Tax Credits

A deduction is something that reduces your overall taxable income, therefore lowering your tax bill. A credit is different because it reduces your tax liability, dollar for dollar.

To get a better idea of how significant this is, let’s look at an example. If you were able to take a $1,000 deduction that would mean you would reduce your taxable income by $1,000. So if your taxable income was $40,000, after the deduction it would mean your taxable income would become $39,000. At the 25 percent tax rate, that would effectively lower your tax bill by $250.

Now, let’s say you are entitled to a $1,000 tax credit. In this case, you would simply reduce your tax bill by the full $1,000! As you can see, this is why tax credits are the most sought after.

So, what kind of tax credits are available to you come tax time? Well, here are a few common ones that are worth double checking each year to see if you qualify.

Child and Dependent Care Credits

The most common tax credits have to do with children and there are two main credits. First is the child tax credit, which gives you a credit for qualifying children you take care of. The credit is $1,000 per qualifying child, and you must meet income requirements.

In addition to the child tax credit there is also a credit for child care expenses. Depending on your situation there are many qualifiers and limits to what can be claimed, but any time you have children these are credits worth looking into.

Finally, there is an adoption tax credit as well. This credit is meant to help ease the financial burden of going through the adoption process. This credit can be as high as $13,360 per child.

Elderly and Disabled Credit

Once you reach age 65, or if you are on permanent disability, there are a few tax credits available. Unfortunately, these credits have very low income limits, so they aren’t available to many.

Energy Credits

Going green has its benefits beyond just helping the environment. There are tax credits available on anything from buying Energy Star appliances to a hybrid vehicle. These credits vary greatly depending on what you buy, but you can typically get up to a 10 percent credit of the purchase price on qualifying energy efficient appliances and home improvements, up to a maximum of $500. That’s not too bad if you need to replace an old appliance anyway.

Earned Income Tax Credit

Another popular tax credit for lower income filers is the earned income tax credit, or EITC. If you have earned income that falls below certain limits (based on how you file and family size) you may be entitled to this credit. Families with children really benefit from this credit and may receive a credit anywhere from a few thousand to over five thousand dollars.

Saver’s Credit

Here is a tax credit that often gets overlooked. The saver’s credit helps low to moderate-income filers to save for retirement. This credit is worth up to $1,000 ($2,000 for married filing jointly) for those contributing to a qualifying retirement plan such as a 401k or IRA. As if the credit isn’t enough, keep in mind that contributions made to some retirement plans also count as tax deductions, so you’re basically double-dipping in the tax savings. It makes saving for retirement a no-brainer.

Make Sure You Get Your Credits

As you can see, there are a number of tax credits available, and these are just the most common ones. Some of these can be easy to overlook, and if you aren’t careful you could be leaving money on the table. Using your trusted TurboTax software, you can be sure you’re getting every tax deduction or credit you deserve.

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Medical Expenses

Whose Medical Expenses Can You Deduct?

Generally speaking you can deduct your medical expenses, your spouse’s expenses, or your dependent’s (such as a qualifying child or relative) if you itemize your tax deductions.

What Medical Expenses Can I Deduct?

Please keep in mind that you can only claim the amount of your medical expenses that exceeds 7.5% of your adjusted gross income. Let’s say your AGI is $35,000. If your medical expenses for the year were $2,700 then you can deduct your expenses that were greater than 7.5% of your adjusted gross income. However, if your medical and dental expenses were only $1,750 then you could not claim any, as they didn’t meet the requirement.

The IRS has a huge list of medical expenses that you can deduct. Some common ones I think many people use include:

• Ambulance/Transportation
• Annual Physical Exam
• Breastpump
• Chiropractor
• Dental Treatment
• Insurance Premiums
• Medicine
• Psychologist

For the entire list and detailed explanations, please check out our Medical Expense Checklist. I think most people will be able to find qualifying medical expenses they’ve had this past year. Please note that you can only deduct expenses that you’ve paid to treat, alleviate, or prevent a physical or mental illness.

My Family’s Medical Expenses This Year

After reviewing the IRS list of eligible expenses, I saw that my family has some medical expenses we can deduct. They include:

• Breastpump: We just had our baby girl this year and I’m breastfeeding so the pump has become handy.
• Contact Lens/Eyeglasses: I have both contacts and eyeglasses for my nearsightedness. Glad to see I can get a tax deduction for them.
• Some Medical Insurance Premiums:  Only the ones that are not a pre-tax deduction from my income.
  
• Laboratory Expenses: The blood-work I had done while I was pregnant is an eligible medical expense.
• Medicines: The medicine my doctors prescribed are included.
• Physical Examinations: I get my checkups annually to make sure everything is in check.

I’m really happy to see that we have medical expenses that are on the tax deductible list. Maybe we’ll get a good size tax refund; we’ll see.

Thoughts on Medical Expenses

What medical expenses are you going to deduct when you file your taxes? What has been the biggest expense? What expense surprised you?

Today, we explore some important tax implications of divorce – and how to deal with them:

Property Settlements

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Property settlement is likely to be the thorniest tax issue surrounding an upcoming divorce. The actual decisions regarding who gets what is not the tricky part – usually, each ex takes what the other one does not want, and what’s left of the couple’s total net worth gets split according to boilerplate ratios like 50/50 or 60/40. What makes property settlements a pain are the tax ramifications. Some assets (like a mortgage) involve tax liabilities or benefits while others involve none. Without special care, you could inadvertently agree to take something that sacks you with a gigantic tax bill.

To avoid these hassles, use the SmartMoney property settlement calculator which computes not just the fair market value of the possessions involved, but also the tax bill and the after-tax value of each item.

Child Support Payments

(banjo d)

Contrary to what some divorced couples believe, child support payments are not deductible on your personal income tax return. This strikes many as unfair, since one could argue that the receiving parent is benefiting from unearned “income” in the amount of the payments. That said, do not attempt to deduct child support payments or deduct them under a different name (such as “family support”) as this is guaranteed to be rejected by any IRS employee who spots it.

