This isn’t a tax benefit that you’d take on your tax return, but a benefit that avoids tax up front by providing employees savings on their daily commute to work through pre-tax (federal and FICA) payroll deductions.

First, the de minimus transportation benefit. “De minimus” is Latin for “about minimal things” and when the IRS uses the term, they are stating there are some matters that are deemed too small to worry about for tax purposes. In this case, we’re talking about the occasional transportation benefit that an employee might get when working overtime, such as cab fare to get home safely.

Next are the four Qualified Transportation Benefits.

Regular transportation in a commuter highway vehicle – This is similar to carpooling, only the employer is providing the ride every day. The vehicle needs to seat six or more passengers and regularly run more than half full to qualify. 80% of the miles must be driven between worker’s homes and the workplace, presumably to avoid personal detour requests. In congested cities this is a great way to be green, provide a bit of employee camaraderie, and save the employees some money with no tax consequences.

Transit Passes – This includes a pass (e.g. the Metrocard) to get you on your local mass transit system, or let you hop onto to a van service to get you to work. Note: There is a $245 per month limit for combined commuter highway vehicle transportation and transit passes.  Transit may include bus, ferry, rail, and vanpool.

Qualified parking – If there’s no on-site free parking, your company might provide for a paid spot near or at your office building. Qualified parking also includes the fees you’d pay to park your car at the commuter rail, mass transit, or the lot where that commuter highway vehicle picks you up. This benefit is tax free to you for up to $245 per month and is in addition to the $245 limit discussed prior.

How about really green? Your employer can reimburse up to $20 per month toward the purchase of a bicycle, as well as cost of repairs, improvements, and storage. The ‘qualified bicycle commuting months’ are only those months for which the other three Qualified Transportation Benefits are not received.

In a sense, this is an invisible benefit.  So long as the value involved does exceed the limits discussed, you won’t see this listed as taxable income on you W2 at year end. Your wallet still enjoys the savings as these numbers can add up to $5880 that wont be taxed when you file your return.  And the planet will thank you for burning a bit less gas in the process.

If you’re doing it by hand (this year will be my 29th return filed using TurboTax, but I’ve read some people still use pen and paper) check your math. It’s easy to transpose numbers or make a simple arithmetic error. Don’t risk interest and penalty for such a simple error.

If you spent time volunteering, the time itself isn’t a deduction, but you may be able to take a deduction for the miles driven. A weekly round trip of 20 miles  can add up at the current rate of $0.14 per mile. If you already itemize, this adds a bit to your potential tax refund. Remember, any cash donations must be acknowledged by the charity in writing before you file your return.

If you have a deduction from your paycheck to a charity, don’t forget to include this. This is a valid tax deduction even though you may not receive a direct acknowledgement from the end charity. Your final pay stub for the year should show the total donation you’ve made.

You know that real estate tax is tax deductible, but don’t forget the tax you pay each year for your car or boat also counts as personal property tax. It may be a couple hundred dollars added to your tax deductions.

Did you refinance again in 2012? If you paid any points on the new loan, you can deduct the points over the life of the loan. The good news is that if you were taking the partial points deduction for the prior loan, you now get to deduct the balance. With how rates dropped to record lows last year, this affects many people who were serial refinancers.

Did you purchase stock in your company at a discount and then sell it for a gain in 2012? The cost listed may not be what you paid. That discount was included on your W2 as ordinary income and should be added to your cost basis when you sell. It’s common to buy stock at a 15% discount, so be careful to check your records, and not let yourself be taxed twice on that discount.

I can’t end a last minute article without mentioning IRAs. Nearly everything on your return has already happened, income, stock sales, 401(k) deposits, and so on. Dec 31st came and went. The IRA is one of the few exceptions to this rule, you can still deposit, until April 15th, up to $5000, or $6000 if you were 50 or older in 2012, and have it count for your 2012 return.

If you converted any IRA money to a Roth IRA, you may be able to still recharacterize any or all of that conversion back to the traditional IRA if you decide it will be in your best interest while reviewing your tax return. This is one of the rare chances at a financial “do-over” and can benefit you if the converted shares fell in value or if your marginal tax rate was higher than you anticipated.

Lastly, go online and prepare your tax return.  TurboTax will help you get all of the tax deductions and credits you’re eligible for and help you keep more of your hard-earned money.  You can e-file up until 11:59 on April 15th if you go online, but the sooner you finish the quicker you can get your tax refund.  If you still have questions, you can get your questions answered by TurboTax tax experts who are CPAs, IRS enrolled agents, and tax attorneys, free.

If all else fails, you can file for an extension with TurboTax Easy Extension. This doesn’t buy you time to pay your tax bill, just some extra time to get your paperwork together. You’ll want to take what information you have and make the best estimation of what you’ll owe and send it with the extension request.

Comment and let me know if I helped you catch a potential mistake or oversight on you return.

If you did spring cleaning in 2012 you can also take advantage of this tax benefit and save on your 2012 taxes.  Let’s look at the types of items you might like to donate.

Household Goods such as furniture, appliances, etc, must be in ‘good used condition’ or better, and you must have a written acknowledgement from the charity for any donations of cash or property worth more than $250. Your old set of cutlery, cookware, or dishes may not seem valuable to you, but agencies helping people get off the street or away from an abusive relationship are looking for these things to set people up in a new apartment.

Used Clothing is also in strong demand in nearly every area of the country. Be careful not to over value it, keeping in mind that the IRS tells us “the price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops, is an indication of the value.” TurboTax ItsDeductible will help value your donated items.

If you plan to donate Jewelry or Gems to a qualified charity, perhaps to help them out at their annual auction, you should have a written appraisal from a specialized jewelry appraiser. The lucky guy or gal that bids on your treasure might have a donation of his or her own, but only to the extent their winning bid exceeded the appraised value of your donated jewelry.

