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Tax Breaks That You Need to Take Advantage Of

January 31, 2012 By

The IRS reports numerous slip ups taxpayers commit yearly while filing their returns and on top of the list is usually the failure of most taxpayers to fill in their Social Security number or making errors on entry. However, this may not be the gravest of all the blunders as millions are lost yearly due to the failure of different taxpayers not noticing and claiming various tax write-offs that can make up huge savings. Below is a list of the commonly overlooked tax breaks that you can take advantage of.

  •  Job searching expenditures

Have you been moving from one office to another looking for work last year? Of course you have incurred costs looking for a job in the same life of profession. If this is the case, then you can itemize these expenses and deduct them as assorted costs, if they surpass 2% of your Adjusted Gross Income. Such costs include: cab fares, employment agency levies, resume printing, as well as food, transport and lodging in search of jobs.

  •  Credit for Home Buyers

Those who qualify and purchased residences before May 1, 2010 may claim up to $8,000 for long term homeowners who possessed a residence for at least five years of the eight years before buying a new one. Taxpayers with attuned gross incomes between $125,000 and $145,000 for single persons and between $225,000 and $245,000 for married couples who jointly file their returns.

  •  State Sales Taxes

Citizens of income-tax states see the tax as a larger burden than the sales tax hence prefer the income tax write-off. The IRS has tables that indicate the amount residents of various states can deduct based on their states, income and local sales tax rates. There is a calculator on the IRS website to aide taxpayers in figuring this out.

  •  Dividends that are Reinvested

This is usually missed by majority of taxpayers but it is a subtraction that can help a taxpayer save a lot of money. By using the dividends to purchase more shares, an investor’s tax basis increases in the fund. Failure to take account of the reinvested dividends may result in their double taxation.

  •  Credit for Child-Care

You can claim as much as between 20% and 35% of what is paid for child care while working. Only the expenses of children below the age of 13 are considered. Despite the fact that only $5,000 can be paid via a tax preferred repayment account, 2 or more kids can benefit from up to $6,000 of the credit.

  •  Student-Loan Paid by Parents

The IRS handles student loans repaid by parents as money given to the kid, who then repays the loan. Up to $2,500 of student-loan interest paid by parents to a child who is not claimed as a dependent can be written off, the kid doesn’t have to itemize to use this deduction.

  •  Baggage Levies

Airlines have become notorious for imposing charges on baggage and travel plans changes. Such charges should be added to the deductible travel expenses.

  •  Extra Bonus Drop

Qualified assets placed in service in 2011 can be written off by business owners. This break only applies to new assets with 20 years or less of recovery period like computers, machinery and farm equipments.

  •  Energy Saving Home Improvements Credits

This is worth 10% of the cost of qualifying energy savers encompassing new windows and insulation. The limit of this credit is $500 overall from 2006 to 2011. Homeowners who set up credible substitute energy equipment like solar hot water heater, geothermal heat pumps, and wind turbines have no dollar limit.

  • Self-Employed Medicare Premiums Deductions

Individuals who keep running their own companies after meeting the criteria for Medicare can take away the premiums they shell out for Medicare Part B and Medicare Part D and the price tag of supplemental Medicare policies.

  •  Job Relocation Costs

If you are forced to move over 50 miles from your current residence to a new home due to a job offer, then you can deduct the costs of moving the household goods to the new residence.

  •  Demutualized Stock Sale

Did you sell stock in 2011 that you received in demutualization? Then you can claim a foundation to lower your tax tab.

  •  Travel Expenses for Military Reservists

Travel costs to drills or meetings by the members of the National Guard or military reserve can be deducted. You must have travelled over 100 miles from home and be away overnight. The costs cover lodging, half the cost of food, and mileage allowance for driving one’s own car.

  •   The Opportunity Credit

This is obtainable for up to $2,500 of college tuition and connected expenses paid during the year. Folks with a bespoken Adjusted Gross Income of $80,000 or less can claim full credit.

  •  Income of a Decedent Estate Tax

You can get income-tax write offs for the value of the estate tax paid on the IRA assets you received

  •  Jury Fees

The IRS demands that jury fees incurred during jury duty be reported as taxable income. The amount refunded to the employer is deductible.

