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. Make a Gift-giving Budget and Stick to it. As a couple, you should set expectations to how much you each will spend on gifts for one another. Whether you want to splurge on your sweetie or show how much you care with a DIY gift, make sure to set a budget and expectations so there’s no disappointment come Valentines day.

2. Give from the Heart and Hearth. Happy memories come these special times, not from spending a lot of money on this day. Bake cookies, knit a scarf or make a personalized scrapbook. A handmade gift or baked goods tells your significant other you invested time (not to mention love) in the gift – and that makes it priceless!

3. Gift Wisely. You are spending your hard-earned cash, so be sure that your honey is getting something they value. Instead of giving flowers and chocolates, try giving something they could use like a piece of technology or something they’ve wanted. They’ll surely love that more than the calories from the sweets they normally receive.

4. Dine In. This may be the national day for spending a fortune on a fancy dinner out on the town, but you shouldn’t shy away from staying home with your Valentine. They’ll not only appreciate a home cooked meal, but you can also save quite a bit by preparing dinner yourself.

5. Donate to a Cause – and don’t forget the tax break! Make a donation to a charity close to your Valentine’s heart. Not only will it be a meaningful gift, you’ll also get a quick tax deduction to boot.

Student Loan

Luckily, most taxpayers who make student loan payments on a qualified student loan will get a little relief. A qualified student loan is a loan you took out solely to pay higher education.

In most cases, the interest portion of your student loan payments during the tax year is tax deductible. Your deduction is limited to interest up to $2,500 or the amount of interest you actually paid whichever is less.  As with most tax credits and deductions, there are limits in place.

You can deduct student loan interest if:

• You paid interest on a qualified student loan in the tax year
• You are legally obligated to pay interest on a qualified student loan
• Your filing status is not married filing separately
• You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s tax return
• You are a single filer with income under $60,000, however your full tax deduction phases out between $60,000 and $75,000. Income limits are double for joint filers. If your income falls above those limits, it is not deductible at all.

The other good news regarding the student loan interest deduction is that you do not need to itemize deductions in order to claim it. This makes sense considering many recent college graduates are not itemizing deductions.

If you paid more than $600 in interest to a single lender during the year you should receive a 1098-E form showing how much interest you paid for the year. If you made student loan payments but did not receive a 1098-E, you are still entitled to claim the interest deduction, but you may need to call the lender or pull up your records online.

When filing your taxes, don’t forget about this tax deduction and remember that TurboTax will calculate the deduction for you if you are eligible.

When we think about vacation homes, taxes are rarely the issue that commands our attention. Yet while the beach out back or the stellar restaurant down the street might be more exciting to think about, taxes are a huge consideration in their own right. Failure to properly plan and budget for property taxes could transform your dream vacation home (or timeshare) from an uplifting getaway into a financial nightmare.

Property Tax

Here, we explore how the details of your vacation home situation affect your property tax obligations and preparation strategies.

How Frequency of Use Affects Property Taxes

Contrary to some assumptions, the government does not simply apply a blanket tax obligation to all vacation home owners. Rather, they consider how frequently the home is occupied, and whether the primary occupants are you (the owner) or tenants that you rent to.

SmartMoney helpfully divides vacation home ownership (for tax purposes) into three categories:

• Use a lot, rent a lot
• Rent a lot, use a little
• Use a lot, rent a little

Each category is summarized and explored in more detail below.

If you use your vacation home a lot, and also rent it a lot…

Your vacation home is considered a personal residence. As SmartMoney explains, this is potentially beneficial for you:

Specifically, this applies to homes that are rented more than 14 days a year and have personal use of more than 14 days or 10% of the rental days, whichever is greater. Personal use includes use by family members and anyone else who pays less than market rental rates. Vacation homes fitting this description are considered personal residences.