Donations of art valued at over $5,000 must be supported by a written appraisal which you should keep with your records. If over $20,000, the IRS would like to see that appraisal attached to your return along with an 8 x 10 inch color picture of the donated art.

Cars and Boats are valued using pricing guides for private party sales, and should be reduced if the car has any damage or excess wear. If the donated car is sold by the charity, you can only deduct what the charity sold it for. What the charity does with the car may impact the deduction you can take, Publication 526 offers a comprehensive set of guidelines for how to value your deduction.

Stocks and Bonds can also be donated directly to charity and there’s a bit of a double bonus in doing so. Say you’ve owned a stock for a long time and its value is many times its original price. By donating the stock to a charity, you get the tax deduction, based on your marginal rate, but you also get to avoid the capital gain on those shares. For those who have significant donations they are making each year, this is a nice strategy to maximize your charitable giving.

I shouldn’t miss mentioning that The American Taxpayer Relief Act of 2012 (what congress passed to avoid the fiscal cliff) extended the Qualified Charitable Distribution for 2013. This means that if you are 70-1/2 or older and taking Required Minimum Distributions (RMD) from your IRA, you can direct the custodian, the bank or broker, to send funds directly to a charity of your choosing. It’s consider part of your RMD, but isn’t taxed. For those who don’t itemize, it has the effect of saving you the same on your taxes as if it were a deduction included on your return. Even if you do itemize, it may still provide a bit of a benefit by not appearing as adjusted gross income.

I hope these Spring Cleaning ideas can help make some room in your house and lighten your tax bill next year.  Don’t forget, if you did spring cleaning in 2012 you can take advantage of these tax deductions when you file your 2012 taxes.  TurboTax will ask you the proper questions so that you can keep more of your hard-earned money.

The Fiscal Cliff is behind us, an agreement to avoid the cliff was codified in the American Taxpayer Relief Act (ATRA). Among the golden nuggets within ATRA were the extensions of particular tax credits relating to Energy-Efficient Improvements to your home to help you save more of your hard-earned money.

First, let’s look at the improvements that qualify, starting with the items that fall under the Residential Energy Efficient Property Credit:

• Solar Electric (i.e. Photovoltaic Panels)
• Solar Water Heating
• Small Wind Energy (Windmills)
• Geothermal Heat Pumps.
• Fuel Cells

Expenses for the above items are applicable to either your main home or your vacation home, with fuel cell being the single exception, main home only.  In addition fuel cells are limited to 30% of cost up to $500.

A 30% credit is available for any or all of the above improvements whether they are added to an existing home or at the time of construction of a new home. Keep in mind the difference between a Tax Credit and a Tax Deduction. Put simply, the tax credit is like a cash discount on the item purchased. Drop $10,000 on a solar panel installation, and Uncle Sam hands you back $3000 tax credit. Additional rebates are available on a state-by-state basis. To learn more about the benefits your state offers, the Database of State Incentives for Renewables & Efficiency, funded by the Department of Energy, will help you find the details. These credits are currently scheduled to be available through 2016.

The next group of improvements fall under The Nonbusiness Energy Property Credit. This tax credit is more limited than the Residential Energy Efficient Property Credit. It’s capped at a $500 credit total for all years from 2005 through 2013. It includes expenses for the following qualified energy efficiency improvements:

• Insulation or any system designed to reduce heat loss
• Exterior Doors
• A metal roof designed to reflect heat
• Exterior Windows

The next category of credit worthy items are residential energy property costs. These include:

• Central Air Conditioners
• Gas, propane, or oil furnaces and qualified natural gas, propane, or hot water boilers.
• Advanced main circulating fans for the systems included in this group.

You don’t need to worry about which types of purchases apply to a given credit.  TurboTax figures out which tax credit your eligible for. Back in 2010, I was finishing my basement, and part of the process was to have professionals install solid foam insulation against the foundation.

Of course, I had been saving all my receipts for material as I went along as this would be added to my home’s cost basis, but what a pleasant surprise I had while working on my return for the year. TurboTax asked me if I had these expenses and gave me the appropriate tax credit and put $1500 back in my pocket.

Daylight Savings Time is here and you can save money by using less electricity, but if you made energy efficient improvements don’t forget to have your receipts ready when you prepare your taxes so you can take these tax credits and save more green this tax season.

The Non-business Energy Property Credits are scheduled to last through 2013, so if you’ve not taken advantage of these and used up your potential credits, you might consider doing so this year. You’ll get a bit of a tax refund and the chance to save on your energy bills in the years to come.

1.  First, combat pay is not subject to Federal income tax. Combat Zones are defined by the federal government under executive order, and currently include Arabian Peninsula Areas, Kosovo area, and Afghanistan.

The lack of any family income could disqualify civilians from receiving any Earned Income Tax Credit (EITC). Even though the combat pay received isn’t taxable, it may be included as income for purposes of qualifying for the EITC. The EITC is based on income and the number of children you have, and may be as much as $5,891 for a family with three or more children. This credit is refundable meaning even if you have no tax at all for the year, you can still receive this credit.

2.  The Roth Thrift Savings Plan was introduced this year providing an excellent alternative to the standard pretax plan that had rules similar to the private sector’s 401(k). As combat pay isn’t taxed, the ability to put some of this money into a Roth designated retirement plan will provide you and your family with a tax free benefit when you retire.

3.  You may have taken a withdrawal from an IRA, 401(k), 403(b), or other qualified plan. If so, the 10% penalty for early distribution will not apply, only the tax that would normally be due for the non-taxed portion of the withdrawal.

If this is your situation, I’m happy to share with you a unique opportunity, the ability to make up this withdrawal. You have up to two years after your active duty ends and are permitted to deposit these returned funds to an IRA even if it was taken from a 401(k) or other qualified plan. This transaction is reported on form 8606. A very nice, yet little-known benefit you might use.

