I didn’t think so.  Nevertheless, here are two key strategies to consider throughout the rest of the year in order to make next year’s filing simpler and potentially less costly.

Stay Organized

One of the more annoying parts of preparing to file your taxes is trying to locate your necessary documents and receipts received throughout the year, but if you stay organized you will make your life much easier.

Some people can spend a bunch of time just assembling all of the tax forms they receive in January or February (e.g., W-2s, 1098s, 1099s, etc.).  But that’s nothing compared to the hours they spend assembling information that they received throughout the previous year.  Such document sleuthing can include anything from discovering receipts for charitable donations and business expenses to finding the cost basis for investments they sold.

Of course, there’s an easier way: don’t wait until April to dig up all of your paperwork.  For example, when you make a donation of clothing to a local charity, don’t take the receipt and leave it on the desk somewhere to contemplate later.  Instead, fill it out right away— list what you donated and its approximate value. Put the date on it.  Put it in a folder labeled “Taxes 2013.”

With business expenses, write down the business purpose on the actual receipt right away.   For business meals, I suggest doing so while still at the restaurant.  When you fill in the tip, just write the purpose at the top of the customer copy of the receipt.  Bring it home and put it in that same “Taxes 2013” folder.  To make your life much easier if you’re a business owner, enter tax-related transactions in your accounting software as they occur.

Monitor Your Payments

As a taxpayer, your goal is to pay enough taxes throughout the year to avoid an underpayment penalty but not so much that you end up providing a sizable interest-free loan to the government.  To do so, you need to ensure that you pay at least the lesser of the following two numbers during the course of the year:

• 100% of the taxes you owed for the previous year (110% if your Adjusted Gross Income was $150,000 or greater)
• 90% of the taxes you will owe for the current tax year

Note that the phrase, “taxes you owe,” in the above paragraph is not the amount you might pay with your tax return; it refers to the total amount of federal income tax paid throughout the year.

What’s the key takeaway?  Many people receive the majority of their income as employees and have it reported to them on Form W2.  Furthermore, most people’s income does not vary greatly from year to year.   If that description sounds like you, consider your last tax return.   If you received a sizable refund, consider lowering your withholding by increasing your allowances.

To do so, simply re-file Form W4 with your payroll department. You can do so anytime throughout the year and use TurboTax W-4 calculator to estimate your exemptions.    When you change your allowances in this way, your next year’s income tax refund will decrease or possibly be eliminated.  On the other hand, implementing this strategy means you will receive an increase in net pay right away.

To take it to the next level, use some of your new money to increase your IRA or 401(k) savings.  Doing so not only prepares you for your future retirement, but also lowers your taxes next April.

There are two major categories of tax credits that can boost your tax refund—non-refundable and refundable.  A non-refundable tax credit can reduce your total income tax liability (the amount of federal income tax you owe for the entire tax year) to zero – but not beyond.  A refundable tax credit will pay excess beyond your tax liability.

Let’s take an example. Say your income tax liability is $950, but that you qualify for a $1,000 non-refundable credit.  If so, your income tax liability would be wiped down to zero.  However, because it is a non-refundable credit, your tax liability can’t become negative.  On the other hand, if the $1,000 credit you qualified for was refundable, you would be paid by the government $50 in excess of the $950 tax liability.

When you file your taxes in the next couple of weeks, here are five popular refundable and non-refundable tax credits that you may be eligible for:

Mortgage Interest Deduction

That big fat mortgage payment you now have to pay every month has an upside. The interest portion of every payment is tax deductible.  Keep in mind that, at the beginning of your mortgage, most of your payment is interest, meaning that the overwhelming majority of your payment is tax deductible.

Real Estate Tax Deduction

Every dollar you pay in real estate taxes is deductible.  While it’s never fun to learn that your property taxes have gone up again, at least you will be able to take some solace in knowing your tax deductions (and your resulting income tax savings) will increase at the same rate.

Charitable Donation Deduction

While the charitable donation deduction might seem unrelated to a home purchase, this is income taxes we’re talking about.  Before you purchased your home, you may not have had enough tax deductions to itemize your deductions.

Why?  Since your standard deduction was greater than your itemized deductions, you did not benefit from any of the itemized deductions you could have otherwise taken.  But when you became a homeowner, the mortgage interest and real estate taxes alone often make it so that you will be able to itemize and you are now eligible for additional tax deductions. The most common of these is the charitable donation deduction. So, if you tithe at church or give clothes to the Vietnam Veterans, you will now also receive a tax benefit from doing so.

Other Considerations for First Time Home Buyers

Save your closing form (HUD).  When you file your tax return for the first time after buying a home, additional expenses incurred on your HUD may be deductible, including prepaid interest (points) you pay at closing.

Save all of your home improvement receipts.  You are likely to sell your home one day.  Most home sales do not result in income tax.  However, it is possible if you move very quickly or make a very big profit. To lessen the odds you will owe capital gains taxes on the sale of your home, save your receipts!

Welcome to the world of home ownership. It can be wonderful and expensive. Make sure you take advantage of every opportunity to keep your costs in line.  Start with taking maximum advantage of the tax deductions available to you.