Since child support is not tax deductible, your only choice is to pay it for as long as your decree states. Consult your decree if you are unsure of when or under what circumstances your child support obligations end.

Child Exemptions

(bobby-james)

Another pressing tax issue stemming from divorce (assuming you have children) is who gets tax benefits and exemptions pertaining to the kids. In a February 2010 article, SmartMoney notes that these exemptions ($3,650 per child in 2009 and 2010) generally go to the parent who wins custody of the children. Alternatively, parents can agree amongst themselves to override this rule and let the spouse of their choosing claim the exemptions instead. Nor will letting your ex take the child’s exemption prohibit you from claiming head of household filing status (more on that later.)

If your divorce was especially bitter, and your ex is the custodial parent, it is unlikely that they will agree to turn these exemptions over to you. In a more civil divorce, it is certainly a possibility. Just make sure that whomever claims the exemption files a copy of Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) each year. The custodial parent must also sign this form no matter what.

Alimony/Spousal Support

(JMRosenfeld)

Alimony (spousal support) payments have unique tax considerations of their own. According to Lawyers.com, alimony payments are tax deductible for the ex who is paying them. If you are getting any clever ideas about disguising property settlement or child support money as alimony (and trying to deduct it) think again:

“If alimony appears to be “front-loaded,” which means that there was a concentrated payment within a very short period of time after the divorce, the IRS may consider the money to be property settlement funds (which are not deductible). Additionally, if alimony ends within six months of a child’s 18th or 21st birthday, this may trigger an investigation by the IRS to determine if the alimony is, in reality, disguised child support.”

Alimony is taxable to the recipient as well. Both spouses must also file separate tax returns as a prerequisite to alimony arrangements.

Head of Household Status

(Kamoteus (A Better Way))

Which ex gets to claim head of household filing status on their income tax return is another contentious divorce-related tax issue. Heads of households, SmartMoney points out, are “entitled to more generous tax brackets and a bigger standard deduction.”

In order for the IRS to consider you “head of household,” you need to file your own separate tax return. Furthermore, you and your spouse cannot have lived together at any time during the last 6 months of the tax year in question. You also must have a “qualifying child” who lived with you for more than six months of the year even if this child can be claimed as a dependent on your spouse’s tax return. Letting TurboTax ask the right questions will help you determine the best filing status for you.

What Expenses Can be Itemized?

Itemizing expenses means you get to sort through a number of different categories and tally them up to come up with your total deduction number. Not everyone will have expenses in each category, but the most common expenses include:

• Mortgage interest.
• Charitable contributions.
• Property taxes.
• State and local income taxes.
• Medical expenses that exceed 7.5% of your adjusted gross income.
• Various miscellaneous expenses that exceed 2% of your income such as: union dues, tools and supplies needed for work, tax preparation fees, some legal fees, and many more.

Should You Itemize?

There’s no right or wrong answer and it really depends on your personal situation. To see if itemizing is beneficial you will have to crunch a few numbers, or if you utilize tax preparation software such as TurboTax it will let you know which method will save you the most money.

Generally speaking, if you had a year with a significant amount of out-of-pocket medical expenses, made large charitable contributions, had a casualty loss, or own a home with a sizeable mortgage and therefore interest payment, chances are you’ll want to look at itemizing.

One thing to note is there are some limits on itemizing deductions.  The amount of itemized deductions and personal exemptions you can take are normally phased out as your income rises. In 2010, however, those income limits have been repealed, and the recent tax relief act extends the repeal for two more years, through 2012.

2010 Standard Tax Deduction

• Married, Filing Jointly    $11,400
• Single   $5,700
• Married, Filing Separately          $5,700
• Head of Household       $8,400
• Blind or over 65 and married – add:        $1,100
• Blind or over 65 and single/head of household – add:     $1,400

Using the above numbers you can see where you need to be when itemizing to make that the more attractive option. As you can see, it isn’t all that difficult to go over the standard tax deduction amount if you are a relatively new homeowner. Even if just $800 of each mortgage payment goes towards mortgage interest you’re up to a $9,600 deduction, and if your annual property taxes are around $2,000 you’re already at $11,600, which is just above the standard tax deduction. That doesn’t even take into account any other itemized tax deductions you may have.

It pays to compare the two tax deduction methods as it could mean leaving money on the table. So, take a look at the expenses that might qualify and see if you’re missing out on any money.

To be eligible for the EITC, taxpayers need to meet the follow criteria:

• Must have valid Social Security Numbers;
• Must be U.S. citizen or resident alien for the entire year;
• Cannot use the married filing separately filing status;
• You and your spouse (if married) cannot be claimed as a qualifying child by someone else.
• Cannot claim the foreign earned income exclusion (which relates to wages earned while living abroad)
• You and your spouse (if married) are between the ages of 25 and 64.
• An easy way to see if you qualify to claim the EITC is to use our Earned Income Tax online calculator.

If you qualify for the EITC, you need to file a tax return to claim your credit. Intuit is working with nonprofit groups and public and private sector partners to help low and middle-income taxpayers get access to free online tax preparation so they claim this and other tax credits and deductions.

Through the IRS Free File program, Intuit provides free online tax preparation and electronic filing for individuals who qualify for the EITC. The program is also available to active duty military with an adjusted gross income of $58,000 or less, or who have an adjusted gross income of $31,000 or less.  Since 1998, Intuit has donated more than 22 million returns to these low- and moderate- income taxpayers.

Additionally, at tax assistance events around the country, eligible tax filers can accurately and easily prepare their returns for free with TurboTax, ensuring they claim all the deductions and credits they deserve. These include:

IRS Volunteer Income Tax Assistance Programs – IRS VITA sites in 12 communities across the country will offer filers the option of using TurboTax to prepare their returns on their own with the assistance of an onsite coach.

New York City Department of Consumer Affairs, Office of Financial Empowerment – Taxpayers can prepare and file their federal, state and city returns online with TurboTax at 20 free tax assistance sites throughout New York City. The program is part of a campaign designed to increase awareness about EITC.