4.  For moving expenses to be a deduction for civilians, there are a number of requirements to meet. Not so for those on active duty. You are able to deduct the cost of moves from your home to your first post, moves from one permanent post of duty to another, and finally, for the move home within a year of your active duty coming to an end. Eligible expenses include the cost of moving household goods and travel costs for you and the members of your household. This includes your spouse and dependents.

5.  If you are selling your home, the current test to take advantage of the $250K (Single)/$500K (Married Filing Joint) exclusion of gains is that you must have lived in the house for two of the prior five years. Members of the armed forces are permitted to suspend the 5-year look-back for as many as ten years. In effect, if you qualify for the two/five rule, the time you are serving will not let the five years get behind you.

6.  Last I’d like to share that TurboTax has introduced TurboTax Military Edition. It’s free for those at a pay grade of E-1 to E-5. It will help you capture the tax credits and deductions that are offered to the men and women who have served.

Points – You may know that points you pay on a mortgage to buy a home are deductible. On a refinance, however, the points are taken over the life of the loan. What’s often missed on a subsequent refinance, you should then take the remaining dollar value of points from the prior refinance.

Rent – Can’t be deducted on your Federal Tax Return, but a number of states allow for a partial deduction.

State Sales Tax – This deduction has been available for only a few years, and is most welcome to those who live in a state with no income tax. The IRS allows you to choose between an amount based on income, or actual sales tax paid, which can be substantial if you’ve made some high ticket purchases.

Charitable Donations – Did you know that if you volunteer for a charity that, in addition to cash or goods donationated, you can deduct 14 cents per mile that you drive to help the charity out. For those who support a food bank with weekly visits, for example, this deduction can add up over the year. Be sure to keep notes for the dates you volunteered and the miles driven each day.

Are you a Teacher? Keep your receipts if you’ve purchased any supplies for your classroom. You can deduct up to $250 even for those who don’t itemize.

Medical Expenses- Tax deductions to the extent they exceed 7.5% of your Adjusted Gross Income (AGI). Some items that are easily missed: mileage – a deduction of 23 cents per mile for medical purposes. For those who have frequent visit to the doctor or clinic, this can add up. Equipment for disabled individuals, including items such as crutches, walkers, and orthopedic shoes. Any changes you make to your home to accommodate an elderly or disabled person is deductible less any value such renovation adds to the house.

Energy Saving Home Improvements – a number of improvements made in 2012 count toward the Residential Energy credit. Included are such items as energy efficient windows, doors, and roof. Also on the list is insulation, and new heating or central air conditioning. We’ll discuss this in greater detail in an upcoming article, so you’ll be an expert on this topic.

Credit for Retirement Savings Contribution – Couples filing jointly with an AGI up to $57,500, or Singles up to $28,750 can receive a credit up to $1,000 per person if they make a contribution to an IRA account during the year. The amount varies based on income, and the credit itself can be as high as 50%, a great motivation for lower income earners to find spare cash to fund their IRA.

TurboTax will ask you the necessary questions so that you get these tax deductions and credits if you’re eligible.  If you have questions, remember only TurboTax allows you to speak to tax experts who are CPAs, IRS enrolled agents, and tax attorneys.

Income

The value of personal exemptions increases to $3,800 per person and the standard deduction also rises to $5,950 for singles and $11,900 for married couples filing joint returns. Just over 2/3 of taxpayers take the standard deduction, so these year over year increases, however slight, are still important. The tax brackets (10%,15%,25%, 28%, 33%, 35%) remain unchanged, but the transition from one to the next shifts up slightly. For example, the single earner will see the 25% rate start at a taxable $35,350 in 2012 versus $34,500 in 2011. A bit of savings due to inflation adjusted brackets.

Inflation adjustment

The “Kiddie Tax” remains unchanged. A child with unearned income of up to $1900 may be able to take a $950 standard deduction and they will be taxed at the 10% tax rate. Income beyond that may be taxed at the parents’ rate.

Retirement Savings

Contribution limits rose for 401(k), 403(b), and 457 plans as well as the Thrift Savings Plan. The new limit in 2012 is $17,000 plus an extra $5,500 if you are 50 or older by the end of the year. The IRA limit remains at $5,000 or $6,000 if 50 or older.

Deductions

The HSA (Health Savings Account) contribution limit has increased to $3,100 for individuals and $6,250 for families. An additional $1,000 is available for those 55 and older.

There are no changes this year to the Dependent Care Account.  There is a $5,000 limit for money you and your spouse can withhold pre-tax to pay child care expenses for your child under age 13.

Flexible Spending Accounts will also see no change in 2012. This is pretax money you have withheld in order to pay for medical needs, including co-pays or prescriptions not covered by your plan. There is currently no limit, although most employers have a $5000 maximum permitted. If you have been debating about getting any elective medical procedures you may want to make the most of your flexible spending account in 2012 since the rules will change in 2013 and the maximum you will be able to contribute to an FSA will be limited to $2,500 per year.

Credits

In 2012 the Adoption Tax Credit decreases to $12,650. Also note, in 2011, it was refundable, meaning you’d get it if you qualified, regardless of your total tax bill. In 2012, the tax credit can not create a negative tax bill, it can only offset your taxes due for the year.

Child Tax Credit – In 2012 you can still take advantage of this tax credit and reduce your tax liability by up to $1,000 for each qualifying child under 17.  The Child Tax Credit is scheduled to expire at the end of 2012.  If the same tax credit is not extended after 2012, the Child Tax Credit may decrease to $500 in 2013.

Earned Income Tax Credit – This tax credit increased to a maximum $5,891 in 2012, up $140 from last year. The maximum income to receive any of this credit is $50,270, and the credit itself is based on both income and number of dependents in your family. Note – Your investment income must be under $3,200 to qualify for this credit so plan accordingly.