Don’t worry about knowing all of these tax deductions, TurboTax will ask you simple questions, and give you the tax deductions you’re eligible for.  If you have questions, only TurboTax lets you talk to CPAs, Enrolled Agents, and tax attorneys while you prepare your tax return, free.

How Much is the Educator Expense Deduction?

The maximum Educator Expense Deduction is $250 per individual.  In the event both spouses are educators and each spends at least $250 on qualified educator expenses, the maximum deduction on their joint return is $500.

What Expenses Qualify for the Educator Expense Deduction?

The IRS has determined that the following expenses qualify for the deduction:

• supplies
• computer equipment (including related software and services)
• other equipment, and
• supplementary materials that you use in the classroom

Keep in mind that health and physical education teachers who incur educator expenses must use them in athletic education to qualify for the deduction.  In addition, all expenses must be unreimbursed to be deductible (If you’re not out-of-pocket due to the expenditure, you didn’t really incur the expense).

Who Qualifies for the Educator Expense Deduction?

Not surprisingly, you must be an educator to be able to take the deduction.  This means you can be a teacher, instructor, an aid, or pretty much anyone who spends 900 hours or more per year in a elementary or secondary school.  Principals qualify too, but home school educators do not.

In addition, you must file either file a Form 1040 or a Form 1040A to deduct your educator expenses.  While some tax deductions require taxpayers to itemize in order to benefit, the Educator Expense Deduction does not. As a result, every taxpayer with the bona fide educator expenses described above will save money on their taxes.

TurboTax walks you through the appropriate tax questions to make sure you get this tax deduction if you’re eligible, so you can keep more of your hard-earned money.  If you still have questions, only TurboTax lets you talk to CPAs, IRS enrolled agents, or tax attorneys while you prepare your taxes, free.

What is the state and local sales tax deduction?

Many people are familiar with the fact that state and local tax payments, including real estate tax, property tax, and state income tax are tax deductible.  A few years ago, Congress added sales tax to the list of deductible state and local taxes.  However, it did so with a bit of a hitch: taxpayers must choose between deducting state and local income tax or state and local sales tax-not both.  Taking the State and Local Sales Tax Deduction may be beneficial to you if you live in a state that doesn’t collect state income taxes or if you made large purchases and paid substantial local sales tax.

How do I calculate my state and local sales tax deduction?

To determine your state and local sales tax deduction, you can keep all of your receipts during the year and then, come tax time, add the sales taxes collected on all of them.  Even if you don’t have all of the receipts TurboTax will help you estimate the value of your state and local sales tax.

If you have state income taxes that were withheld from your paycheck or that you paid and state and local sales taxes, TurboTax will automatically select the higher deduction for you, ensuring you keep more money in your pocket.

What else should I consider when thinking about the state and local sales tax deduction?

If you have relatively low income compared to spending or live in a state without an income tax, be sure to deduct your state and local sales tax deduction.  TurboTax will walk you through the necessary questions and help you get this tax deduction if you’re eligible.

1. Adjustments to Income
2. Itemized Deductions

Adjustments to Income

IRA Deduction

You have until April 15, 2013 to make a contribution to a regular IRA for the 2012 tax year.  As long as your income is less than certain limits, you may take a tax deduction for your IRA contribution.  No deduction is available for a Roth IRA contribution.

Moving Expenses

If you moved far enough during 2012 for a job, you might be eligible to take a deduction for expenses related to moving you, your family, and your possessions to your new home.  If your new workplace is at least 50 miles farther from your old home than your old job location was and you work for most of the next year (39 out of the following 52 weeks), your expenses may be tax deductible.

Alimony

Most alimony you pay during 2012 is taxable income to your ex-spouse.  It’s also deductible for you.

Student Loan Interest

Up to $2,500 of the interest you paid during 2012 on most student loans is tax deductible.  You’ll probably receive a Form 1098-E, indicating the total amount of student loan interest you paid.  If the amount you paid exceeds $2,500, then you qualify for the maximum deduction. If you paid some lesser amount, you can deduct the amount you actually paid.

Common Itemized Deductions

Charitable Donations

Gifts you make to 501(c)3 organizations (i.e., most legitimate charitable organizations) are tax deductible. Gifts can include not only cash, checks, or credit card charges, but also donations of clothing and household items.  Make sure you get donation receipts for your files, and then deduct your charitable donations as itemized deductions.

Mortgage Interest

Interest you pay on your mortgage is tax deductible. Recall the deduction isn’t for your entire mortgage payment – it is only for the interest portion. Fortunately, your bank will send you a Form 1098 in January indicating the amount of your 2012 mortgage payments attributable to interest, and it is this amount you can deduct.

State and Local Taxes

While you can’t deduct your federal income tax, your Social Security, or Medicare taxes, you do catch a tax break for the state income tax and property tax you pay – if you itemize.

Typically, each of the above tax deductions are both simple to claim and worth the additional time it takes to prepare your tax return.  Plus TurboTax helps you get all of the tax deductions and credits you’re eligible for.  It is worth it to ensure you keep more money in your pocket!

What do you call it when a blogger sits down to write a post titled, “Shedding Holiday Pounds” alongside a big bag of tortilla chips?

On second thought, don’t answer that.

I’ll ask you another question instead:  What do you call it when you learn of a financial incentive to do something you kind of know you ought to be doing anyway?

Exactly – a no-brainer.