Community events – Intuit is participating in a series of more than 30 tax assistance events across the country through April. Taxpayers can prepare and file their taxes through the IRS Free Program and with 21 state Free File programs.

Last year, California taxpayers alone left more than $1 billion in EITC funds unclaimed. There’s simply no reason to leave money you’re owed on the table. Find out if you qualify and file your return to claim your EITC.

Tax deductions come in two major flavors: the standard deduction and itemized deductions. The standard deduction is just that—a standard dollar amount set by the IRS each year. This is the easiest deduction to take because there are no calculations to make, no receipts to gather, and no additional tax forms to prepare. While easy, it may not always be the best choice. That’s where itemized deductions come into play.

Itemized tax deductions require a little more work, but it can also mean a big savings on your total tax bill. For example, in 2009 the standard deduction amount for a married couple filing jointly was $11,400. This is a nice deduction, but if you own a home, make contributions to a retirement account, or made charitable contributions the standard deduction may be less than what you could itemize. In situations like this it obviously makes sense to itemize so that you can maximize your total deduction amount. To itemize your deductions you will need to file 1040 Schedule A.

Itemized deductions fall under these primary categories:

• Medical, dental, prescription drugs, and health care costs
• State and local income taxes or sales taxes
• Property taxes
• Mortgage interest
• Personal property taxes (such as vehicle registration fees)
• Interest paid on certain investments
• Charitable contributions
• Personal losses due to theft or casualty
• Job-related expenses
• Union dues
• Tax preparation fees
• Home office expenses
• Gambling losses

Some Things to Consider

If you do plan on itemizing deductions, there are a few things to consider. First, many deductions are limited to a certain threshold amount. A common example of this is in relation to health care expenses. These expenses are deductible only if they exceed 7.5 percent of your adjusted gross income. So, you may not have enough health expenses to be able to take advantage of the deduction. There are also limitations in effect for higher income earners and if your income is above the threshold for the year they may be reduced.

In addition, itemizing means careful record keeping. You will need to keep all of your receipts and track the expenses you’d like to deduct. In the event of an audit you’d be required to substantiate your deductions, so keeping careful records is crucial.

Play it safe by searching for 501(c)(3) organizations on the IRS’s publication 78, available at irs.gov.), and while many will happily accept everything from your vacation home to your commercial property, here are the three most common ways to make a contribution without a whole lot of effort:

Cash

Making a cash donation is the easiest way to give, and get back. For example, a $1000 cash donation would save you $250 in the 25% bracket; $350 in the 35% bracket.  Just remember to substantiate your gift with a letter or receipt from the qualified organization, a canceled check or a bank statement showing how much you gave.

Stuff

While it is often more profitable (and thoughtful) for you to donate used goods to a charity than it is sell them in a garage or yard sale, keep in mind that per 2006 rules, in order for you to claim a deduction on your ‘stuff’ – whether household items, electronics, linens, furniture or clothing – it has to be in good or better condition (unless you’re writing off a single item, appraised at over $500). To determine your item’s fair market value – what it would sell for in a thrift store – use our free ItsDeductible tool.

Appreciated securities

Giving appreciated securities – such as stocks or mutual fund shares you’ve held for over a year – is one of the best ways to fund your favorite charities because the benefits are twofold: you get to deduct the asset’s market value and you avoid paying capital gains. For example, say you purchased XYZ stock last year for $10,000 and now it’s worth $20,000. If you sold the $20,000 stock instead of donating it, you would pay capital gains tax (15%) on the $10,000 gain. Donate it instead and you’d save $1500 ($10,000 x 15%). Plus, you can deduct the full $20,000. So, if you are in the 25% tax bracket, this could generate another $5,000 in tax savings ($20,000 x 25%), bringing your total tax savings to $6,500.



Here’s the skinny:

Weight loss programs ARE deductible

All programs – whether a big commercial program like Weight Watchers, Jenny Craig or a physician or hospital-based weight loss program – can be deducted, providing your doctor has confirmed that your current weight is a threat to your health, and has therefore ordered you to enroll in a program to treat a specific disease, whether obesity (a designated disease as of 2002), hypertension, heart disease, or high cholesterol, for example. You must have this in writing.

Expenses must be legitimate

While you cannot deduct the obvious – such as the cost of diet foods (considered a personal expense), home exercise equipment, health club/gym/spa dues, nutritional supplements or any costs that are covered by insurance – legitimate program expenses include everything from initial fees to meeting fees to behavioral counseling, to appointments with physicians, dieticians, and nutritionists.

Consider costs

To get a deduction, costs must exceed 7.5% of your adjusted gross income. If you make $45,000, for example, you can deduct weight loss expenses above $3375; if you make $50,000, you can deduct expenses exceeding $3,750.

Vanity doesn’t count

Thinking about getting liposuction to suck away those extra five pounds you’re carrying on your hips? Considering joining a gym just because you want to look – and feel – better? Expenses, as such, that are merely beneficial to general health, do not count, but things like Bariatric surgery, FDA-approved weight loss drugs and other medical expenses – providing they relate to alleviating or preventing a physical or mental defect or illness – do.

Toys For Tots

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One of the better-known toy charities operating during the holiday season is Toys For Tots. Run by the U.S. Marines, Toys For Tots collects new, unwrapped toys during October, November and December of each year with the goal of distributing them to less fortunate youngsters all across America.

If you’re looking for a charity that is unquestionably legitimate and has never even remotely been linked to scams, this is it. Toys For Tots has been around since 1947, consistently ranks in Chronicle of Philanthropy’s Philanthropy 400 and was named “Outstanding Non-Profit Organization Of The Year” by the DMA Non-Profit Federation in 2003. Toys For Tots offers a comprehensive list of ways to donate here.

Toys ‘R Us

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Toys R’ Us is another holiday season toy donation option. In addition to accepting donations in many areas on behalf of Toys For Tots, Toys ‘R Us has consistently collected toy donations of its own from nearby citizens during the latter months of each year. Customers are also encouraged to donate new, unwrapped toys at Babies ‘R Us and Toys ‘R Us Express locations.

