Standard Deduction vs Itemized Deductions: 5 Tips to Help You Decide

When you file your tax return, you usually have a choice whether to itemize deductions or take the standard deduction. Before you choose, it’s a good idea to figure your deductions using both methods. Then choose the one that allows you to pay the lower amount of tax. The one that results in the higher deduction amount often gives you the most benefit. Here are  tips to help you choose.

  1.Figure your itemized deductions. Add up deductible expenses you paid during the year. These may include expenses such as:

•  Home mortgage interest 
•  State and local income taxes or sales taxes (but not both) 
• Real estate and personal property taxes 
•  Gifts to charities 
•  Casualty or theft losses 
•  Unreimbursed medical expenses 
•  Unreimbursed employee business expenses 

 2.Special rules and limits apply. Visit IRS.gov and refer to Publication 17, Your Federal Income Tax for more details.

 3.Know your standard deduction. If you don’t itemize, your basic standard deduction for 2013 depends on your filing status:

•  Single $6,100 
•  Married Filing Jointly $12,200 
•  Head of Household $8,950 
•  Married Filing Separately $6,100 
•  Qualifying Widow(er) $12,200 

 Your standard deduction is higher if you’re 65 or older or blind. If someone can claim you as a dependent, that can limit the amount of your deduction. Check the exceptions. Some people don’t qualify for the standard deduction and therefore should itemize. This includes married couples who file separate returns and one spouse itemizes.

 4.File the right forms. To itemize your deductions, use Form 1040 and Schedule A, Itemized Deductions. You can take the standard deduction on Forms 1040, 1040A or 1040EZ.

 5.File Electronically. You may be eligible for free, brand-name software to prepare and e-file your tax return if your adjusted gross income is less than 58,000. IRS Free File will do the work for you. Free File software will help you determine if you should itemize and file the right tax forms. It will do the math and e-file your return – all for free. Otherwise, you may file electronically with commercial software such as TurboTax or H&R Block, or through a paid preparer.

Simplified Option for Claiming Home Office Deduction Now Available

In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.

 The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually. The new option is available starting with the 2013 return taxpayers are filing now. Normally, home-based businesses are required to fill out a 43-line form (Form 8829) and (instructions)often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return. Self-employed individuals claim the home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32 and eligible employees claim it on Schedule A Line 21.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.

 Long-standing restrictions on the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. Further details on the home office deduction and the new option can be found in Publication 587.

Health Care Tax Credit For Small Business.

The Affordable Care Act or more commonly known as ObamaCare was enacted on March 23, 2010. It contains some tax provisions that are in effect and more that will be implemented during the next several years.

As part of the Health Care Reform Act's effort to assist small businesses in providing health care coverage, a health care tax credit was created based on health insurance premiums paid for employees. For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.

To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year. Basically, two half-time workers count as one full-timer. Here is an example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20. Thus a small business can have as many as 25 full timers or 50 half timer to be eligble for the credit. In addition, those employees must have average wages of less than $50,000 a year. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10 – the number of FTEs – and the result is your average wage. The average wage would be $20,000. 

Also, the amount the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less. 

Small businesses cannot take a tax credit for insurance premiums paid for owners of the business. For small businesses structured as a C-corporation, no tax credit is available for employees who own 5% or more of the corporation. For S-corporations, no tax credit is available for employees who own 2% or more of the S-corporation. Source: Internal Revenue Code, section 45R, paragraph (e)(1). 

Partners, members of LLC treated as a partnership, owners of a single-member LLC, S-corporation shareholders owning 2% or more of an S-corporation, and sole proprietors are all treated as self-employed persons for health insurance purposes, and are eligible for the self-employed health insurance deduction instead of the tax credit. 

 Small businesses should review their accounting systems to make sure they are keeping track of employer-paid and employee-paid health insurance premiums. This will become vitally important as employers will need to report the value of health insurance benefits on employees' W-2 Forms. Additionally, business owners will want to review how they structure their health benefits. For example, owners may want to revise what percentage of health insurance premiums they want to pay so as to be eligible for the tax credit.

2009 Tax Deductions That You Should Not Overlook

With 13 days to go before April 15th here is a list of tax deductions many people either miss or forget.