Shedding Pounds

If you need to lose weight, many of your expenses helping you to do so may be tax deductible. But, since it’s taxes we’re talking about, it’s not as simple as, “Deduct all of your weight loss expenses.”  There are a few hurdles you have to overcome to reduce your tax burden.

Key Requirements to Deduct Weight Loss Expenses

Remember when you needed a doctor’s note to get away with something?  Same deal for the weight loss tax deduction.  In order for the tax deduction to be available for you, losing weight is something the doctor has to tell you need to do.  Your doc needs a good reason, too. He or she can’t just provide you a generalized recommendation along the lines of a reminder to wear your seat belt.  Instead, your doctor must recommend, in writing, that you lose weight to help something critical to your health. Once you have the note, you’re on the way to a medical expense deduction.

What Weight Loss Expenses Are Deductible?

Let’s get the fun stuff out of the way first. Gym memberships, healthy food, and a treadmill are not deductible expenses.  Neither are vitamins or herbal supplements.  On the other hand, you may deduct meetings with a nutritionist, other related doctor’s appointments, the cost of weight loss programs, prescription weight loss drugs, and even the cost of gastric bypass surgery as long as the expenses are related to the diagnosis, cure, mitigation, treatment, or prevention of disease.

What Else Should You Consider?

Qualifying weight loss costs are deductible as medical expenses.  Due to their nature, such expenses are therefore  tax deductible to the extent that all of them exceed 7.5% of your adjusted gross income and you itemize your tax deductions.  After December 31, 2012 your expenses will need to exceed your adjusted gross income by 10%.  If you’re not sure if you can itemize, TurboTax will ask you simple questions and determine if you are eligible.   If you won’t be able to itemize, consider using your workplace flexible spending account to save on your weight loss expenses.

charitable contributions

Charitable Donations Can Be Tax Deductible

On the other hand, when you give to charitable organizations, a tax deduction might be available.  As long as your gifts are given to 501(c)(3) organizations, charitable donations to them are deductible to the extent the value you give exceeds the value you receive.

A couple of examples will help explain.

Example 1:  If you donate a check for $100 to your church as part of a fundraiser and, in exchange, receive a ticket to a dinner with a value of $30, your charitable donation is $70. ($100 value donated less $30 value received).

Example 2: If you give clothes that cost you $500 to an organization, such as Goodwill Industries, that are worth $100 at the time of the donation, your potential tax deduction is $100.

Don’t worry about trying to figure this out.  TurboTax ask you simple questions about your donations and helps you figure out your tax deductions.  In addition, you can use ItsDeductible to value and track your donations.

Business Gifts and Tax Deductions

Run a small business? If you give gifts to business associates, you can deduct part of the cost of that gift.  That’s true even though the associate is likely another person or company – not a 501(c)3 organization.  Furthermore, you can give and deduct as many business gifts as you like. However, the amount of the tax deduction is limited to only $25 per gift recipient per year.  So, if you give five $50 gifts to five different people, your total tax deduction is $125 (5 different individuals multiplied by the $25 maximum per recipient.)

Are Gifts You Receive Taxable?

While it may seem like the government taxes everything, gifts you receive are not taxable.  So enjoy the rare tax-free income.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a crucial tax benefit available for low to moderate income earners. It is also very important to those with larger families and relatively low or moderate incomes. Here are the guidelines for this important tax credit.

Income Limits

For the 2012 tax year, your earned income, and your adjusted gross income (AGI, the sum total of all of your earnings less certain deductions) must be less than:

• $45,060 ($50,270 married filing jointly) with three or more qualifying children
• $41,952 ($47,162 married filing jointly) with two qualifying children
• $36,920 ($42,130 married filing jointly) with one qualifying child
• $13,980 ($19,190 married filing jointly) with no qualifying children

If you make more than the relevant amount above, you won’t qualify for the EITC.  Also, if your investment income (like dividends and interest) exceeds $3,200, you’re not eligible for the EITC.

Earned Income Tax Credit Eligibility

In addition to earning less than the dollar amounts in the table above, you must have a valid Social Security Number, work for pay, and your filing status cannot be married filing separately in order to qualify for the EITC. There are other requirements including USA citizenship/resident alien status and limitations on investment and foreign income, but those are typically not issues for people eligible for the EITC.

Work for Pay

Unemployment income doesn’t help you qualify for the Earned Income Tax Credit. Neither does bank interest.  In order to receive any money via the EITC, you must work. You can have a traditional job as an employee or you can be your own boss and earn money from self-employment.  But one way or another, you’ve got to earn some money in order to qualify for the EITC.

Qualifying Children

As you can see above, the relevant income limits are much more generous if you take care of at least one qualifying child.  Your child qualifies if he or she meets all of the following conditions:

• Has a valid Social Security Number
• Is your child (natural, adopted or foster), grandchild, sibling, step-sibling, half-sibling, niece, or nephew
• Younger than you and younger than 19, unless a student (in which case your child must be less than 24), or totally and permanently disabled (in which case there is no age limit)
• Lives with you in the United States for more than half of the year
• The child doesn’t file a joint tax return

TurboTax and the EITC Finder will help determine your eligibility for the Earned Income Tax Credit.