As an added encouragement to donate, Toys ‘R Us assures donors that “all toy donations made at “R”Us stores will be distributed locally, so every toy donation made will directly benefit needy children in your area.” Donors are also provided with receipts (for deduction purposes) whether they donate online or in stores.

Goodwill

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If there is no Salvation Army in your area, there is probably a Goodwill center instead. These two organizations serve largely the same purpose: providing donated, good-quality items to the nearby poor for free or at vastly reduced prices. Like Salvation Army, Goodwill stores happily accept donations of new or gently used toys and will provide you with all the tax-related documentation you might need.

Use the Goodwill Locator to find a location near you. Also, have TurboTax donate $5 to Goodwill on your behalf on Facebook from now till Dec. 31, 2010.

The Toy Bank

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Since The Toy Bank program took off in 2003, over $50 million in new toys have been donated and distributed to hundreds of children’s charities. The program, run by Toy Industry Foundation, works with nearly 400 charities including Ronald McDonald House Charities and My Stuff Bags Foundation (which serves foster children.) Additionally, The Toy Bank has relationships with dozens of special needs schools, military families and at-risk children.

In short, there is no doubt that toys contributed to The Toy Bank will reach worthy and deserving recipients this holiday season.

Ronald McDonald House Charities

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Another reliable option for holiday toy donations is Ronald McDonald House Charities. On a webpage devoted exclusively to their Toy & Food Donation Program, RMHC explains that they welcome any or all of the following:

• Board games
• Stuffed animals and dolls
• Books for various reading levels
• Puzzles
• Video games (rated E)
• Movies (rated G)
• Balls and outdoor games

The only requirement is that these toys be new and store-bought (handmade toys are not welcome.) If you want to help kids in your area specifically, use the chapter locator to find wish lists of children nearby.

Finding Other Charities

There are countless other charities to donate toys to this holiday season. To find them, consider the following resources:

• Charity Navigator
• JustGive.org
• IRS Charities Search

According to tax expert, Bob Meighan, the following are smart tax moves taxpayers can make before year’s end to maximize their refunds. Watch this short video, then get 5 more key tips below:

1. Invest in making your home more energy efficient – Spend money to insulate your home, replace drafty windows, replace creaky old furnaces and water heaters or install residential solar, wind turbine systems or geothermal heat pumps to slash your energy bill now and increase your refund at tax time. You could be eligible for up to $1500 federal tax credits for investing in these energy savings.

2. Give back – Donating to qualified charities helps those in need and can increase your tax refund. Obviously you can get a tax write-off for cash contributions, but don’t overlook donations like clothing, furniture, toys and bikes. Even the miles driven to and from volunteering can be deductible. Remember to keep receipts and documentation for all donations. There are free ways to find out how much your items are worth: visit ItsDeductible.com. Keep track of donated items here so it’s easier come tax time. Visit IRS.gov to make sure your chosen charity qualifies.

3. Invest in your retirement plan – Investing in your 401k or IRA can increase your tax refund and fund a more comfortable retirement nest egg – tax free. Contributing to retirement accounts before the end of the year will decrease taxable income, boosting this year’s refund.

4. Use tax software or go online – Despite pending tax law changes, taxpayers using tax software or going online can be confident that tax software will be updated when they are ready to file. Also, most of the pending tax legislation applies to 2011 and beyond. Very few of the pending tax bills affect one’s 2010 tax return.

5. Ask questions – If you have questions on deductions and credits, there is still time to get free answers to your questions. Visit freetaxquestion.com to have a tax expert call you back with a free answer between now and the end of January 2011.

1. Consider Life and Disability Insurance

From diapers to diplomas, the cost of raising a child can really add up. If something awful were to happen to you or your spouse, life and disability insurance offer a safety net to keep your loved ones’ financial lives on track. You can get an estimate of your insurance needs by using the online calculators at the non-profit Life and Health Insurance Foundation for Education (LIFE).

2. Build an Emergency Savings Fund

You never know when your roof will spring a leak or when the job market will turn sour. Keeping six months of income in a savings account or money market fund can help weather life’s inevitable pitfalls. Try setting aside money at the beginning of the month, not the “extra” at the end – there’s rarely any extra!

3. Start Saving for College

Your baby may not even be crawling yet, but with college costs rising 40% in the last decade, it’s a good idea to start saving early. Consider opening a Section 529 college savings account. As long as you use the account for qualified higher education expenses, all distributions will be tax-free.

4. Let your employer help

Many employers offer flexible spending accounts which allow you to set aside thousands of dollars in pre-tax income to pay for qualified childcare and healthcare expenses. Depending on which tax bracket you are in, using these accounts can save you thousands of dollars a year.

5 . Claim the child care credit

Your baby brings a new dependent deduction for your tax return, but other benefits are available as well. Though child care is expensive, Uncle Sam can help take the sting away with a tax credit. If you work and pay for child care, until your child turns 13, you can claim up to 35% of the first $3,000 of expenses ($6,000 for two or more children). Nursery school, private kindergarten, after school programs and day care are all qualifying expenses.

The financial stakes rise considerably when you bring a new child into the world. As you travel the road to financial security, be sure to take time to enjoy your new baby!

Click here for more tax tips for new parents.

Donate To Charity

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One sure way to stack up your tax deductions is by making donations to charity before the year is out. Be warned, however, that not every organization qualifies you to claim a tax deduction. According to the IRS, the organization or entity you donate to must have 501(c)(3) status. This is a tax exempt status given only to organizations deemed by the IRS to be “organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.”

Generally speaking, institutions focused on charity work, education and other non-profit seeking goals can qualify for 501(c)(3) status. Make sure any organization you donate to has it before money changes hands – otherwise, no tax benefits will accrue to you.