  • Spring State Tax Remunerated

If you filed a previous year’s state income tax return the following spring, you should include the amount in your state-tax write-off on the following year’s tax returns alongside state income taxes suspended from your paychecks or paid via quarterly probable expenditure.

  • Points from Refinancing

You can subtract the points paid to acquire your mortgage at a go. You however, have to deduct the points on a new loan over the life of that loan if you refinance.

These tax breaks can enable a serious taxpayer save a lot of money if claimed.

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Using Charitable Donations as Channels for Tax Relief

January 30, 2012 By

2010 marked the first time, in two years, that charitable giving had increased. This happened despite the fact that the economy was just beginning its road to recovery. According to the annual philanthropy report of 2011 by Giving U.S.A foundation and Center on Philanthropy at Indiana University, individuals, corporations and foundations gave estimated amounts of $290.89 billion in charitable contributions in the year 2010, which was a 3.8% increase in current dollars, or 2.1% growth in inflation adjusted dollars from the previous year’s contribution.

The growth in contributions was a reversal on the trend in the previous two years and good news for non -profit making organizations. In 2008 and 2009, recession caused the largest drops in charitable giving in 40 years, but the drop in recession from 2010 marked a rise in charitable giving.

Religious organizations, in an expected trend, continued top the chart as the top beneficiaries of charitable donations in 2010, totaling to an estimated amount of $101 billion, which was a sizeable 35% of all donations made in the year.

Donations made to human services in the same year added up to an estimated amount of $26.49 billion. The contributions to the human services comprised he majority of funds donated to Haiti disaster relief, which was estimated to have cost $1.43 billion.

Individual donations, which include estimated amounts for itemized charitable deductions, grew by 2.7 percent in current dollars or 1.1 percent in inflation adjusted dollars in 2010 to an estimated $211.77 billion. Included in individual donations were estimates for “mega-gifts”, which Giving USA described as gifts large enough to affect the percentage change of total donation by 1 percent from one year to the other.

Corporate giving, on the other hand, grew by 10.6% in current dollars or 8.8% in dollars adjusted for inflation to an estimated $15.29 billion. Giving USA says that around $22.83 billion was donated by the corporate society, despite the fact that there was no estate tax in 2010, and as a result no tax excuse for bequests to charities.       

For taxpayers hoping to enjoy tax benefits through charitable donations, they must ensure they follow the donations rules of the IRS, one of which is to ensure that the donation that one is giving is received by the charitable organization by the 31st of December.

Donations made via credit card on the 31st of December can be filed as a donation in the current year, although the bill for the credit card gets paid in the following year.

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The Tax Wars between Online Retailers and Physical Retailers

January 27, 2012 By

Shopping applications are said to have increased the urgency by “brick and mortar” retailers to have a federal law requiring collection of sales taxes by internet retailers.  A consumer can use one of the many available shopping applications to touch and scan the barcode of an item in a store to a smart phone and then search the web to see if they can obtain a similar product at a cheaper price elsewhere. Further, the buyer can purchase the cheaper item while still standing in the store to the despair of the salesperson.

Physical stores usually compare and match cheaper online prices in a manner similar to how they would match the price from a competing physical store. Price matching and comparison is, for example, done when a consumer comes in with a newspaper advertisement. However, they cannot match the sales tax savings made by the online retail shops mainly, because the Supreme Court ruled that a retailer cannot be forced, by the state, to collect taxes without the go ahead from Congress, and unless the retailer has a physical state presence, which online retailers claim they do not have.

For retailers, shopping applications can be an advantage at times, especially when their prices are cheap, as this assists them to close a sale. If a consumer scans the barcodes on products, searches the web, and ends up finding the same store to be the one with the cheapest prices, then they will end up buying there.

This kind of promotion has generated a lot of outrage from some retailers who term it as an “in your face” promotion. However, their outrage has only ended up giving more publicity to the apps thereby enabling more and more people to learn about them. According to a survey released by Comscore, Inc. 38% of persons with smart phones had used their phones to complete a sale, and only 36% of those had actually completed an online purchase while in a retail shop.