Maximum Credit for 2012

While the precise amount of your credit will largely be determined by your filing status, number of children, and income, there are maximum payable Earned Income Tax Credit amounts. For 2012, these are as follows:

• $5,891 with three or more qualifying children

• $5,236 with two qualifying children
• $3,169 with one qualifying child
• $475 with no qualifying children

What is a Refundable Tax Credit

Note that unlike many other tax credits, the EITC is a refundable tax credit. This means that the EITC can not only eliminate any income tax liability you might have, but if your credit exceeds your tax liability, you can also receive a tax refund for that amount. It is for this reason that the EITC is one of the most important tax considerations.

You will be able to file your 2012 taxes soon so don’t miss out on this valuable tax credit.  It just might mean an extra $2,000 or more in your pocket. Few other tax maneuvers can earn you that kind of cash!  TurboTax ask you the appropriate questions and correctly calculates the Earned Income Tax Credit if you are eligible.

Fresh Start Initiative

In recognition of the challenging times many people continue to face due to the lackluster economic recovery, the Fresh Start Initiative (FSI) provides some people with a little breathing room.

The Fresh Start Initiative changed four components to help struggling taxpayers:

• Tax Liens
• Installment Payments
• Offers in Compromise
• Penalties

1. Tax Liens

The Fresh Start Initiative increases the Notice of Federal Tax Lien filing threshold from $5,000 to $10,000.  Although the IRS might still choose to file a tax lien notice at a level less than $10,000, doing so is less automatic.  In addition, the Fresh Start Initiative makes it somewhat simpler to have a lien withdrawn after payment.  You can use Form 12277, Application for Withdrawal to request the lien withdrawal once you have filed all of your tax returns and paid all of your back and current taxes.

2. Installment Agreements

Like with Tax Liens, the Fresh Start Initiative’s provisions raised thresholds on balances due and the time given to pay tax liability.   Specifically, the maximum total for streamlined installment agreements has been doubled by FSI from $25,000 to $50,000. Furthermore, the length of time you have to pay back the taxes you owe has increased from five years to six years.  To start the Installment Agreement process, read the Instructions for Form 9465. Then, complete Form 9465, Installment Agreement Request.

3. Offers-in-Compromise

The Fresh Start Initiative also provides for a streamlined Offer-in-Compromise process.  An Offer-in-Compromise is IRS-speak for the IRS acceptance, as full payment of your back taxes, some amount less than the full amount owed.  To determine if you’ll qualify, you’ll need to complete Form 656-B, Offer in Compromise Booklet.

The streamlined nature provided by the Fresh Start Initiative enables you to share less financial data and, generally speaking, provides you with more flexibility as it considers your ability to pay your tax liability.

4.  Failure to Pay Penalties

If you are even a day late paying your income taxes, you are ordinarily subject to interest charges and penalties based on the amount of your payment shortfall. However, the Fresh Start Initiative allows you to delay paying your 2011 taxes due by April 17, 2012 until October 15, 2012 – without being subject to any failure-to-pay penalties.  Interest will still be charged, however.

Taken together, these four benefits of the Fresh Start Initiative can be valuable in landing you back on your feet. If you’re behind on your taxes, consider taking advantage – the Fresh Start Initiative presents not only a great opportunity to get your finances back in order but also lets you sleep better at night.

Tax Deadline

When is Your Extended Tax Return Due?

Your timely filed extension changes your deadline to file from April 17 to October 15.  Of course, this six month delay assumes you paid any tax you owed back in April. As the saying goes, an extension of time to file is not an extension of time to pay your tax.

How Do You File a Tax Return You Previously Extended?

To file an extended tax return, simply gather and enter the information from your W-2s, 1099s, and tax documents.  TurboTax will ask you the necessary questions to enter the appropriate information from your documents and help you complete your tax return.

What Should I Do If I Didn’t File a Tax Extension?

If you missed the tax filing deadline and the deadline to file an extension in April, you should still file your tax return as soon as possible.  You may be missing out on your big tax refund and if you owe money you will continue to incur penalties and interest until you file your tax return.

Need More Time?

Years ago, filing an extension provided the filer with four additional months to file his or her return, until August 15.  Back then, you could apply for an additional two-month extension if you needed it.  While that second extension wasn’t technically automatic, it was nearly so.  These days you automatically get the additional six months from the get-go.  On the other hand, that means no additional extensions are available so make sure you file your tax return by October 15.

Here are the second five of ten easy strategies to increase your savings level without becoming cheap.  The first five are posted here.

Savings

 Strategy 6:  Enjoy being with people you like.

Your friends make the evening enjoyable—not the menu design or the lighting where you meet. When a few friends suggest meeting for dinner, it’s perfectly fine to suggest a place you loved when you had less money.  That place is probably less expensive than the trendy yuppie restaurant that just opened. Many of your friends (but not all) will be thrilled to spend $15 on the evening’s food rather than $35.  They just lack the courage to propose an alternative to the comparatively free-spending organizers.  Don’t be surprised if one or two of your friends thanks you for your suggestion—in private.

Strategy 7:  Don’t blow off the recurring minor.

Small recurring expenses aren’t truly minor. Examples include your cable bill, your cell phone plan, and your morning coffee.  Estimate the cost of such expenses for a full year. Are you comfortable with that level of spending?