The Saver’s Credit – This is a credit up to $2000 for couples and $1000 if you’re single. To qualify, a couple may have an income of up to $28,750 for a single filer, and $57,500 for married filing jointly. This credit is based on both income and your deposit to a retirement account. It’s also impacted by other deductions and credits, so it’s best to let TurboTax show you what credit, if any you’re eligible for.

Estate Tax

The estate tax top rate will stay at 35%, with the exemption rising to $5,120,000 until the end of 2012.

Education Credits and Deductions

• American Opportunity Tax Credit – (A modification to the Hope Credit) This tax credit is for up to $2500 per eligible student. It is available for couples filing joint with income up to $180,000 or $90,000 if single. 40% of the credit may be refundable, this means that if this tax credit is greater than your total tax for the year, you may get a check from the IRS for up to $1000 in addition to the tax you already paid.

Other requirements for this education tax credit include the fact that the student must be enrolled at least half time for at least one academic period during the tax year, and as of the end of 2011, the student must not have any felony drug convictions. Last, note that qualified expenses include not only tuition, but any enrollment fees, and required course material.

• Lifetime Learning Credit – The rules for this credit are a bit different from the American Opportunity Tax Credit. The credit is worth $2000 per return (not per student) and there is no limit to number of years it may be taken, so long as it’s in effect. The credit may be taken for couples with income up to $122,000 or single filers with income up to $61,000. All years of post secondary school qualify for the credit as do any courses to acquire or improve one’s job skills.

The student doesn’t need to be registered for any number of classes, even just one class qualifies for the credit. Besides the tuition, fees, and books, both “supplies and equipment” also qualify. Felony drug conviction is not a disqualifier for this credit. Last, the credit in not refundable. It can only offset your tax bill, not refund in excess of what you paid.

• The Student Loan Interest Deduction – for some time, personal interest (credit cards, car loans, etc) has not been deductible, but student loan interest might be. For those with modified adjusted gross income (MAGI) of $150,000 or less for joint filers, $75,000 if single, interest up to $2500 per year may be taken as a deduction. This is a deduction directly against your income, not subject to the need to exceed the standard deduction to get on schedule A. The interest deduction is available until the student loan is paid off, or until canceled by congress.

• Tuition and Fees Deduction – This deduction is against income, skipping the Schedule A, and helping to reduce your taxable income if this benefits you more than either the American Opportunity Tax Credit or the Lifetime Learning Credit. The deduction is available for Joint filers whose MAGI is less than $160,000, $80,000 if single. The eligible expenses include Tuition and fees, but specifically exclude room and board.

No discussion of tax savings for college should ignore the savings accounts targeted for college expenses. Let’s take a look at the two popular ones.

• Coverdell Education Savings Account – When first introduced, this account was called the “Education IRA” which was a bit of a misnomer as the account has nothing to do with retirement. On the other hand, it bears a striking resemblance to the Roth IRA. The deposits to the Coverdell are not tax deductible, but grow and are withdrawn tax free if used for the beneficiary’s qualified education expenses. The deposit limit is $2000 per year, and there is a limit of MAGI of $220,000, $110,000 if single to make the deposit. Any funds not used for qualified expenses must be withdrawn by the time the beneficiary turns 30. Distributions that don’t qualify for college expenses are subject to tax as well as a 10% penalty. This account may be combined with the credits and deductions above, but not for the same exact expenses.

• Qualified Tuition Program – Commonly known as the 529 plan, this account has no income restrictions at all for deposits. The account deposit limit is currently $300,000 which is well over the amount that would be needed for any 4 year degree. Practically speaking, it’s common to limit deposits to the $13,000 gift limit ($26,000 if both parents deposit.)

One is also permitted to gift ahead up to five years with no gift tax due and not tapping into the unified lifetime gift tax amount. Withdrawals for qualified expenses are withdrawn tax free, but as with the Coverdell, tax and penalty apply if withdrawn with no qualifying expense.

One choice is to take the remaining balance and change the beneficiary for the account. Any close family member up to first cousin is eligible for the transfer. For those who are trying to get money out of their estate, this opens up the possibility to move significant sums of money out of their name to set up 529 accounts for their extended family.

There is no age restriction, so no rush to transfer funds. You can wait until your new graduate has children of her own and make them the new beneficiaries to educate the next generation. This account may be combined with the credits and deductions above (including the Coverdell), but not for the same exact expenses.

Dependents

Before you can get any of the tax breaks that you deserve, make sure your child has his or her own social security number. Now, when you file your tax return, you have an additional exemption to claim.

In 2011, an exemption represents a deduction against your income of $3,700 and in 2012 the exemption will increase to $3,800. Not to be confused with tax credits which are a dollar for dollar savings for you, these deductions simply reduce the final tally for your taxable income. In the 15% bracket this will save you $555, and at 25%, $925 in 2011, you get the idea.

If you adopted a child, you are eligible for The Adoption Tax Credit, up to $13,360 for 2011 to offset your out of pocket costs . The credit begins to phase out for couples with a Modified Adjusted Gross Income (MAGI) over $185,210 and is completely eliminated at a MAGI of $225,210 for 2011.

The Child Tax Credit is an additional $1,000 credit you may be eligible for if you have a child under 17. It’s available to couples whose MAGI is under $110,000 or $75,000 for a single parent, and phased out above these levels.

If you pay someone to take care of your child under the age of 13, while you are working or actively seeking work, you may qualify for a Child and Dependent Care Tax credit up to $1,050. Families that earn less than $15,000 can claim a credit for 35% of qualifying expenses up to 3,000 for one child and up to $6,000 for two or more children.  If your earned income is more than $43,000 you are still are allowed 20% of eligible costs.