Many physical store retailers are up in arms saying they want the federal government to pass tax legislations to have online retailers collect sales taxes in a bid to even the field better.  However, some of the online retailers claim that since they do not have a physical presence in the states where they have established warehouses, and since the warehouses are held in a separate subsidiary,  they cannot collect taxes.

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Tax Relief Procedures for Ponzi Schemes Victims

January 26, 2012 By

People who pay large amounts of taxes might be forgiven for thinking of the federal government as a Ponzi scheme that takes in tax money and produces federal gravy. It is even worse if one loses money to a real life Ponzi schemer. However, on a positive note, one can claim a tax loss when defrauded.

The IRS recognizes the possibility of taxpayers getting defrauded and has theft loss deductions that are available in various forms. The IRS provided safe harbor, beginning in 2007, for Ponzi schemes victims. In Ponzi schemes, differentiating between what is real and what is counterfeit is not very straight forward.  In the IRS tax relief, filing of criminal charges against perpetrators of such schemes was a major component of the relief although the IRS accepted that there would be no criminal charges if the perpetrator was dead. The IRS revenue procedure 2009-20, therefore, outlines safe harbors for victims of Ponzi schemes, to cater for situations where the perpetrator is dead and foreclosed criminal charges.

However, the IRS, in the Revenue Procedure 2011-58, has redefined the “qualified loss” from its initial description in 2007. The new definition allows a theft loss and not a capital loss for scheme investors. The usual limits on investment losses do not apply on a theft loss from a Ponzi scheme. The regulations usually permit only $3,000 per annum beyond capital gains from investments.

The deduction is supposed to be done in the year one discovers the fraud unless one has a claim that stands a good chance of recovery. The determination of the discovery year and application of the rule on “reasonable prospect of recovery” depends on one’s facts.

One’s theft loss can include lost investments, including earnings reported in past years. Ponzi scheme investors can apply for a theft loss deduction for the entire amount invested and even for “income” paid from the scheme promoter and for which tax was paid for before one discovered the fraud.

Due to the fact that most taxpayers file earnings from Ponzi schemes as fictitious income and pay income taxes for them, they have made a suggestion to the IRS to have their prior tax returns filed in such manner reviewed. However, the Internal Revenue Service has failed to share their opinion and as a result, it has not addressed the issue in its guidance for Ponzi Schemes losses, however, individuals who are not sure about their claims can seek proper guidance from professionals.

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Understanding Marginal Tax Rates

January 25, 2012 By

The rate of taxation is the biggest source of confusion in taxes. It may seem straightforward because of the tax bracket an individual may fall in, like those who make $100,000 fall into the 28% tax bracket; you should owe Uncle Sam $28,000. This may not be as straightforward because as deciding how much you owe in taxes requires that you follow a few steps.

Cutting Your Taxable Income

Your taxable income is what sets your tax bracket. If you earn $100,000 a year, the amount to be taxed may range from $65,000 to $75,000, as per your taxable income. If you have sufficient deductions that can amount to $67,000 in income, and maybe file returns jointly with a spouse, then the tax bracket you fall in is the 15% and not 28%. This does not automatically determine your tax at 15% of $67,000 as marginal tax rate operate differently.

Marginal Tax Rate

All income is taxed at varied rates, from the lowest to the trivial tax brackets. If you are in the 15% bracket, some of your income can be taxed at 10% while others at 15%. If your taxable income is $67,000 in 2011, the first batch of income up to $17,000 is taxed at 10% which amounts to $1,700. The remaining $50,000 is taxed at 15% which amounts to $7,500. The total of the annual tax comes to $9,200. What this implies is that you are paying only 9.2% of your gross income in taxes.

Someone in a higher tax bracket, like with a taxable income of $100,000. The income of such individual totaling to $17,000 is taxed at 10% amounting to $17,000. The second batch of $52,000 income is taxed at 15% which is $10,350. Finally, the remaining $31,000 of income is taxed at 25% which results in $7,750. When all the taxes are summed up, it amounts to $19,800. This is a smaller portion 19.8% of taxable income compared to the taxable income bracket of such an individual that is 25% bracket. If such a person’s gross income were more than $120,000 a year, the real percentage of income paid in taxes would be lower, at 16.5%.