There is no right or wrong answer here—it’s a personal decision. Some people need their coffee every morning and it’s something they look forward to from the moment they wake up.  But other people spend $5 every weekday morning ($1,300 annually) just to delay getting to the office for another few minutes.

Regardless, don’t try to change all your habits at once, but see if you can find at least one minor recurring expense to cut.  Perhaps lose the premium cable channel you never actually watch.  Or switch to a lower minutes­­–per-month cell phone plan.  Minor expenses aren’t really minor if they last a long time.

Strategy 8:  Spend with comfort on items or experiences you value highly.

As with time management, you cannot prioritize all financial desires as “highly important.”  Life requires choices. Not prioritizing your spending is itself a choice.  Often, the result is giving up control, because you run out of money at an inopportune time.

A better approach is to prioritize your desires.  When you know what you truly value, you can spend on those things with no guilt. Enjoy! Sacrifice what is not important to you. Few people have enough money for unlimited discretionary expenses, and you are not one of those people.  So enjoy whatever you value highly and limit the discretionary expenses you do not.

Strategy 9:  You won’t spend what you don’t see.

Think about a friend with a similar lifestyle who makes 10 percent more than you.  Seems she should be able to save about 10 percent more of her pay, right?

You: No doubt.  We go out together and shop at the same stores. It definitely seems like we spend about the same.  I just don’t know why she can’t save more given she makes more than I do!

Good.  The same is true about you because somewhere someone is looking at you in the same way.  This person makes 10 percent less than you do—and thinks you could save 10 percent of your pay without much effort.

You: Hey!

Suddenly saving this much might seem hard if you don’t know what you’re spending that “extra” 10 percent on. If your spending is limited only by the money you have available, the money just seems to disappear.  The solution is to create a forced savings program, in which a percentage of your income, say 10 percent, is redirected into savings without your ever “seeing it.”

If you spend the money you have available (but not more), you quickly learn to spend less. You must, because the missing 10 percent isn’t sitting in your checking account.  The earlier in your career you participate in a forced savings program, the easier it is to do successfully, so don’t delay.  When you just start out, any pay is big pay.

Strategy 10:  Constant budgeting isn’t required.

While some swear by it, I am not a fan of constant budgeting because I find the task too inflexible to deal with life’s spontaneity.  Still, it is appropriate to prepare a budget when committing to a significant nondiscretionary expense.  Evaluate what you can afford based on your income level and spending history.  Don’t take the salesperson’s word that you can afford what he’s showing you.

However, if you prioritize your values and commence a forced savings program, you will consistently meet any strict budget objectives you would otherwise put together.  To me, that’s a better way to live.

You: But the title­—

Sorry, but that refers to rental properties you own.

You: Now how could I possibly own the property if I am renting it?

If you’re the landlord.

You: I knew that.

There are many tax benefits available to those who own rental properties.  As an important example, most modifications you make to your rental property result in tax savings of one kind or another.

You: How so?

It depends.

You: On?

Whether the changes you make to the property are considered improvements or repairs.  Whereas repairs may be immediately tax deductible, improvements must be depreciated over time.

You: What’s the difference?

What’s the difference between improvements and repairs? Or what’s the difference between an immediate tax deduction and depreciation over time?

You: Actually, both.

Fair enough.

Home Improvements

Improvements vs. Repairs

Like they sound, repairs don’t make any permanent changes to the property; they simply put the property back to a previous state.  Said another way, repairs don’t add to the value of the rental property.  Consequently, expenses such as the cost for a plumber to go fix a toilet or for an electrician to replace a circuit are textbook examples of repairs.  But, so too, are far more expensive costs, like the expense of painting your property or fixing up part of a roof where it might be leaking (again).

On the other hand, expenses you incur which increase the life of the property or add value to it are considered improvements.   Replacing the whole roof, for example, is an improvement. Although you wouldn’t necessarily think of a new roof as immediately increasing the value of the property, it certainly increases the expected useful life of it and consequently is considered an improvement.  Obviously, additions and similar major upgrades are considered improvements as well.

Tax Deduction vs. Depreciation

Repair expenses may be immediately tax deductible from rental income. This means you’ll reduce your taxable income from the rent you collect by the exact amount of the repair expense.  On the other hand, costs for improvements must be depreciated or divided over their useful life.  As a result, improvements add to the amount you can already depreciate related to your rental property on an annual basis.

You: What does that mean?

Say you decide to add a new piece of furniture to the property. Furniture typically has a five-year life, at least according to the IRS (that you and your tenants might have completely different opinions is not relevant).   If the price of the furniture is $500, you can depreciate $100 a year for five years.  Since a couch is not a repair, you cannot immediately expense it.

Between improvements and repairs, there’s plenty of tax savings opportunities if you’re in the mood to get to work (and to spending) this summer.

Five Simple Saving Strategies Part 1

Here are the first five of ten easy strategies to increase your savings level without becoming cheap.

Saving Strategies

Strategy 1:  Don’t become emotionally separated from your money.

Remember when a grandparent or special aunt gave you a dollar bill?  As a child, you enjoyed simply having the money, looking at it, and even counting it.  You knew exactly how much you had and you planned exactly how you were going to use it.

How things have changed!  Now your paycheck is direct-deposited and you charge most every expense. You don’t have a clue how much money you have in your wallet until you find yourself at a place that doesn’t accept credit cards.