Defer Income

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Another way to lighten your tax burden on April 15 is by deferring end-of-year income. As you may know, you are only taxed on income earned and reported during the previous calendar year. Yet, you as an individual (or business owner) retain full freedom regarding when income is accepted and received. In other words: let’s say a $5,000 consulting payment is owed to you by a client before the end of the year. If you would rather not pay taxes on this income right away, simply opt not to receive it until after January 1, 2011.

There is nothing illegal, unethical or immoral about it. You are not cheating the IRS – rather, the fact that you are not paying any taxes stems from the fact that you are not receiving any income. Instead, you are consciously choosing to receive that income later, and pay the tax in 2012 instead of 2011.

Increase Appropriate Expenses

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If you are self-employed, you can also lower your tax bill by increasing appropriate end-of-year expenses. Note the word “appropriate.” The strategy here is not rushing out to Office Depot and indiscriminately emptying the corporate account on pointless purchases. True, you would lower your tax bill dramatically, but you would have squandered capital for no other benefit.

No – the strategy is nothing more and nothing less than grouping objectively needed purchases at year’s end, when the biggest tax benefits can be gained. Think about supplies or materials you know the company requires and can benefit from. Then, resolve to buy them before December 31, rather than waiting until after the New Year.

Un-reimbursed Medical/Work Expenses

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If you are not self-employed, you may still be able to deduct certain expenses on your upcoming return. If you have not yet been reimbursed (or will never be reimbursed) for the any of the following:

• Medical expenses
• Gas mileage or auto repairs
• Work-related hotel stays
• Work-related air travel

These are valid deductions and perfectly legal to take. Just note that such expenses may only be deducted in excess of a certain percentage of your adjusted gross income; that is, you cannot cite $100,000 in un-reimbursed fees and claim that you are now off the hook for paying taxes on your $80,000 salary. However, you are certainly entitled to total up the fees you did accrue and key them into Schedule A on your Form 1040.

Beef Up Retirement Contributions

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Anyone (self-employed or not) can boost late year write-offs by plowing more money into tax-deferred retirement accounts. The big exception here is the Roth IRA: instead of writing off contributions today, you get to withdraw the money tax-free in old age (which lets your money grow untaxed over many years.) For most other retirement accounts – like the 401(k) and Traditional IRA – you deduct the amount of contributions made this year on your upcoming tax return.

The first thing you will need to do is apply for a Social Security number if the hospital hasn’t already done so on your behalf. When you file your first tax return that includes your newborn the IRS will want to see her social security number along with yours and your spouses. If you are a single parent you may file under head of household status which provides you a bit of savings over filing as a single. Your child comes with her own exemption which means another $3,650 dollars off your gross income before you calculate the tax you owe.

There are a number of additional tax incentives you should be aware of.

First is the Earned Income Tax Credit (EITC) which reduces your tax burden by $3,050 if you’re filing jointly and your adjusted gross income (AGI) is $40,545 or less. Note: A tax credit reduces your tax dollar for dollar as compared to a deduction which reduces your taxable income. For EITC you lose this credit if your investment income for the year is greater than $3,100. If you qualify based on AGI a bit of planning may be in order to keep your investment income below this threshold.

Next we have the Child Tax Credit. This credit is worth up to $1000 for each qualifying child under the age of 17. The credit phases out for a married couple beginning at $110,000. The exact rules and requirements to take advantage of this credit are complex but tax software like TurboTax will walk you through every deduction and credit you deserve.

If both parents are working and/or attending school full time you should consider the Dependent Care Account (DCA) if either of your employers offers this. The DCA allows you to deduct up to $5,000 annually for reimbursement of the expenses incurred for child care up to the age of 13. Your employer should have a website or pamphlet that explains the expenses the DCA covers. The most common expenses are day care, a nanny/au pair, nursery or after school care programs. This benefit is “use it or lose it”, if you don’t submit receipts to cover all of the money you’ve had withheld your employer will not refund it to you. For this reason careful planning is recommended as you must choose between the Child Tax Credit or DCA, no double dipping here.

Last, you may wish to take advantage of the Flexible Spending Account (FSA). Similar to the DCA in that money is held from your paycheck pretax the FSA can be used for any out of pocket health care costs including the copay for any doctor or dentist visits as well as for prescribed medicines (Note: until this year over the counter medicines were reimbursable but this has been changed for 2011). One subtle distinction between the DCA and the FSA is that you may be reimbursed from the FSA account before deposits have been made. In other words if you chose to have $4,000 withheld over the year you may submit and get reimbursed as soon as you’ve incurred up to $4,000 worth of eligible expenses. For the DCA you are reimbursed only as deposits fill your account.

For the two employer plans, a change in family status permits a change to your participating in these plans. Just because your child is born after you made the 2011 benefits decisions does not mean you missed out for the year. Contact HR and put your request in as soon as you can after the birth. Best wishes to you and your new family!

• Salary or hourly wages
• Interest income
• Self-employment income (e.g., freelancing or otherwise running your own business)
• Rental income

Capital gains income result from the selling of certain items for more than you paid for them.  Examples of transactions which often trigger capital gains include:

• Stocks sales
• Mutual fund sales
• Home sales

There are two kinds of capital transactions: short-term and long-term. Short-term transactions occur if the sale happens a year or less after the purchase. Short-term capital gains are taxed as ordinary income. However, long-term capital gains (where the taxpayer owned the asset for more than one year), are taxed at capital gains tax rates.

At most times in our history including today, top ordinary income tax rates exceed top capital gains tax rates. Consequently, you’d prefer income from a capital gains transaction over the same event triggering ordinary income.

Calculating Capital Gains Tax

To determine the extent of a capital gain or loss, you simply subtract your basis in the asset you sold from its sales price. If your basis is less than the sales price, you have a capital gain. If your basis exceeds your sales price, you have a capital loss.  Let’s take an example.

Say you sold 101 shares of the stock HLMA on November 10, 2010 for $15/share.  You used a discount broker, so your commission on the trade was just $7.  The net proceeds from the stock sale are $1,508 ((101 shares x $15 price) – $7 commission).