Conclusion

Understanding how the marginal tax works is the best way to determine your tax bracket. The way the IRS calculate our income tax may in essence mean, that moving up a tax bracket does not impact much on the mount to be taxed. To understand better how you are taxed, it is crucial to understand how the marginal tax rates work.

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Planning Mileage Rates for 2012

January 24, 2012 By

The optional standard mileage rates for 2012 have been issued by the IRS. The rates are used to deduct automobile operational costs for business, charitable or health purposes. They are as follows:

  • 55.5 cents for every mile for miles driven on business trips
  • Twenty three cents per mile driven for health or moving purposes
  • Fourteen cents per mile driven for purposes of charity

The above rates take effect from the 1st of January in 2012, and reflect a very minimal change from the rates that had taken effect on the 1st of July 2011. In fact, the rates for charitable movements and business miles have remained unchanged, as has been the case for the last 15 years. Mileage rates for charitable organizations are set by Congress and are not adjusted for cost of living.

Under the current rules, one can use the standard rate of mileage, regardless of whether or not they are reimbursed, and whether or not that reimbursement is higher or lower than the amount arrived at using the standard rate of mileage.

Another option available to taxpayers is the option of deducting actual car expenses instead of the standard rate of mileage. Actual car expenses are expenses attributable to the use of the car. These include depreciation, repairs, tires, gas expenses, insurance cover, and license as well as registration fees. To determine one’s deduction, one should add up his/her expenses every year. The portion that is attributable to the business use of the car is deductible, but if the car is used for both personal and business purposes, then the expenses must be pro-rated.

Timing and ownership are very crucial in the deductions and in deciding which method to apply. If one’s wish is to use the standard rate of mileage and one owns a car, then one should make a claim in the first year the car is used in one’s business. In the following years, one can claim either the standard rate of mileage or the actual expenses.

For those who opt to use the standard mileage rate on a leased car, they must use it for the entire period of lease. One must make the choice, which cannot be revoked, by the due date of one’s return, including extensions. Regardless of the method one uses, whether the standard mileage rate or actual car expenses, parking fees, toll charges, interests as well as taxes are deductible separately for purposes of business, medical, moving, and charity.

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Are You Paying the IRS Excess Tax?

January 23, 2012 By

Even the wealthy find it a bit of a daunting task to pay their taxes. What’s worse? Paying taxes on wages you didn’t earn. Regrettably, that’s what is happening. Many mutual funds have to pay huge amounts in taxable allocations. You have to be careful if you are planning to spend big on investments, or else, you could find yourself in a huge pile of tax bills you shouldn’t have incurred.

Tax agitation

When you have shares in a company, your tax requirements are quite simple to fulfill. When you get dividends for your investment, you simply have to include it in your annual tax return and pay the tax levied on it. It is unaffected by the rise in stock, you will not be required to pay tax of whatever profit until you make a decision to put up your stocks for sale. That makes you the sole decider of when you will pay capital gains taxes and is an amazingly beneficial way of taking advantage of tax deferral, without using a tax favored retirement plan like a  401k or IRA.

For reasons best understood by the IRS, shares and mutual funds go by different tax systems. In mutual funds, the tax system operates by probing inside the funds to determine whether you owe taxes on income earned. So, where dividend is received, the mutual fund is obligated to pay you and then you have to pay tax on it. Worse still, if the mutual fund decides to acquire investments inside its portfolio, then you are obligated to pay the capital gains that might be required; it doesn’t matter if you never sold you stocks. As a matter of fact, even if you try reinvesting your mutual fund distributions to purchase more shares like most investors do, you are still mandated to pay tax on it.

Congress’ Pending Business

In 2010, the United States Congress almost passed a tax law that would have revised and reformed the grueling tax demands of long term mutual fund shareholders. Unfortunately, Congress was made to shift focus on what most Senators believed to be more important issues. As a result, mutual fund tax reform got shoved aside, yet another time. Without a reform, investing in a mutual fund leaves you open to the risk of heavy tax demands whenever there is a big fund distribution.