If you are in the 25% bracket or higher, instead of the credit, it may make sense to use a Dependent Care Account (DCA) if your employer offers it. You may deduct up to $5000 pretax and apply for reimbursement of expenses for your child under the age of 13 (or older child incapable of caring for his or her self.) Important to note, even though the enrollment period is usually once a year, around November, the change in family status (i.e. having the new child) enables a during-the-year change request.

The Flexible Spending Account (FSA) is another opportunity to withhold pretax money. The typical limit offered by most companies is $5,000 per year. Similar to the DCA, this account is used to cover medical expenses, co-pays, prescription medicine, glasses, or other medical procedures not reimbursed by your insurance. While you may have one with or without a child, the hospital bills for a child birth add up, and this is a great way to cut your tax bill a bit further. This account is “use it or lose it,” so plan carefully. If December approaches and you realize there’s extra money, it’s time for new glasses. Non-prescription medicine is no longer eligible, although you can certainly ask your doctor to write one for aspirin, cough medicine, etc, during a regular visit.

By the way, just when you can’t remember what it was like to sleep through the night, your child will be a teenager and sleep till noon every chance he gets.

Retirement

On the road to retirement, there are some decisions you’ll have which can impact your taxes along the way. Your 401(k) and IRA accounts – should you choose the traditional pre-tax flavor or Roth?  The Roth plan requires post-tax contributions, but allows tax free growth and distribution, in most cases.  If the distribution is the result of a conversion or certain rollover in under 5 years after conversion and you are under 59-1/2, you may have to pay an additional 10% tax penalty.  With pre-tax plans, you contribute to the plans with your funds without any taxes deducted so the distributions are taxable.  So which one do you choose?

One approach to consider is to look at your marginal tax rate, and see how far into that bracket you are. For example, a single filer will be in the 15% bracket from $8,500 of taxable income right until $34,500. If you find that after deductions, exemptions, credits, etc, your taxable income is $38,000, it may not make sense to be in pre-tax retirement accounts for all your retirement savings. Since only the amount above $34,500 is taxed at 25%, by putting exactly $3,500 into a pretax 401(k) or IRA, you’ll reduce your taxable income so the last dollar is taxed at 15%, and none at 25%.

If your company offers a 401(k) with a company match, see if they also offer a Roth 401(k). If not, at least be sure to deposit enough to get the match, and then use a Roth IRA to top off your savings. If the Roth 401(k) is an option, you are usually able to change between this and the standard pre-tax 401(k) on a pay cycle adjustment. The process can be fine tuned a bit by using a traditional IRA and converting some of it to Roth, as needed. A bit of attention to your taxable income and your paystubs and you should be able to take advantage of the difference between these two tax rates.

On the retiring side, you can implement a similar strategy. As a single retiree, finding yourself with a mix of pre and post tax investment accounts, by choosing the pre-tax 401(k) and IRA to make withdrawals right up to the taxable income of $34,500, and Roth or other post tax money for anything above this, you can aim to live right on the edge of 15% through retirement.

With the 2011 standard deduction ($5800) and exemption ($3700) adding to $9500 right off the top, this is about all the median earner needs at retirement. If your withdrawals are a bit lower than this, consider the strategy of converting just enough IRA money to top off that 15% bracket.

It’s not as difficult as it might appear. By looking at last year’s return and adjusting slightly for this year’s numbers, you should have a good idea where 2011 will put your taxable income. Underestimate a bit, and convert just enough IRA money to Roth to hit your goal.

If in April, your return tells you went over, just recharacterize enough to get the taxable income number dead on. This strategy for the just-retired person will help bring that IRA balance down over time to avoid some potentially large RMDs (Required Minimum Distributions) after reaching 70-1/2.  Please note: once you make contributions to a designated Roth account, you cannot later change to a pre-tax account.

Note – the rates I discussed are for the single filer. Take a peek at the page I linked above for the tax table for other filing status, the idea works the same with the numbers adjusted for status.

State Sales Tax

This year, those who itemize their deductions have a choice to deduct, either the amount of state income tax paid or state and local general sales taxes paid. It’s either/or, you cannot take both. For those with a state income tax, that tax will often be far higher than the sales tax paid over the year, which is why I highlighted those states with no income tax at all.

Even if you do have a state income tax, it’s still possible that in a high spending year, perhaps including a car purchase or major remodeling along with all the high priced appliances, that the sales tax will total more than your state income tax. Either way, it’s worth taking a bit of time to see if this deduction can benefit you.

Hopefully, if you are going to use the sales tax deduction, you’ve been saving your receipts to document your total claimed sales tax. If you haven’t, or perhaps you only have the bill of sale for that new car or boat, there’s still an option for you.

You can enter your combined state and local sales tax rate and TurboTax will make the behind the scenes calculations for you, per IRS guidelines, to determine the accurate state and local sales tax deduction for you.  If you don’t know your state and local sales tax rates, TurboTax will also calculate your deduction based on just your home state sales tax rate.

One thing to note, taxpayers often think that they will be able to deduct more, because they think the deduction is their gross income times their sales tax rate, however per IRS guidelines, the sales tax deduction is a result of the sales tax rate times an amount based on your income from the IRS State and Certain Local Sales Tax Table and not your entire income.

Tax Tip:  You have the option to deduct sales tax instead of state income tax, even if you live in a state without a state income tax.

Don’t miss out!  Unless Congress extends the rule allowing the deduction of sales tax, 2011 is the last year to add it to your itemized tax deductions.

Last Minute Tax Moves

First, if you are employed by a person willing to hold off on paying you your last pay check and bonus that may be due you this year, you can shift this income to next year.

If you run your own business, and are on a cash basis, by holding off sending out the final bills of the year just a few days, you’ll avoid having a fast paying customer send you income in 2011. These strategies work best if you find that you will be in a higher bracket than usual in 2011 and benefit from this income shift from one year to the next.

