-service year equal to 100 percent of the cost of the property. Businesses that acquired qualified property during 2010 on or before September. 8, 2010, can claim a bonus first-year depreciation allowance of 50 percent of the cost of the property.
6. Cellular telephones. For tax years beginning after Dec. 31, 2009, cellular telephones (cell phones) and other similar telecommunications equipment are removed from the categories of “listed property.” This means that cell phones can be deducted or depreciated like other business property, without onerous record keeping requirements.
7. Carryback of general business credits. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. However, for the taxpayer’s first tax year beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of one.
Some of the new tax breaks are straightforward, others are complex, and some present choices,” said Terrence Rice, CPA. “But they all provide an opportunity to save money.”
1. Roth IRA rollovers no longer restricted. You can now make a qualified rollover contribution to a Roth IRA, regardless of the amount of your modified AGI.
2. Income from Roth rollover can be spread out. Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010. Normally, deferral is the better choice. However, if you have deductions or losses that could offset the income, or credits that could wipe out the tax on it, including it on your 2010 return may be the better choice.
3. Limits on personal exemptions and itemized deductions ended. For 2010, you will no longer lose part of your deduction for personal exemptions and itemized deductions, regardless of the amount of your adjusted gross income.
4. Personal casualty and theft loss limit reduced. Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of the $500 limit that applied for 2009). This yields larger deductions and thus greater tax savings for affected individuals.
5. Corrosive drywall damage. A taxpayer who paid for repairs to his personal residence or household appliances because of corrosive drywall that was installed between 2001 and 2008 may be able to deduct those amounts as casualty losses under a special safe harbor from the IRS. Without the safe harbor, a casualty loss might not be allowed because long-standing rules bar deductions for damage resulting from progressive deterioration of property through a steadily operating cause. The safe harbor treats the corrosive drywall damage as a casualty loss and includes a formula for determining the amount of the loss.
6. Homebuyer credit. An eligible first-time homebuyer (and a long-term resident treated as a first time homebuyer) may be able to claim a first time homebuyer credit for a home that was purchased in 2010. To qualify, the home must have cost $800,000 or less. You generally cannot claim the credit for a home you bought after April 30, 2010. However, you may be able to claim the credit if you entered into a written binding contract before May 1, 2010, to buy the home before July 1, 2010, and actually bought the home before October 1, 2010.
7. Adoption credit. For tax years beginning after December 31, 2009, the maximum adoption credit is increased to $13,170 per eligible child for both non-special needs adoptions and special needs adoptions. In addition, the adoption credit is refundable, i.e., you get the credit even if it exceeds your taxes.
8. Gifts to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an Individual Retirement Account) has been extended. If you elect, a qualified charitable distribution made in January 2011 will be treated as made in 2010.
For businesses:
1. Luxury auto limits. First-year luxury auto limits for vehicles first placed in service in 2010 are $11,060 for autos and $11,160 for light trucks or vans (for vehicles ineligible for bonus depreciation, or if taxpayer elects out, $3,060 and $3,160, respectively).
2. Self-employed health insurance deduction. Effective March 30, 2010, a self-employed person who paid for health insurance may be able to include in his self-employed health insurance deduction any premiums he paid to cover his child who was under age 27 at the end of 2010, even if the child was not his dependent. Also, health insurance costs for a taxpayer and his family are deductible in computing 2010 self-employment tax.
3. Small business health insurance credit. For tax years beginning after December 31, 2009, there is a new tax credit for an eligible small business employer who makes qualifying contributions to buy health insurance for his employees. This credit is very complex but it can yield substantial tax savings. In general, the credit is 35 percent of premiums paid and can be taken against regular and alternative minimum tax.
4. Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under legislation enacted in the fall of 2010, for tax years beginning in 2010 (and 2011), the $250,000 limit is increased to $500,000 and the investment limit is increased to $2,000,000. The $500,000 amount can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
5. Special depreciation allowance. Businesses that acquire and place qualified property into service after September 8, 2010, can now claim a depreciation allowance in the placed-in-service year equal to 100 percent of the cost of the property. Businesses that acquired qualified property during 2010 on or before September. 8, 2010, can claim a bonus first-year depreciation allowance of 50 percent of the cost of the property.
6. Cellular telephones. For tax years beginning after Dec. 31, 2009, cellular telephones (cell phones) and other similar telecommunications equipment are removed from the categories of “listed property.” This means that cell phones can be deducted or depreciated like other business property, without onerous record keeping requirements.
7. Carryback of general business credits. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. However, for the taxpayer’s first tax year beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of one.
Monday, February 7, 2011
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