You originally purchased 100 shares on April 26, 2008 for $12/share also paying a $7 commission.  Your total purchase price is $1,207 ((100 shares x 12 price) + $7 commission).

Since you paid $1,207 for a stock you sold for $1,508, you have a capital gain of $301 ($1,508 – $1,207), right?

While many would calculate their gain that way, it might lead to an overpayment of tax, because your basis is not always exactly equal to your purchase price. Perhaps you noticed our example features a sale of 101 shares but a purchase of only 100. Where did the other share come from? It turns out HLMA paid a $20 dividend on December 13, 2009. At that time, HLMA was trading for $20/share (Yes, last December would have been a better time to sell our fictional stock but, alas, there is no crystal ball). Upon your instructions, your broker took the $20 dividend and bought another share of HLMA, otherwise known as reinvesting your dividend.

When you calculate your basis in the HLMA stock you sold, add the $20 to your basis. Therefore, your total capital gain is actually $281 ($1,508 sales price – $1,227 basis).  Your capital gains tax rate currently varies based on your total income, but the highest current rate is 15%, so the most tax you’d owe on this hypothetical stock sale is $42.50 (15% x $281 capital gain).

Note:  the maximum capital gains tax rate is set to rise to 20% on January 1, 2011. Whether and to what extent tax legislation passes affecting 2011 tax rates is currently anyone’s guess. Hmm, sounds like a future blog posting at the TurboTax blog.

[taxcaster]

TaxCaster takes full advantage of Microsoft’s easily styled controls and animations to create a compelling user experience. The pivot control enables you to quickly navigate through the application to enter your tax data.  TaxCaster builds on the momentum of Intuit’s innovative, multi-platform suite of mobile offerings for consumers and small businesses. We expect to introduce several new WP7 apps in the coming months.

TaxCaster is expected to be available for free download to Windows Phone 7 users in the U.S. on Nov. 8. Updated versions for the current tax year for all mobile platforms, including Android and iPhone apps, will be available in mid November.  Bloggers can also download it as a plugin here.

]]> http://blog.turbotax.intuit.com/2010/10/28/taxcaster-mobile-app-for-windows-phone-7-arrives-november-8/feed/ 9 turbotaxcolleen http://blog.turbotax.intuit.com/2010/10/07/where-are-all-the-homebuyer-tax-credits/ http://blog.turbotax.intuit.com/2010/10/07/where-are-all-the-homebuyer-tax-credits/#comments Thu, 07 Oct 2010 17:29:23 +0000 joshritchie http://blog.turbotax.intuit.com/?p=3728 Full story]]> According to GAO, through July 3, 2010, approximately one million claimants claimed $7.3 billion in interest-free loans through the Housing and Economic Recovery Act of 2008, which provided homebuyer assistance in the form of a refundable credit for homes bought after Apr. 8, 2008 and before Jan. 1, 2009 (taxpayers must repay the credit over 15 years beginning in the 2011 filing season). Another 1.7 million claimed $12.1 billion in homebuyer credits using provisions of the American Recovery and Reinvestment Act of 2009, and 600,000 claimed $4.1 billion in credits under the provisions of the Worker, Homeownership, and Business Assistance Act of 2009. GAO also provided a state-by-state ranking under three different statistics: the total dollar amount claimed; the dollar amount claimed per resident; and the average dollar amount claimed per tax credit claim.

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<a href="http://intuitturbotax.files.wordpress.com/2010/10/tt-homebuyer-tax-credits0927.png" target="_blank"><img src="http://intuitturbotax.files.wordpress.com/2010/10/tt-homebuyer-tax-credits0927.png?w=630&h=1437" alt="HOMEBUYER CREDIT" title="HOMEBUYER CREDIT" width="630" height="1437" class="alignnone size-full wp-image-8428" /></a><br /><a href="http://www.turbotax.com/" target="_blank">Free Tax Filing, Efile Taxes, Income Tax Returns</a> – TurboTax.com

There are a number of tax benefits scheduled to expire this year, and many require that you take action soon if you want to see a higher refund or a lower tax bill next year. There is always a chance — in fact, I can guarantee — that Congress will make more changes to tax laws before it’s time to file in April 2011. For now, consider taking advantage of some of the credits and deductions that may not be around next year.

Homebuyer Tax Credit

One of the most popular benefits is the updated Homebuyer Tax Credit. If this is your first time buying a home, the government wants to give you up to $8,000. If you’ve lived in your current home for a long time but move to a new house, you could receive up to $6,500.

Unless extended by Congress, you must buy a qualifying house by the end of June this year. There are other restrictions as well, including income limitations. Make sure you’re familiar with all the rules before expecting the credit. Experts aren’t expecting this credit, already extended once, to be extended again. Time is running out, but the decision to buy a house should not be based solely on the existence of a tax credit.

Adoption Credit

Just a few weeks ago, Congress extended tax credits for adoption expenses to 2011, so there is now an extra year for taxpayers to receive some of the expanded benefits that have been put in place recently. Parents who adopt a child can receive a credit of up to $13,170 to help cover expenses spent during the adoption process.

American Opportunity Tax Credit

One new tax law of the 2009 economic stimulus was a new credit to help pay for college expenses such as tuition. The Hope Credit was expanded into the new American Opportunity Tax Credit, increasing the benefit students and parents can receive on their 2009 and 2010 taxes.

For any of the first four years of higher education, students or their parents (if the student is a dependent) can claim $2,500 in 2009 and 2010 to offset the costs. Up to $1,000 of this credit each year is refundable, which means you will receive the credit even if you have no other tax liability. This is a benefit for students who may not have much other income.

Unless Congress changes the rules again, the American Opportunity Tax Credit will expire at the end of the year. It will be superseded by the older Hope Credit, which provides a smaller benefit.

Making Work Pay Credit

Most people are receiving the Making Work Pay Credit without even knowing it. Rather than receiving this credit as part of your annual tax refund, most people have been receiving a small amount extra in their paychecks since April 2009 and will continue receiving this extra amount through the end of the year.