Another thing to consider is if you have stocks currently selling below your cost, you can take up to $3000 in losses against ordinary income. Losses first offset gains, thus you may just benefit by the favorable capital gain tax rate, not your full marginal rate, with any losses beyond $3000 still remaining used to offset future gains. Ginita Wall’s Harvest Time for Tax Losses offers the full details of this tax saving strategy.

Next, let’s focus on the itemized deductions you may be able to take advantage of. Some of the more common Schedule A deductions include Real Estate Taxes, Home Mortgage Interest, Home Equity Line Interest, State Income Tax, and Charitable Donations.

It’s possible that you are not able to itemize as you’re not above the standard deduction amount for this year, $5,800 single/ $11,600 joint. By pulling in some of the payments within your control, you may find you are able to get over that threshold and itemize every other year.

The real estate tax bill may be due Jan 1, but payable by Feb 1. This is an opportunity to pay it in December and add those dollars to this year’s deduction. Similarly, the next mortgage payment, due Jan 1, contains the payment for December’s interest. By making this payment by Dec 30, you’ve just pulled that deduction into this year. For the philanthropic readers, you may consider pulling in much of your 2012 charitable donations into 2011.

If you’ve always been close to itemizing, this strategy alone can help make those donations deductible. To put it simply – you’d make your donation in January and December of the odd number years only. The charities will see the same money coming in, but to the IRS you’ve become an every-other-year itemizer.

Another tax saving trick for this year – the Charitable IRA Contribution. Unless Congress extends this ruling again, 2011 is the last year those who are 70-1/2 or older can direct IRA administrators to send an IRA withdrawal directly to a charity of their choice.

There are multiple benefits to this strategy, for those who are charitable, but don’t itemize, the tax benefit of the donation is lost. Since this contribution counts as an RMD (Required Minimum Distribution) but is not included as income to the IRA holder, the benefit of avoiding taxes on that contribution is back. If the amount donated is greater than the RMD, it helps reduce the future RMDs by reducing the account balance.  The provision allows individuals 70-1/2 years and older to exclude up to $100,000 of their qualified charitable distribution from gross income until December 31, 2011.

Last – you have until April 17th to fund your 2011 IRA. $5000 if you are under 50, or $6000 if you are 50 or older in 2011. It’s deductible if your MAGI (modified adjusted gross income) is under $56,000 if you are single and $90,000 if you are married filing jointly.  Your IRA contributions are reduced or phased out once you reach these income limits.

You can also check out the TurboTax tax calculator or TurboTax online if you want to see how your taxes will be impacted by making these tax moves.

Keep in mind, your driving costs include vehicle depreciation, maintenance, and insurance as well. Remember that if your actual documented costs exceed these rates, you can take your actual expenses instead. You must use the standard rate the first year you put the car in service, but may change methods in subsequent years. If you are leasing a car, you must use the same method each year that you chose in the first year of the lease. Do the math and choose wisely. Following are the rates, in cents per mile, which you are allowed to deduct for the end purpose listed.

What’s the impact of this change? The EPA offers an estimate of 12,000 miles driven per year, but it’s safe to assume those who are driving for business purposes are not average. So, if we assume a 20,000 mile per year driver, this increase in rates will provide an extra $450 in deductions, and $112 back in the pocket of the 25% bracket filer.

To take this write-off the IRS expects you to keep contemporaneous (“real time”) records, a log of daily miles driven justifying the proper use. The easiest way to have this disallowed in an audit is for it to become obvious the records were recreated after the fact, and not as the miles were driven.

Last, you’ll notice that the charitable rate hasn’t changed. It was 14 cents per mile in 1998 and hasn’t changed since. Does Scrooge work for the IRS? Hardly. In a strange quirk of our tax code, it’s congress that’s responsible for the rate allowed for charitable miles driven. Now is as good a time as any to give your local congressperson a call or send a note mentioning that you support bringing this rate up to a more reasonable level.

The first step to adjusting your withholdings is to get a copy of your W-4 form. You should also have your most recent pay stub, last tax return, as well as last year’s W-2. The form itself is pretty brief, it will take into account whether you itemize or take the standard deduction. The form also considers your dependents an whether you expect to have any interest or dividend income. Last, it takes into account whether you are filing jointly with your spouse. These calculations are all done to arrive at a single number, your withholding allowance.

There are a number of situations that would prompt you to want to review and possibly adjust your withholding.

Marriage or divorce is a major tax-changing event, and once you’d done either, it’s time to look at how your taxes would be impacted. The addition of a dependent, by birth, adoption, or an elderly parent moving in and getting more than 50% of their support from you will qualify as an extra exemption. This last example is easy, and shows how one additional withholding allowance on the W-4 represents one more personal exemption on your tax return. On a side note – these life changing events should also trigger a review of your beneficiaries on any and all of your retirement accounts.

The purchase of a new home is likely to have the largest impact on your withholding. A $250,000 mortgage (at 4.5% 30yr fixed) with have just over $11,000 in interest the first full year. Add another $4,000 for property tax. If your state income tax already put you at or near the standard deduction, then this $15,000 will translate to 4 additional allowances on your W-4. For purposes of this form, a dependent’s exemption of $3,700 (in 2011) or any itemized deductions for the same $3,700 are equivalent, one withholding allowance having the same effect as an exemption. It’s your way of telling your payroll department, “Don’t tax me on that $3,700 worth of income.” For a couple in the 25% bracket, the example above will help them increase their take-home pay by just over $300 per month. But only if they adjusted their withholdings!

Is this the right time for you to review your withholdings?