This emotional separation from your money makes it much easier for you to spend more.  Try using cash instead of credit cards for a while.  Keep track for a couple of months and see if your expenses decrease.  Handing over six hard-earned twenties is far more difficult than charging $119.40 on a credit card.

Strategy 2:  Understand and be honest about expense classifications.

Think of discretionary expenses as “wants” and nondiscretionary expenses as “needs.”  But be careful.  Frequently, people categorize wants as needs. Incorrectly labeling your expenses limits your ability to take advantage of additional savings opportunities.

Think about decisions you make every day. Are the bulk of your purchases legitimately needs, or do you just view them that way? Eating is a need. Eating out is a want.

Strategy 3:  The time to lower your “needs” spending was yesterday.

Despite successful efforts to limit discretionary spending, many people still struggle with saving.  Typically, this is because their nondiscretionary expenses are just too high for their income level.  The best way to handle this is to avoid the situation in the first place.

It is you who must care enough to review your spending priorities before you make a commitment to an apartment lease, mortgage, or car. Just because someone will sell you something doesn’t mean you can actually afford it. You determine your nondiscretionary expenses when you sign your name. Keep that point in mind next time.  Knowing that additional nondiscretionary expenses could take a significant part of your monthly income for a year or longer just might motivate you to not choose the one with “all the extras” for “just a few more bucks a month.”

Strategy 4:  Enjoy free stuff.

Depending on your interest, you can go on a long hike, sit in a park, talk with a friend, read a book or newspaper, lie on the beach, or play sports with friends without spending a dime.  Many people think they can’t have a good time unless they spend a fair amount of money.  But that belief is based on what has been successful for them in their recent past, not on reality.  When you were younger, there were hundreds of days in which you had no money to spend, yet you were as busy and as happy as ever.  Can you try just a day or two like that this month?

Strategy 5:  Major on the major.

Don’t spend much time evaluating minor expenses, such as where to buy pizza. Rather, put major focus on major purchases.  A car and a place to live are obviously major expenses.  What else is major?  Regardless of your age, financial aptitude, or income, a good rule of thumb is to treat anything you can’t pay for entirely when you buy it as major.  Spend serious time evaluating those purchases to ensure you can afford what you are buying, and you value every feature you’ll be paying for over the upcoming months and years.

Check back for part two of simple savings strategies soon.

Indeed, summer vacation is greeted eagerly by children around the country (but not in my household, where my oldest is routinely distraught in late June by the reality of no school for an extended period). As for parents, they must prepare for challenge number one: keeping their children busy and out of trouble without breaking the bank.

Enter summer camp

Indeed, summer camp remains a ritual of growing up for some families.  Depending on the camp, the expense varies widely.  Fortunately, there is tax help – maybe.

The Child and Dependent Care Tax Credit  – Qualifications and Expense Limits

The Child and Dependent Care Tax Credit can be applied to summer camp expenses, subject to certain restrictions.  Your first consideration is the type of summer camp.  If your child sleeps over at the camp, that camp does not qualify.  In addition, if your child is 13 or older, he or she’s out – only expenses for kids 12 and under qualify for this credit.

Of course, it’s not as though you’ll instantly get tax help even if you decide to send your nine-year-old to day camp. That’s because there is another limit to the credit.  Once the total dollar amount spent on child care exceeds $3,000 per year for one qualifying child (or $6,000 for two or more qualifying children), you reach the maximum expense for which you can apply the credit towards.  This maximum amount includes not only day camp but also any child care expenses (including a nanny) you incur throughout the year.

Calculating the Child and Dependent Care Tax Credit

The calculation of the credit is based on the number of children under 13, your total child care expenses, and your adjusted gross income (AGI).  If you have one child and spend the maximum or more, you can multiply the top dollar amount ($3,000) by a rate based on your AGI which ranges from 20% to 35%.  The 20% rate applies to households whose AGI exceeds $43,000. Your income must be less than $15,000 to benefit from the maximum 35% rate.

If you have one qualifying child and earn $43,000 or more, your maximum credit may be $600 ($3,000 multiplied by 20%). If you have two or more qualifying children and $6,000 or more in expenses, you may receive a credit of $1,200 ($6,000 multiplied by 20%).  Keep in mind a credit reduces your taxes dollar-for-dollar and therefore may be more valuable than a tax deduction.

The Child and Dependent Care Tax Credit won’t make summer camp free, but it just might make it more affordable.  Just remember to use part of the savings for bug spray.

What is a tan?

When your skin gets darker.

No, I mean for purposes of the tanning tax, what’s a tax?

The health care reform package created several new taxes, many of which phase in over time. However, the tanning tax became effective immediately, back in 2010.  Here are the answers to some frequently asked questions about the tanning tax.

According to the IRS, a taxable indoor tanning service is a “service employing any electronic product designed to incorporate one or more ultraviolet lamps intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in air between 200 and 400 nanometers, to induce skin tanning.”

Are there any tans, tanning services, or tanning products which are exempt from the tax?

Phototherapy is exempt from the tax if it is performed by a licensed medical professional.  Phototherapy is done in the treatment of a specific list of diagnoses including seasonal affective disorder, neonatal jaundice, and sleep disorders.  To be exempt from the tanning tax, the phototherapy must be performed at the professional’s office – it can’t be done at your home or any other location.