If you do not have regular tax withholding through your job or if you elected not to receive this extra money in your paycheck, you were able to claim the Making Work Pay Credit on your taxes and will be able to again in 2010. This is another tax rule enacted by the 2009 economic stimulus, and it will expire at the end of this year.

Low capital gains tax rates

Since 2008, investors have benefited from low tax rates on investments. For example, taxpayers in the 15% bracket can sell stocks with long-term capital gains without owing any taxes. In 2011, this tax will return to a rate of 10%. At all income levels, taxes on investments will increase. Currently, the dividends from some investments are taxed at these lower rates, but in 2011, dividends will be taxed at the same rates as ordinary income.

Stay tuned for more updates

The tax system is designed to be adjusted when necessary to react with current economic issues. Keep checking the TurboTax Blog for the latest updates when tax laws change, affecting taxpayers and their wallets.

So how do those changes affect your tax situation? Can you claim your girlfriend on your taxes? What about your son who lives with your mother? And of course, pets. Can you claim Buster the beagle on your taxes? I sat down with Lee Ferris, one of our in-house tax experts and asked her those same questions.

The question and answer session aims to explain some of the more common dependent questions so you can get your biggest refund possible.

Question: Can someone claim their girlfriend or boyfriend on their taxes?

Answer: If your girlfriend has lived with you for all of 2009, her gross income is less than $3,650, and you’ve provided more than half of her total support (which is room board, food, car, insurance, etc.), you could claim her as a dependent on your tax return. To determine if you pay for more than half of her support, see IRS Pub 501 page 20. Each dependent you claim on your 2009 tax return reduces your taxable income by up to $3,650.

Question: What if we have a child, can I claim the baby also?

Answer: If the baby is your child, lived with you for more than half the year, and can’t support itself, you can claim the child as your dependent. And I know you are thinking, ‘Of course my baby can’t support itself.’ This was a-recent change by the IRS and a good example is if you have a child that is an actor. That child might be receiving a decent income and that counts as supporting itself.

But for all those parents with non-actor children out there, you can claim a child under the age of 19. If the child is a full-time student then you can claim them until the age of 24. If they are 25, working on their master’s degree and not earning any income you might be able to claim what the IRS calls a “qualified relative.” I would recommend visiting the IRS link to get more info on what defines the qualified relative and qualified child.

Question: My sister lives with me, and she receives Social Security Disability Benefits. If I charge her rent – which gets paid with social security – can I claim her as a dependent on my tax return?

Answer: If you are providing more than half of her total support (taking into consideration the rent she’s paying you) and she doesn’t make more than $3,650 a year, you can most likely claim her. Remember her social security isn’t counted as gross income. Look at the IRS worksheet in pub 501 to get more information on this.

Question: Can I claim any of my pets? What if they require special needs?

Answer: No. But I have been reading about a bill in Congress that is making the rounds that allows people to deduct pet medical expenses up to $3,500. The bill is proposed by Republican Thaddeus McCotter of Michigan. I am not sure what will happen with this but it is worth paying attention to.

Q: My parents just moved in with us so that we can take care of them. Can I claim them?

Answer: This is a common question right now because of the economy. If they are living with you, their only source of income is social security, and you are supporting them by more than 50 percent, you can claim them as a qualified relative. Remember, social security doesn’t count towards their gross income. Also, remember that since they are qualified relatives, they don’t have to live with you. You could be supporting them in their own home and still claim them as dependents.

Question: Can I still claim my spouse even though she received unemployment the majority of the year?

Answer: Even if your spouse is a stay-at-home mom, you can’t claim her as a dependent. This is why I encourage you to file a joint return. That way you get $3,650 for you and $3,650 for your spouse as a write-off – also known as an exemption. So 99 percent of the time it is more beneficial to file jointly because of that write-off amount and other deductions and credits.

However, one of my top questions this year is “Is unemployment taxable?” And the answer is, the first $2,400 of unemployment is NOT taxable. If both spouses receive unemployment benefits during 2009, each may exclude from taxable income the first $2,400 of benefits they received.

Question: I have been supporting my grandchild for the past six months and paid for everything. Do I claim her or does my daughter?

Answer: It depends. There are some questions you need to answer first. Will the father claim the child on his return? Is your daughter going to claim the child? If the child has lived with you for more than six months, both the father and your daughter are not going to claim the child , then yes, you can probably claim your granddaughter as a qualified child and get the various child credits on your tax return.

Question: Can I claim my niece if she is here on a student visa, going to college, and living with us? She makes no money here, pays no rent to us and we support all her expenses, except for tuition.

Answer: In this case, if she is under 24 and a full-time student and she’s not a qualifying child for anyone else, you can probably claim her as a dependent. But I like to urge people to please ensure that someone else is not already claiming the person in question as a dependent. Your niece can’t be claimed more than once. Also you can only claim the niece as a dependent if she’s a U.S citizen, U.S. resident, U.S. National, or resident of Canada or Mexico.

For questions we haven’t covered, please check out the IRS.gov page. The site has updated sample situations to help U.S. filers.

Check out this TurboTax video as well:

I’m not going to be able to file my taxes in time. What should I do?

If you can’t make that April 15 deadline, you are in good company. The Internal Revenue Service says it received requests for 11 million extensions in 2008, which amounts to about 8% of all tax returns. (I was one of them!) Taxpayers who ask for an extension get an extra six months to file—your new deadline in 2010 will be Oct. 15.

You can get some extra time without any hassle. Simply e-file for a Personal Tax Extension of your federal tax return using TurboTax Easy Extension. You can also file for an extension on the IRS website.

But there a few important things to remember when you request an extension. First, a federal extension does not automatically extend the deadline for your state income tax return. To find the extension guidelines for your state, click on this list of state tax websites compiled by TurboTax.

Also, an extension to file your federal taxes does not give you an extension to pay your actual tax bill. You still have to figure out your taxes and make an estimated payment.