“This helps you, because Uncle Sam lets you deduct interest on up to $1 million of mortgage debt (and up to an additional $100,000 for home equity loans). Property taxes are generally deductible, no matter how many homes you own. Those fortunate enough to own more than two homes can pick the two with the most mortgage interest each year which is usually the main residence and the vacation home with the biggest loan.”

The main thing to keep in mind is that you must deduct the expenses from your own use of the house and the expenses incurred while renting separately.

EXAMPLE SCENARIO:

To use SmartMoney’s example, we will assume your vacation home is rented for three months, used by your family for two, and vacant for the other seven. Vacant time, it should be clarified, is considered personal use for tax reasons. Thus, you would deduct three months worth (25%) of the interest and taxes from rental income, and nine months (75%) from your itemized deductions on Schedule A of your tax return.

Keep in mind that this category applies to “homes that are rented more than 14 days a year and have personal use of more than 14 days or 10% of the rental days, whichever is greater.”

If you rent your vacation home a lot, but only use it yourself a little…

You are treated differently for tax purposes. Specifically, the rule is that your vacation home will fall under the category of “rental properties rather than for personal residences if you rent more than 14 days a year and if your personal use doesn’t exceed 14 days or 10% of the rental days, whichever is greater.”

This scenario varies considerably from the first category. For one thing, since your home is a rental property, rather than a personal residence, you cannot deduct the interest expenses incurred during your own use. But there are benefits as well. If you incur rental losses, you can write these off as a taxable loss as long as you “actively participate” in the property by making day-to-day management decisions and meet personal income limits.

If you use your vacation home a lot, but only rent it out a little…

By far the simplest and most beneficial category, this applies to homes “that are rented for fewer than 15 days a year and used by the owner for more than 14 days.” If this describes you, then your vacation home is actually a personal residence for tax purposes. As such, you can deduct the interest and property taxes as itemized deductions, in the same manner you do for your actual home.

Best of all: you do not have to legally declare any rental income. Although you don’t get any write-offs for operating expenses, this is a benefit well worth taking advantage of!

IRAs

IRAs can be a powerful tool that can help you build your finances, prepare for a better retirement, and get a hefty savings at tax time. However, some people are confused on what they are, how much they can contribute, and the deadline for their contributions. I’ll answer some common questions to help you feel more comfortable using them.

Max Out Your IRA Contributions

When should you start investing in an IRA? As soon as you can, provided that you have an emergency fund in place and don’t have any high interest (>12%) debts.

How much can you contribute to your IRA? For 2011, you can contribute $5,000/year or the amount of your taxable compensation. If you’re over 50, you get an additional $1,000 added to your contribution ($6,000/year). Don’t forget that these are for individuals, so a couple younger than 50 can contribute $10,000 into IRAs ($5,000 each). If you can max out your contributions, then please do so.

With IRA contributions, there are guidelines for the deduction and contribution limits.  If you contribute to your traditional IRA by April 17th, you may be able to claim a tax deduction on your tax return for the amount contributed.  Roth IRA contributions, however are not tax deductible since the qualified distributions are tax-free.

You can contribute to your Roth IRA if your modified AGI is less than:

• $179,000 for married filing jointly or qualifying widow(er),
• $122,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

For your traditional IRA, if you or your spouse is covered by a retirement plan at work, your deduction may be limited.

Don’t worry about figuring out these limitations.  TurboTax easily guides you through the necessary entries and gives you the appropriate tax deduction to maximize your tax refund.

Make it Easy to Contribute

The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It can be as small as $25/week; the important part if getting you into the habit of saving up for your retirement.

You can also set aside a chunk of any bonuses or windfalls you get this year to deposit into your IRA.

Deadlines for Contributing to Your IRA

2011 is over, but you still have until April 17th to make a tax deductible contribution to your traditional IRA and reap the benefits of a bigger tax refund.

Thoughts on Your IRA

How many of you have continued to contribute your IRA? How has it been doing this year?