In addition, there is no tanning tax on spray tans or suntan lotions (but you’ll probably pay your regular state and/or local sales tax on the purchase).

There is some good news. There’s still no tax for tans earned the old-fashioned way–at the beach.  Not yet, anyway.

How much is the tanning tax?

The tanning tax is 10% of the amount charged for the tan.  So if you pay $25 for a tanning service, the tax is 10% of $25, or $2.50.

How do you pay the tanning tax?

Similar to a sales tax, you pay the tax at the time you buy the service.  The tanning tax simply increases the amount you owe for the tan.

What if I wasn’t charged the tanning tax?

It’s possible that the salon owner decided to include the tanning tax in the price you paid for your tan.  Regardless, the tanning tax will be ultimately paid to the IRS by the tanning salon owner; you, as the individual recently bronzed, have no responsibility for this tax after you walk out of the building.

Why is there a tanning tax?

The tanning tax was created for two commonly stated reasons. First, to provide additional revenue to the government for the specific purposes of paying for health care reform. Second, to provide a negative incentive (didn’t burn the “New Jersey Tanning Mom”) for the use of tanning salons, as there have been studies showing their use has long-term harmful health consequences.  Of course, these two goals work against each other somewhat; since the use of tanning has gone down somewhat due its increased cost, the amount of revenue raised for health care reform has fallen quite short of budget estimates.

Will the tanning tax be repealed?

Although there have been efforts to repeal the tax, repeal’s near-term passage is quite unlikely given our divided Congress. Of course, should the U.S. Supreme Court find the Health Care Reform Act unconstitutional, one possibility is that it would throw out the entire law, presumably including the tanning tax.

Happy summer!

Savers Credit

What is the Retirement Savers Credit?

The Retirement Savers Credit is a tax incentive to save for retirement. In exchange for you putting money in a qualified retirement account such as a 401(k), IRA, Roth IRA, or 403(b), the government reduces your taxes.  You might already know that the government allows an immediate deduction for contributions to many retirement plans—separate from this credit.  For example, every dollar you put in your 401(k) plan may reduce your taxable income, immediately saving you taxes.  One would think that would be enough of an incentive to save; and it is, for many.

Yet, possibly disappointed by how little most taxpayers save for their futures, the government created an additional incentive–the Retirement Savers Credit. What’s more, the credit is in addition to (not instead of) all the other existing tax incentives to save.

How Does the Credit Work?

Depending on your income level, a certain percentage of the amount you save for retirement is eligible for a credit.  The maximum savers credit may be as much as $1,000 ($2,000 for married couples).

Who Qualifies for the Credit?

Only those who save for retirement qualify for the credit.  Married savers filing jointly with an Adjusted Gross Income (AGI) below $56,500 qualify for the credit, as do Heads of Households with an AGI less than $42,375 and singles with an AGI less than $28,250.

What is the Credit Worth?

Unlike tax deductions which reduce your taxable income, credits reduce your tax–dollar for dollar. Said another way, whereas a $100 tax deduction for a low-income taxpayer might save him $10 or $15 in tax, a $100 credit saves him $100.  Note, however, that the Retirement Savers Tax Credit is not refundable.  This does not mean you can’t get money (e.g,. a refund) when you file your taxes if you take the credit. Rather, a tax credit’s status as nonrefundable simply means the credit cannot reduce your overall tax liability (including what you pay throughout the year via federal income tax withholding) to below zero.

If you’re skeptical about the credit and your ability to double-dip (i.e., take a deduction and a credit for the same savings), I hear you.  Twice benefiting (three times if you count the additional retirement security you create by saving) from the same decision is a true tax rarity.  If you qualify, take a few minutes to consider saving for retirement.  Although you might feel financially stretched and unable to save, the Retirement Savers Credit just might make saving within your reach.

Free File

Are you eligible for Form 1040 EZ?  Here are the key considerations for filing Form 1040 EZ.

Filing Status Choices Are Limited

There are five possible filing statuses. If you file as single or married filing jointly, you are eligible to use Form 1040 EZ.  If you choose head of household, married filing separately, or are a qualifying widow with a dependent child, you’ll have to use either 1040 A or 1040.

Dependents are Not Allowed

 This is pretty simple. Do you have kids or a parent you take care of more than 50%? If so, since Form 1040 EZ does not allow you to claim any dependents, you’ll want to pick a different form.

No Adjustments to Income on Form 1040 EZ

No adjustments to income are permitted on 1040 EZ. Common adjustments to income include the IRA deduction, the moving expense deduction, and alimony paid. If you experienced any of those expenses, or any other adjustment to income, you’ll want to pick a different form besides Form 1040 EZ.

Credits – Only the Earned Income Tax Credit Is Permitted

You can’t take the child tax credit, the dependent care credit, the foreign tax credit, or any other tax credit except the earned income tax credit on Form 1040 EZ. So while you shouldn’t let your eligibility for the Earned Income Tax Credit prevent you from using Form 1040 EZ, you have to use a different form if you qualify for any other tax credit.

Age and Vision Requirements

You must be under age 65 and not be blind to use Form 1040 EZ.  It’s not actually blatant discrimination that prevents the elderly and those without sight from using Form 1040 EZ; it’s just that the form doesn’t provide for the ability to take the increased standard deductions those over age 65 and blind would otherwise receive.