Techniques to Employ to Prevent Unfair Tax

 It is vital to note that all aforementioned issues largely affect only mutual funds in normal taxable accounts. If you hold a mutual fund in a 401(K) or IRA, you need not worry about these issues if you are running a fund that isn’t an IRA or 401(K). Here are a few tips on how you can possibly save yourself from a tax chaos.

1.            If you are planning to invest in a mutual fund, it is very advisable you inquire if they are planning to make a year-end distribution. This is important because, the tax effect depends largely on who will be a shareholder when the fund would be paying out its proceeds. You would save yourself some tax problem by waiting.

2.            Likewise, if you are probably considering selling your share that you have possessed for a long time, seriously consider selling before a big distribution. This would easily save you from a short term capital gain income, taxable at a ridiculously high rate, and in its place get suitable long term capital gain.

3.            On the other hand, if you sell shares you possessed for less than 12 months, you should consider taking the distribution. The reason for this is your possible gain would eventually be considered a short term capital gain and you get a huge tax bill. Taking the distribution would automatically mean that your gains may possibly be converted into dividend, which receives better tax scales.

No matter the case, you should be aware of obscure tax laws similar to this if you are to prevent paying the IRS more than you should be paying. By making the right decision and implementing the right practices in investing in mutual funds, you can avoid needlessly high taxes.

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Tax Breaks for Burglaries and Home Theft to Consider

January 20, 2012 By

Almost every where in the world, the first few weeks of the year is celebrated with a lot of giving and sharing, joy, and happiness. But you can’t rule out unwanted visitors. When burglars break into your home, it can be a very nasty experience; one that might consume much more than your valuables in extreme cases. The single experience with such unwanted guests could change your perception of life for a long time.

How Safe is Your Home?

Garage doors should be equipped with locks, just like your front door.  Lots of criminals make their way through garage doors. According to the police, it is said that many offenders scout neighbourhoods during the holidays in search of suitable houses to rob by checking garage doors to see if they can go in through there. You should always remember to lock the doors to your garage as it is their first option of entrance into your house. It’s possible that they can also pick the locks of your door, but the chances are slimmer because most burglars are usually after easy scores; they might be too lazy or impatient to pick locked doors.

It is also important that whenever you drive out of your garage, you go back in to lock the garage door and activate your alarm system. All this might be a bit stressful, especially on days when you are rushing out, but it is worth all the trouble you would have to go through explaining to your family, friends and police how they broke into your house, not forgetting the cash implication.

Are there Any Theft Deductions?

The answer is yes. If an intruder manages to break into your secured house, you might be able to get help from the government in form of a tax break. The Form 4684 for disaster losses is what you’d have to fill out; it covers for damages that are not too devastating. It has been designed primarily for theft and casualty losses. In criminal law, there is a clear disparity between theft and burglaries, burglaries can be filed under the IRS definition of deductible losses. This should ease your burden when you are replacing your lost items.

How Do You Know your Limits?

The same boundaries or limits that are placed on deductions for major natural disasters also apply to burglaries and theft too. The first thing to do is to itemize your deduction claims. If you happen to be operating an insurance policy that helps you repay for some of your losses, you have to deduct the amount given to you by the insurance provider from you overall loss. After which, you reduce your non-insured loss by $100.

Lastly, from you reduced figure, subtract 10% of your Adjusted Gross Income. What is left is the amount that you are allowed to claim as your deduction. If it is your own property that was stolen or vandalised, you can read up the IRS Publication 584 to learn more on what to do to get better tax cuts. For losses on business possessions, read up the IRS Publication 584B.

If much wasn’t stolen from you and you have an insurance plan to cover for you, you might not get much in tax deductions However, if a lot was stolen, this might be a good way to reduce the tension on your wallet. Let’s just hope and pray we are all safe this new year.

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Tax Breaks for Taxpayers with Aged Dependents and Relatives

January 19, 2012 By

When facing a tricky balancing act financially, where their kids are going to university, or where parents are getting older and beginning to require more attention, care, time, and money, incurring huge costs is often times, inevitable. If any of these cases particularly apply to a person, they may obtain some assistance in form of tax breaks.

It’s not unusual for one to fork out $5,000 and above every month for in-home care for family members and old relatives. This is a huge figure to factor into one’s expenditure in the event that one does not have healthcare coverage.