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Educator Expense Tax Deduction

Who qualifies? If you are a teacher, instructor, counselor, principal or aide for grades K-12, you will qualify if you work at least 900 hours during the school year.

What expenses qualify? You can claim up to $250 of expenses for classroom supplies, materials, books, computer equipment, software, other equipment, and supplementary materials that you pay from your own pocket, as long as you didn’t receive reimbursement. Here’s a little fine print: If you teach courses in health and physical education, your expenses for those courses must be related to athletics.

Do I have to itemize my tax deductions? That’s the best part – you can take the Educator Expense Deduction even if you claim the standard deduction and even if you file the short form. TurboTax will easily guide you through an interview and put the tax deduction on the right form.

My spouse is a teacher – can he claim the tax deduction as well? More good news: you can each claim the tax deduction for a combined total of $500, even if you file a joint return. Of course, you can’t each claim a deduction for the same costs, so be sure to split the purchases between you for maximum tax savings.

What’s the catch? For most people, there is no catch, but certain educators with unusual situations may find their deductions limited. That’s because the expenses have to exceed any interest on US savings bonds that you excluded from income because they were used to pay education expenses, and any tax-free distributions from a 529 plan or other tuition program that you excluded from income, including any tax-free withdrawals from your Coverdell Education Savings Account.  See, I told you that those situations were unusual.

Congress decided a few years ago to give teachers a tax break temporarily, but each time the Educator Expense Deduction is set to expire it has been extended. It is set to expire again at the end of 2011, so don’t pass up this limited-time opportunity. There are no guarantees that the deduction will be around for future years, so take advantage of the tax break this year and buy those qualifying supplies before year end.

A weak economy has many people feeling more cautious than ever.  As a result, 7 out of 10 of us (68%) will be “giving” more sparingly to our favorite causes, according to a study by Campbell Rinker.  Another 1 in 10 Americans plan to stop giving altogether until the economy gets back on track.

The good news is there are plenty of ways to be charitable without actually dipping into your pocketbook.  All you have to do is shop more thoughtfully, and “doing good” can easily be a part of your everyday life.

Here are some options:

Shop Your Closet

Have a couch that no longer matches your living room decor?  Gently worn clothing that is cluttering up your closet?  A television set that you’re not using?  As long as your “stuff” is in good or better condition, charities will be pleased to take it, and you’ll be rewarded with a nice little tax deduction come tax time.  To determine your item’s fair market value, use ItsDeductible, a free online site from TurboTax.  It’s free, easy to use and it imports directly into your TurboTax return.

Shop Online

A site called GoodShop.com makes giving a cinch.  Anywhere from 3% (on average) to as much as 30% of each purchase you make on this shopping portal – which is affiliated with over 2500 name brand retailers from Amazon, Toys ‘R Us, Target, to GAP, and Petco – is donated to your favorite charity.  Simple as that.

Change Your Search Engine

Every time you do a search on GoodSearch.com, a Yahoo-powered search engine (that you use as you would any other search engine), one penny is donated to your favorite cause.  And those pennies add up:  the ASPCA, to name one, has already earned over $34,000 from searches by its supporters.

Shop Smart

Put your funds to work when you shop by buying from one of the many companies that donate part of their proceeds to a noteworthy cause.  Lots of them do – from Estee Lauder, Kiehls, The Body Shop, Tom’s Shoes, Dancing Deer Baking Company to Newman’s Own.

Buy and Sell on eBay

Support your favorite causes through the eBay Giving Works program.  Sellers:  Choose the charity and the percentage of the sale you’d like to donate when you list an item.  The listing will automatically be indexed for buyers wanting to give to the charity that you have selected.  Buyers can also search for items by charity in order to ensure that their bids support their favorite causes.

Apply Credit Card Points

See if you can convert your credit card points into a charitable donation.  The Members Give program at American Express (amex.justgive.org), for example, allows its customers with points-based rewards cards to redeem these points as a donation to any of the charities listed on GuideStar.org (there are over a million to choose from).  Charities get $10 for every 1,000 points you redeem.