No Six Figure Incomes on Form 1040 EZ

Only taxable incomes less than $100,00 can be processed using Form 1040 EZ. Any amount higher means you’re looking at filing Form 1040 A or Form 1040. It should be noted that if you otherwise qualify for Form 1040 EZ but for being over the income limit, your Form 1040 A or Form 1040 should still be relatively simple and painless to prepare.

No “Weird” Income – Except Alaska Permanent Fund Dividends

Form 1040 EZ is designed for straightforward tax situations.  So if you won the lottery, ran your own business, or received a pension or any government payment besides unemployment income or Alaska permanent fund dividends, you’re out of consideration for Form 1040 EZ. Taxable scholarships and fellowship grants are allowed as is interest income, but only if the latter is under $1,500.  Tips are only allowed if they are included in boxes 5 and 7 of Form W-2.

In taxes, nothing is more straightforward than filing Form 1040 EZ.  If you qualify, make your life simpler (and less expensive) by filing Form 1040 EZ.  Don’t worry about figuring out which form to use, TurboTax makes figuring out which form to use easy by taking your information entered and putting it on the correct forms.

K-1

But the strangest thing happened today – you opened the mail and there, with your name on it, is a tax form you’ve never seen: Form K-1. You weren’t expecting it, you never received one before, and you just got it, only a month before the tax deadline.

You: What gives?

A K-1 is a tax form distributed by many partnerships, S-Corps, estates, and trusts.  If you are a general or limited partner of a partnership, a shareholder in an S-Corp, or the beneficiary of an estate or trust, you’re likely to receive a K-1.

You: But what is it?

A K-1 is just like a W-2 or other tax form.  You use the information provided on the form to accurately complete your tax return.  Except as illustrated in the opening scenario, K-1s are often distributed much later in the year than other tax forms.

You: Why do they arrive so late?

In order for the entity to send you the K-1, it first needs to complete its own tax return.

You: Huh?

For example, a partnership must prepare its taxes- its partnership tax return – before it sends out the K-1s to the partners.   The due date for most partnership tax returns is March 15. Consequently, K-1s are often received much later than other tax forms. Furthermore, like individuals, partnerships can request extensions of time to file, often until September 15.

You: So I might not receive a K-1 until after April 17, the deadline for my tax return?

Indeed, it’s not only possible, it happens routinely.

You: So how do I plan for that?

Most people who receive K-1s know they will receive them.

You: How do they know?

It’s rare to own a partnership or be a trust fund kid and not know it.

You: I suppose you’re right. So if get one of these K-1s, what would I do next?

Once you’re ready to start your tax return, collect all your tax forms, including any K-1s. If you’re using tax software, the program will tell you what you need to do with each form. TurboTax easily guides you through entering items reported on your K-1 and puts the information on your proper tax forms.

So, don’t lose too much sleep; the K-1 is, ultimately, just another form used to complete your taxes and report your income to the IRS.

debt cancellation

However, as the housing crisis was really starting to get going in late December of 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007.  As a result of that legislation, people restructuring certain home loans or losing their homes via foreclosure or short sale have a reasonable chance to avoid the tax hit. Currently, this relief is set to expire on December 31, 2012.

How Do I Know if I Have Canceled Debt?

If an organization lent you money but accepts less than full repayment, it is supposed to report the amount forgiven by issuing Form 1099-C: Cancellation of Debt. A copy of Form 1099-C is sent to you and to the IRS. Generally speaking, when you receive a Form 1099-C, you were supposed to include the amount forgiven in your income.

However, the Mortgage Forgiveness Debt Relief Act provides key exceptions to the general rule of taxing the amount forgiven. In most cases, up to $2 million of debt forgiven or canceled by a mortgage lender can be excluded. While a mortgage modification, a short sale, and an outright foreclosure qualify for the exclusion, if the loans were on a second home, you are out of luck. To exclude a forgiven debt, the amount owed must be on a principal residence.

What Kind of Debt Won’t Qualify for the Exclusion?

Amounts borrowed on your home which were not used to improve (i.e., remodel), acquire, or build your home do not qualify. Home equity loans not used for remodeling are a common problem.  In addition, only your main(principal) home qualifies. So mortgages for vacation homes or amounts borrowed to acquire investment properties won’t qualify for the exclusion if their debt is forgiven under the Mortgage Forgiveness Debt Relief Act.

How Do I Ensure I Don’t Pay Tax on My Mortgage Forgiveness?

If you receive a 1099-C, TurboTax Premier will guide you through the proper questions regarding your cancellation and make the proper entries on the correct forms so you are not taxed if the cancellation of debt is related to your principal residence.

How Else Might I Avoid Tax on Forgiven Loans?

Not all debts are related to homes. Similarly, not all canceled debts are automatically included in income.  In fact, debts canceled as a result of a bankruptcy filing are excluded from income.  TurboTax Premier will also check to see if you experienced this situation.

In the spirit of making lemonade from lemons, be sure to pay attention to the tax saving opportunities available if you are able to gain some traction in reducing the amount you owe on your home. It’s quite possible Uncle Sam might help you out – or at least not make the situation any worse.