The month of November is annotated as the National Family Caregivers’ Month, a time specifically set aside to offer assistance to caregivers. The Federal government always offers some resources for caregivers as they embark on this arduous yet very useful task.

Sharing the financial the financial cost of healthcare and dependents:

In a family unit made up of several children, the financial burden of catering for aged parents can be taken by children that are able to afford health care maintenance. It will also alleviate the burden to a large extent, if other relatives contribute to the costs. When several people share these healthcare and maintenance costs, the burden becomes lighter.

The Tax Form Number 2120, which is designated as the Multiple Support Declaration, enables individuals who share support expenses to indicate who their dependents will be. Members of a family may, in turns, claim dependency, with each family member taking a turn at different times.

In a scenario where a person obtains a better benefit from this claim, all those involved could select to assign the dependent, and then divide the tax benefit so obtained. The individual who is chosen to claim dependency on a family member gets to be head of the dependent’s household, if such a dependent happens to be single.  Such a person gets to take a tax break for the medical costs of the dependent.

Deductible medical costs:

One should bear in mind that the total cost of a residential facility may also be deductible. What one requires in order to qualify for such deduction are relevant documents from a doctor clearly indicating that the person is no longer able to live autonomously, and must thus live under supervisory care.

With that important document in place, the taxpayer automatically qualifies for deductions on expenses incurred on rent, food, and other necessary supplies. One should be careful to obtain monthly or yearly statements from the care facility indicating the amount paid.

It is noteworthy that one may only deduct the costs paid and not the full cost incurred by all the members of the family.

Family members should ideally meet at the start of every year and determine who will claim the dependency for tax break purposes. Members who can’t use medical breaks can offer their monthly payments to the individual can. The person who claims the tax break foots all the bills and obtains the full benefit of medical cost deductions.

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Adoption Tax Credit as a Tax Reduction Measure

January 18, 2012 By

In the process of adoption, there is always a bill that keeps popping up; the IRS provides an adoption tax credit which is meant to make adoption much cheaper. One can qualify for a refund on adoption expenses that meet the IRS qualification through a tax credit of up to $13,360 per child in 2011 and $12,170 in 2012. Even if the adoption was not finalized in 2011 or fails to get finalized in 2012, taxpayers can still qualify for the full tax credit. Taxpayers without qualified expenses but with a special need child or children can also qualify for this credit.

The value of one’s tax credit is arrived at by adding up all the genuine and reasonable expenses that one accumulated during the adoption process. These expenses might include legal costs, travel costs, health costs of the birth mother, and foreign adoption fees etc.

Among the exceptions to the adoption tax credit are the expenses incurred through adoption of a spouse’s child or taking part in surrogate parenting. Additionally, one cannot include amounts that were paid by one’s employer, either directly or indirectly on one’s behalf, to assist with the adoption, although one would not have to pay taxes on such amounts. Furthermore, if one makes an attempt to adopt from a foreign country and the adoption fails, then one cannot deduct those expenses. However, should the adoption of an international child fail but that of yet another international child goes through, then one can deduct all those expenses up to the maximum credit.

The rules of adoption vary depending on whether the adoption is domestic or international. Adoption processes can take over a year and it is therefore, important to keep records of all expenses and when the adoption was finalized.

In domestic adoption, if one incurs adoption expenses within the year the adoption is finalized, then one can use the expense towards their adoption tax credit in that year. For expenses incurred in a different year from the one in which the adoption is finalized, the expenses can be used in the year in which they were incurred.

For foreign adoptions, one must wait for finalization of the adoption before they can use their adoption tax credit. After the finalization, one can use all the expenses incurred in the entire process for the adoption tax credit for that year. If one incurs any additional expenses in the years following finalization, one can use them towards the tax credit in the year they are incurred.

In 2011, the tax credit was refundable, which meant that one could get the credit even if they did not pay an equivalent amount in taxes, but in 2012, it is non-refundable and reduced. To claim the adoption tax credit, one needs to fill a form “8839, Qualified Adoption Expenses”. The process might be complex, depending on type of expenses one is filling, and it is therefore, advisable to seek professional help.

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