For example, there are other items that can impact your effective marginal rate, phase outs of credits or certain deductions. Today, I would like to focus on the taxation of social security benefits. Partially because it impacts so many people, and also because there are some strategies to minimize this extra tax hit. For those collecting Social Security benefits if half the benefit plus your other income exceeds $25,000 (if single) then up to half the Social Security Benefit is taxable. If half the benefit plus your other income exceeds $34,000 (if single) then up to 85% of the Social Security Benefit is taxable.

This can be quite confusing, so let me put it in simple terms. You are single, and collecting a pension and Social Security. Thinking you are in the 25% bracket, you withdraw an extra $1000 from your IRA, after all, you’re not going to be anywhere near that $83,600 income level, your total taxable income including the Social Security is barely $40,000. What you find, however, is that extra $1000 in income caused an extra $850 from Social Security to be taxed as well, and the result was a tax bill that was $462.50 higher, feeling like a 46.25% effective marginal rate.

With a bit of planning, however, you might be able to avoid or reduce this phantom marginal rate. The planning needs to start as early as possible, right after Thanksgiving will due, as TurboTax is available by then and there’s still time before year end. If you find you will be right in the midst of this high marginal rate, you can do a couple things to lower your income. If you itemize your deductions, pull in a bit of the donations you planned to make next year. If you still have a mortgage, pay the January payment before the month ends. If you converted any traditional IRA funds to a Roth this year, you can recharacterize back to traditional to take that money back out of your taxable income. In fact, if the recharacterization is part of the plan, you can wait until you file your return , extension included, so you can get your taxable income exactly where you’d like, and not worry some dividend or capital gain will put you back over at year end.

The other possibility is that you find that all your Social Security will be taxed and you can’t avoid it. Your RMDs (Required minimum distributions from your 401(k) or IRA) may be rising, and you’re back to a 25% marginal rate. Seeing that this rate extends right to a taxable income of $83,600, now may be the time to convert some IRA money to Roth. Just enough to “top off” that 25% bracket and help lower those future RMDs.

If you have any questions or thoughts on this articles, please feel free to leave a comment below.

Ask for additional time to pay: It’s nearly that easy. You can request an additional 60 to 120 days to pay what you owe. You can call the IRS or go to the Online Payment Agreement and submit your information. This is a good solution if you have a first quarter bonus coming in or just needed time to rearrange some of your assets to free up the cash.

Apply for the Installment Plan: You can use this option to pay off a tax debt of up to $25,000 over as long as 60 months. You can use the same Online Payment Agreement link or apply by using Form 9465. Your application is subject to approval but it’s guaranteed if the amount owed is not over $10,000, you have a clean record for the prior five years (all taxes paid with or prior to the return due date), you agree to pay it in full within three years, and the IRS determines you can’t pay in full immediately.

Pay by credit card or debit card: Since the penalty can be as much as 1/2%/mo and interest is currently 4% annually, you may have a credit card that offers a lower rate, perhaps even a zero percent teaser rate for a year. With average credit card rates still at 14% in addition to the 2%+ fee from the card service provider, the IRS route still seems best in most cases. The fee to pay with a debit card is less than $4, but if you have the cash to debit, why not just cut the check?

401(k) loan: The rules for these loans allow you to borrow up to 50% of your vested balance for five years. The current rate (based on the common “Prime+1/2%) is about 3.75%. There are risks, however. Should you lose your job, your loan balance is subtracted from your account and the amount is deemed as distributed. Taxes and 10% penalty are then due which results in yet another debt to the IRS.

The IRA shuffle: You can’t borrow from your IRA, but did you know that if you wish to transfer the funds from one account to another, you have 60 days to do this? In effect, this is the same as a 60 day loan. So long as the money is deposited into a different account on or before day day 60, there’s no tax or penalty. You should only consider this option if you are certain of having the money within the 60 days, otherwise, there’s a high price to pay, both tax and a 10% penalty.

HELOC: The home equity line of credit is to be used as a last resort, it puts your house at risk if you default. With most HELOCs tied to the Prime Rate plus a bit of an adder the rate will be in the 4%-5% range. Not a bad cost to borrow and you avoid any penalty. If you choose this type of loan, try to pay it off quickly, the bill’s minimum payment will likely reflect interest only. Don’t let a single year’s tax bill turn into 10 years of payments.

Now that you’ve decided how to pay the tax man, take a look at How to Adjust Your Tax Withholding for the New Year. Understanding and making changes to your withholding this year will prevent you from owing so much in April 2012.

• For a faster return submission, e-file. TurboTax offers a free federal e-filing plus e-filing of your state for an additional charge. For me, avoiding that post office line is well worth it. You should also know, a refund will follow a paper return in about six to eight weeks after filing, while the e-filed return will have your refund to you in about three weeks.
• If you are getting a refund, you can ask the IRS to direct deposit your refund to your checking or savings account. You are permitted to designate up to three separate accounts if you wish, but as the IRS warns, your bank may not accept a joint refund into your single accounts, so check with your bank first.
• Owe money and can’t pay? Still, file your return. There are penalties for failure to file which are in addition to the late payment penalty and interest. There are two choices for delayed payments: the brief additional time to pay, an extra 60 to 120 days to pay in full, or the installment plan. For the installment plan you use Form 9465 and can choose to pay for up to 60 months. This should be a last resort, but the IRS interest rate is better than most credit cards will charge, and may be the right option.
• Wondering just how much interest the IRS will charge you if you are late or choose an installment plan? Easy. News Releases and Fact Sheets is the place to look. Enter “interest” in the search field and choose “title.” I quickly uncovered the latest release which told me the rate for Q2, 2011 is 4%.
• Just can’t cope with that pile of paper? File an extension with TurboTax for free. We’ll walk you how to form file Form 4868 the “Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.” To be clear, this will just extend the time to file your return and help you avoid the potential penalty for not filing, it’s not an extension of the time to pay your taxes. So while you’re still finding letters thanking you for your large charitable donations, be sure that you’ve at least paid enough to avoid a penalty, then file the extension.
• One last thing many taxpayers can easily miss, the Make Work Pay tax credit. This credit can get you up to $400 (or $800 if married filing joint) depending on your income level. If you’re doing your taxes by hand, it’s pretty easy to overlook. This credit was only available for 2009 and 2010, so don’t miss out.