Estimating how much money you’re going to owe can take time, so please do not wait until April 15 to get started. Last year’s tax return could be a good starting point if you haven’t experienced any major life changes. If that is the case, you can probably pay the same amount in taxes for 2009 that you paid in 2008. But if you lost your job, purchased a new home with the first-time homebuyer’s credit, or had a baby,  you’ll need more information to determine your tax bill.

Why is it so important to come up with this ballpark estimate? You will pay a penalty if you underpay your taxes by more than 10 percent. Thankfully, TurboTax takes the guesswork out of calculating your estimated payment.

If you are expecting a refund, file your taxes as soon as possible if to get that payment. You risk losing your refund if you fail to claim it within three years of the return due date.

Here is a rundown of why people file late…or not at all.

What do I do if I can’t afford to pay my taxes?

I posed this question to the IRS, and the No. 1 thing to do—even if you can’t pay all the taxes you owe—is to file your return. “If there is one message to get to consumers, I cannot emphasize enough how important it is to file your return,” says an IRS spokesman.

My advice: File your return as soon as possible, preferably before midnight on April 15. Why? Failure to file your taxes is a federal offense that could have significant legal ramifications. And if that isn’t reason enough, another incentive to file your taxes on time is a financial one. That’s because the IRS can impose a penalty of 5% of the tax you owe for each month you do not file your return. The maximum penalty is 25% of your tax bill.

Try to pay as much of the bill as you can. But if you don’t have the cash, you may be able to work out a payment agreement with the IRS. In the past few years, the IRS says it set up installment agreements for 2 to 3 million returns. It should take less than 10 minutes to figure out if you are eligible for an installment agreement on the IRS website.

You can also call the IRS at 1-800-829-1040 to discuss your payment options.

Filers who pay the IRS via an automatic installment plan typically owe less than $25,000. Also, if you are interested in a payment plan, you should be in good standing with the IRS, and you should expect to pay off your bill within five years.

Installment agreements can be costly, so think before you leap. The IRS charges a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account. The interest rate fluctuates, based on the amount you owe. For a sense of how these payment plans work with sample scenarios, look at this IRS page.

If I haven’t closed on my new home yet, can I still claim the first-time homebuyer credit?

Yes. You still have time to get that credit, but you need to act fast. The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, has been extended. According to the IRS, “an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.” No wonder you are seeing more “For Sale” signs around town.

So who is eligible? You qualify as a first-time buyer if you have not owned a primary residence during the three years up to the date of purchase. You must also meet certain income restrictions: The credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. If you qualify, you may be eligible for a maximum tax credit of $8,000.

If you don’t fit the criteria for the first-time homebuyer credit, you could be eligible for a long-time resident credit of up to $6,500. Buyers must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence. In addition, you must buy your new home before May 1, 2010. Or, if you sign a binding contract on or before April 30, 2010, you must purchase or close on the new home on or before June 30, 2010, according to the IRS website.

There is a significant amount of documentation required if you want to receive either of these credits, which is why the IRS doesn’t let you e-file.

The homebuyer credit is a hot topic for 2009. The IRS offers extensive information about the ins and outs of the homebuying credit on its website.

If I was unemployed for part of 2009, is any of my income tax free?

Unemployment benefits are taxable, but you don’t have to pay taxes on the first $2,400 you receive. If you and your spouse are out of work, you can both exclude that first $2,400 in benefits. You should have received a Form 1099-G reporting what you’ve been paid.

If you end up with a big tax bill from your unemployment benefits, consider changing your withholding status for 2010. Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes.

There are a bunch of education tax breaks available. What’s the difference and which one should I take?

I hear this question a lot. In fact, I recently got it from a listener on National Public Radio’s All Things Considered. While a tax deduction of up to $4,000 can be claimed for qualified tuition and fees, tax credits usually result in bigger tax savings.

For many people, the American Opportunity Credit will provide the most bang on a tax return because it offers the largest tax break ($2500 for qualified tuition and expenses). It is an expansion of the Hope credit, and it is tied to the economic stimulus package. The income cap for the American Opportunity Credit is higher than other credits, too. The credit can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010. Books and required course materials count as a qualifying expense. Plus, the credit can be claimed for four post-secondary education years instead of two.

If you have brushed up on your career skills, use the Lifetime Learning Credit. It provides a credit of up to $2,000 to cover qualified education expenses, such as job training. And it is applicable for you, your spouse or your offspring. The credit is based on your income—joint filers can’t claim it if their income exceeds $120,000.

If you want to delve into the nuances of the various education-related incentives, this Q&A from the IRS does a terrific job of explaining the differences. I also like this education tip sheet.

Finally, to figure out which educational tax break makes the most sense for you, use TurboTax to compare the impact on your tax return.

Is there anything I can still do to lower my tax bill?

One of the best options to lower your tax bill is to maximize your 2009 retirement savings. For 2009, you can stash up to $5,000 in an IRA ($6,000 for those over age 50). But there are income hurdles to be aware of. You can also buy a new house (above) or contribute to Haiti and Chile relief (below).

I made donations to support relief in Haiti and Chile this year. Can I deduct it on my 2009 taxes?

Yes, assuming you made those donations before March 1 to help Haiti and Feb. 26 for Chile. But pay very careful attention to the news. Pending legislation, which already passed the House of Representatives, is now awaiting approval in the Senate. (It is considered to be a slam dunk, but Congress has been a little tied up with healthcare reform.) There is a good chance Congress will extend the deadline for charitable contributions to Haiti and Chile through April 15. And if that happens, you should be able to use the deduction for 2009 returns.

If I need to amend my tax return, does that need to be done by April 15?

If you sent in your tax return already and realized you forgot to claim something, you can amend your return. (It happens to the best of us: Last year we forgot to include our 529 savings plan contributions on our 2008 tax return.)

Use Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF),Form 1040EZ (PDF), Form 1040NR (PDF), or Form 1040NR-EZ (PDF). If you used TurboTax to file your return you can follow these instructions to amend your return. To avoid any penalties and interest, you need to file Form 1040X and pay the tax by April 15 of the following year.

If you are filing for an additional refund, the IRS advises you to wait until you have received your original refund.