Charitable Contributions: If you itemize your deductions and gave money to a church, a charitable organization such as the Red Cross, or a nonprofit organization such as the Boys and Girls Club of America then you are entitled to deduct your contribution. You must make sure you get a written receipt for your deduction just in case you get audited. If you donated your old clothes, furniture, books, etc to your local Goodwill, Big Brother or Salvation Army, you are entitled to deduct the value of your contribution. In addition, if you donated money to support disaster relief in Haiti after January 11, 2010 and before March 1, 2010 these contributions also qualify to be deducted on your 2009 return. So, if you didn't have the cash to contribute in 2009, I hope you charged it.

Points: If you were able to refinance your home in these tough economic times, any points you paid to refinance your home can be deducted on a monthly basis over the life of the new loan. All unamortized points on an old refinancing are deducted in the year of a new refinancing.

Health Insurance Premiums: Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. But you have to add these to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit. If you're self-employed and not covered by any other employer-paid plan, though, you can deduct 100% your health insurance premiums (to the extent of your net income) "above the line." Above the line means the expense is an adjustment to your adjusted gross income.

Educator Expenses: If you're a kindergarten through grade 12 teacher, teachers aide, instructor or principal, you can get an above-the-line deduction for as much as $250 for materials you bought in 2009. That includes books, supplies and even computer equipment.

College Education Expenses: In this category you will have a choice of taking either an adjustment to income or a tax credit. A tax credit will reduce your taxes payable on a dollar for dollar scale while the adjustment to income can either reduce or increase your gross income. If your adjusted income is less than $65,000 for single taxpayers or less than $130,000 for married filing jointly taxpayers you can deduct up to $4,000 on your adjusted gross income. If you qualify, you can take either the Lifetime Earning Credit which is worth $2,000 or the American Opportunity Credit which is worth $2,500. Since you have choice between the tax credit and the adjustment to income, you will have to choose which one offers the greater tax benefit.

Health Care Reform Taxes

Individual responsibility: Starting in 2014 everyone will be required to maintain health insurance. If you go without insurance, you will be subject to a tax of $695 per year.

Employer responsibility: Large companies will be required to provide health insurance as a benefit to its employees. Companies that do not provide this benefit will be imposed a tax of $2,000 a year per employee.

High cost plan excise tax: Starting in 2018, high cost health insurance plans will be subject to a tax. Plans for single persons that cost in excess of $10,200 and family plans that cost in excess of $27,500 are in this sections cross hairs. The excise tax rate on incremental costs will be 40 percent.

Medicare tax: Medicare tax will now be assessed on investment income for families making in excess of $250,000 and for singles making over $200,000. Investment income includes interest, dividends, capital gains, rental income and royalties. In the past, Medicare taxes had been assessed on wages only. Earn one dollar of investment income while you are over the threshold limits and you will incur this tax. This tax will commence January 1, 2013.

Medicare tax: In addition to the expansion of Medicare tax on investment income as noted in Section 1402 above, the Medicare tax rate has also increased. This tax increases by a third, from 2.9 percent to 3.8 percent.

Brand name pharmaceuticals: Starting in 2011, the pharmaceutical industry will be subject to a $2.5 billion annual excise tax. The annual excise tax increases in subsequent years, rising to $4.2 billion in 2018. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes

Medical Devices: A 2.3 percent excise tax on the sale of medical devices goes into effect on Jan. 1, 2013. That tax, which excludes items sold at retail to consumers, would raise $20 billion through 2019.

Tanning Tax: A 10 percent excise tax on indoor tanning services goes into effect in July 2010.

Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

Two new tax benefits are now available to employers hiring workers who were previously unemployed or working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act.

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.

The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.
In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.

House Approves Health Care Bill

The House voted 219-212 in favor of health legislation backed by President Obama. The 219-212 House vote, coming after a tumultuous day of protests and rancorous debate, paves the way for Obama to sign the major portion of his 10-year, $940 billion plan early this week. The vote assured that about 32 million Americans will gain health insurance coverage and millions more will win protections against losing theirs. The legislation will raise taxes, largely on the wealthy, and reduce future Medicare spending by about $500 billion.

"This legislation will lead to healthier lives," House Speaker Nancy Pelosi of California said in the final floor speech before the vote. "This is an American proposal that honors the traditions of our country."

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