Game for Good

Give to a good cause by playing social games that drive donations to various charities.  TurboTax has a Facebook game, “Gaming for Good“, which is designed to generate holiday toy donations for Toys for Tots.  Successfully complete all three levels of the game and TurboTax will donate one toy to a child in-need.

Don’t assume because these numbers seem so high that you may not exceed them. Better to take the time to review the things you can deduct and start the old adding machine. Let’s go through the items you may be able to take on your Schedule A:

• Mortgage points - Points are considered prepaid interest as their purpose is to buy down the rate charged on your loan. You can deduct these in full on the purchase of a home if the mortgage is a million dollars or less. If greater than a million, it must be scaled back as will the interest deducted. Note: Points paid for a refinance are not deducted all at once but are taken over the term of the loan, a fraction each year.
• Mortgage interest - Interest on your mortgage is deductible up to the first million dollars of debt owed. Further, interest on up to $100,000 of a Home Equity Liner of Credit (HELOC) is also deductible.
• Property tax - The real estate tax you pay on your home, car, and boat are all deductible.
• For those who live in a co-op, a building in which you own your apartment, but there’s a common area and perhaps, an underlying mortgage, the association should give you a statement each year documenting how much of your monthly fee was for property tax and mortgage interest. Don’t miss these.
• Investment interest - Is deductible limited to your net investment income.
• Student loan interest - is not subject to itemizing, you may take this deduction right on form 1040.
• State income taxes/State sales tax - you may deduct one or the other, which ever is greater for you. If you are in a state with a low income tax, it may be easy for your sales tax to be higher than your local income tax especially in a year when you are furnishing a home or buying a new car.
• Charitable contributions - Cash contributions are the simplest to document. You cut a check or charge the donation, and the charity acknowledges it in writing. If you benefit in any way (book, CD, T-Shirt, tote bag, etc) the charity should tell you the value of the item and it comes off the amount you may deduct. If you donate non-cash property valued over $500, you must fill out a form 8283 to document the donation. If you have long term stock gains, those shares are a candidate for donation. You get to deduct the value on the day the donation is made, and avoid the capital gain on the profit if you were to sell.
• Medical and dental expenses - You can deduct medical and dental expenses as part of your itemized deductions, but only the amount that exceeds 7.5% of your adjusted gross income. Doctors include chiropractors, psychiatrists, psychologists, as well as the traditional MDs and surgeons. Prescription drugs, weight loss programs prescribed by a doctor, and items such as false teeth, eye glasses, and contact lenses are included. Note that you can only deduct the cost of expenses for which you weren’t reimbursed.
• Casualty losses - I discussed this at length last year with all the flooding in the news. You are allowed to take a deduction for losses due to flood, fire, or theft, subject to a $100 deduction, and then only to the extend it exceeds 10% of your adjusted gross income.
• Business expenses - There are a number of items that fall into this category. Use of your home – you must maintain an area exclusive to your business and nothing else. It must be your principal place of business (i.e. your employer, if any, does not have a office for your use. The home office can’t just be for your convenience.) Form 8829 is used to determine the deduction you are allowed. Similarly, the use of your car for business purposes may be deducted. If the car is not used exclusively for business you must keep a contemporaneous accounting of your business miles and deduct only the business portion. If you are reimbursed by your employer for the business use, you don’t report the reimbursement, nor do you take a deduction. Costs incurred while traveling on business are deductible. These include Cost of airfare, meals, lodging, tips, dry cleaning, laundry, and cost of calls made. These expenses are all reported on for 2106 which calculates the amount that flows on to the schedule A.

A long list, I know, but whatever tax bracket you are in, the taxes you save by itemizing can add up fast. If this article helped you uncover some hidden deductions, please let me know by commenting below.