I hope these tips helped you through the final hours before calling the tax year a wrap.

Fund your 2011 IRA: There is a limit of $5000 or $6000 if you are 50 or older. If you are covered by a retirement plan at work, your deductible amount is limited based on your income. For singles, your contribution is phased out from an income of $56,000 to $66,000 and if your are married, $90,000 or less in modified adjusted gross income gets you a full deduction, and it’s slowly phased out until your MAGI reaches $110,000.

Decide how to handle that Roth conversion: In 2010 something remarkable  happened regarding the rules concerning the Roth IRA. For conversions made in 2010 you could claim the full conversion in 2010 as usual, or you can split the income over two years, and add half the income to your 2011 tax return and half to 2012.

The HSA: If you had an HSA in 2011 you can make your final deposit by the tax return due date, up to $3,050 if you have self-only HDHP coverage and $6,150 if you have family HDHP coverage.  Generally you can claim your contributions as an adjustment to income.

Charitable deductions: In general, when we donate to charity, it’s either by check or credit card for easy tracking. If you’ve donated items such as clothing, books, toys, or furniture to a qualified charity during the year, now’s the time to find that receipt. In fact, now is the time to grab a folder and write “taxes 2011″ and “charitable deductions.” Keep these receipts in order so you don’t miss any potential deductions. If you work for an employer who offers a payroll deduction for charity, often the employer does not send a year end confirmation, your final paystub should serve as proof of the donations during the year, this one is easy to miss.

The state sales tax deduction: You are able to take a deduction for sales tax instead of state income tax if that benefits you. For states with no income tax this is an easy decision. If you had a large purchase such as a car, you may find that sales tax paid over the course of the year was greater than your state income tax.

As we get near the filing deadline, I hope these tips help you uncover some tax savings you may otherwise have missed.  Also remember that TurboTax will guide you through these entries.

You may be able to take the Home Office Deduction. There are a number of qualifications you can pass in order to take this deduction:

• Exclusive and Regular Use: This must be your exclusive and regularly used principal place of business. If you are an employee, it must be for your employer’s convenience that you work from home. For example, two salesmen work for a company, one near a major city where the employer maintains a office for the local sales force and holds their meetings. This salesman cannot claim a home office deduction. The other lives in a smaller region, no office space is provided. He may be entitled to the deduction.
• Exclusive and Regular Meeting place: You use a portion of your home to meet with patients, clients or customers. This is common for some doctors, especially psychiatrists, or financial advisers who have small practices. The exclusivity rule is important to note here. The IRS offers an example of an attorney who makes regular use of a room to prepare his work, but if that room is also used as a den for the family, he just lost his potential deduction.
• There is a separate, unattached, structure where you maintain you trade or business. This is well suited to the craftsman who has his shop on the same property as his home. Many of the old fashioned crafts come to mind, woodworking, pottery, glass blowing, among others.
• Exceptions to the exclusivity rules include use for storage of samples or items for sale, and for operating a daycare-facility. For these two uses it’s the ‘regular’ use that’s required.

Above, I’ve touched upon the rules which would allow or disqualify you from taking the home office deduction. IRS Publication 587 Business Use of Your Home offers a more comprehensive look at this topic.

Now that you have a good idea of whether you can take the Home Office deduction, let’s look at what exactly, we mean, the things you can deduct:

• Mortgage Interest
• Real Estate Taxes
• Insurance
• Repairs & Maintenance
• Utilities
• Depreciation

Note: All of the above items are pro-rated to the area of your home used for business. e.g. if the square footage of your home office is 12% of the total home area, then 12% of the above items are a deduction. For Depreciation, you begin by depreciating 12% of the value of the house (not land). The intricacies of depreciation are discussed in Publication 527.

Many who qualify don’t bother to take this deduction, feeling that it’s too much effort. I’ll admit, there’s a bit of bookkeeping required, numbers to track, but in the end, it’s money in your pocket. Don’t walk away from it.

• Small Business Health Care Tax Credit: 4 million small businesses are eligible for a tax credit to help fund insurance for their workers. A small business is defined as those employing 25 or fewer people, and the credit is up to 35% of the coverage cost.
• Changes to the Flexible Spending Account: In 2011 one change that may impact you is that non-prescription (i.e. over the counter) medicines are no longer allowed to be reimbursed by the FSA or you Health Savings Account (HSA). There is a specific waiver that permits insulin to be covered without prescriptions, and eyeglasses, contact lenses, and co-pays/deductibles remain approved.
• Health Coverage for Older Children: Companies are now permitted to cover employee’s children up to age 27. This may appear a bit old at first, but given the job market and students taking time off during their college years, many were left uninsured. This provision helps close that gap.
• Indoor Tanning: A 10% excise tax went into effect July 1,2010. Licensed medical professionals treating skin disorders are exempt from this ‘vanity’ tax.
• Employer-Provided Health Coverage: While not taxable, employers are encouraged to report the value of this benefit to their employees. This is optional for 2011, but required next year.
• The Adoption Credit: The tax credit you can receive for the expenses associated with the adoption of a child is now up to $13,170 per child. Further, this credit is refundable, meaning if your total tax bill was otherwise lower than the credit you qualify for, you will get a check for the amount owed to you. Form 8839 will walk you through the income restrictions and other details to better understand this benefit.

Overall the intent of the Affordable Care Act is to live up to its own name, to reduce and one day eliminate the high numbers of us who are counted as uninsured.