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.

Tax Tips For The Tax Season

Well the new year is here and normally that means start paying down on all that debt we incurred on Christmas shopping and getting ready for tax time. Here are my eight tax tips in order to get ready for the 2010 tax season.

1. Start gathering your records. Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support an item of income or a deduction you’re taking on your return.


2. Be on the lookout. W-2s and 1099s will be coming soon from your employer; you’ll need these to file your tax return.


3. Try e-file. When you file electronically, the software will handle the math calculations for you. If you use direct deposit, you will get your refund in about half the time it takes when you file a paper return. E-file is now the way the majority of returns are filed. In fact, last year, 2 out of 3 taxpayers used e-file.


4. Check out Free File. If your income is $57,000 or less you may be eligible for free tax preparation software and free electronic filing. The IRS partners with 20 tax software companies to create this free service. Free File is for the cost conscious taxpayer who wants reliable question-and-answer software to help them prepare a return.
   
5. Consider all filing options. There are many different options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free face-to-face help at an IRS office or volunteer site. Give yourself time to weigh all the different options and find the one that best suits your needs.


6. Consider Direct Deposit. If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.


7. Remember this number: 17 Check out Publication 17, Your Federal Income Tax on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.


8. Review! Review! Review! Don’t rush. We all make mistakes when we rush. Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.

Technology Expenses Now Eligible For A Special Tax Break

Parents who purchase computer technology for higher education purposes may be eligible for a special tax break. The American Recovery and Reinvestment Act of 2009 added computer equipment and technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan.

A qualified, nontaxable distribution from a 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology, equipment or Internet access and related services. To qualify the beneficiary must use the technology, equipment or services while enrolled at an eligible educational institution.

Here are some things the IRS wants you to know about 529 plans.

1. A 529 plan is an educational savings plan designed to provide tax-free earnings for the benefit of a student. Withdrawals must be used for qualified higher education expenses at an eligible educational institution.


2. Qualified higher education expenses include tuition, reasonable costs of room and board, mandatory fees, computer technology, supplies and books.


3. An eligible educational institution includes any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.


4. Contributions to a 529 plan cannot be more than the amount necessary to provide for a student’s qualified education expenses.

Winterize Your Home and Save On Taxes

You can now winterize your home by making energy saving improvements that will reduce your heating bills and save on taxes at the same time. When the government passed the American Reinvestment and Recovery Act (ARRA), it expanded the Nonbusiness Energy Property Credit and the Real Energy Efficient Property Credit.

The Nonbusiness Energy Property Credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count. By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

The residential energy efficient property credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property. Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits.

Tax Credits or Tax Deductions

A deduction is an expense or an amount of money which lowers your taxable income. It is subtracted "off-the-top" from the amount of money you made throughout the year otherwise known as your gross income. Once all deductions are subtracted from your gross income, you arrive at an amount known as your adjusted gross income, or AGI. Examples of deductions used to obtain your AGI include contributions to a traditional IRA, student loan interest that was paid during the year, tuition and expenses, alimony paid, and classroom-related costs for teachers. After you obtain your AGI, the standard or itemized deductions are subtracted from the AGI, yielding your taxable income. Taxable income determines the amount of tax that you owe.

Tax credits, on the other hand, are dollar-for-dollar reductions which are subtracted from your tax liability. Let’s say, for instance, that you qualify for a $100 tax credit. The government is, in essence, saying to you “We are giving you credit for having already paid $100 in tax." Therefore, $100 is subtracted directly from the amount of tax that you owe.

The following example illustrates the difference between the two. As earlier stated, a deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

Tax Planning Tips For The Hurricane Season

With the 2009 hurricane season underway, there are several steps you can take in order to protect yourself against loss.

• Create An Electronic Backup of All Important Documents

Each household should keep an electronic set of backup records in a safe place. Your backup records should include bank statements, tax returns, insurance policies etc. It is very easy to keep your records in an electronic format since many financial institutions provide statements and documents electronically, and much more financial information is available on the Internet. Even if the original records are provided only on paper, such as passports and birth cer, they can be scanned into an electronic format using any flatbed scanner or multifunctional printer that contains a scanner. With documents in electronic form, you can save them onto a backup storage device, like a portable hard drive which comes in capacities of 250gb to 750gb, or a usb flash drive which can hold up to 32gb of data. I recommend also burning a copy of your data onto a DVD (CD if you do not have a DVD burner) as a backup to your electronic backup, because we know what could happen to our electronic devices if they get wet. Whatever backup device you choose, the data should be kept current and be stored away from the original set in a special emergency bag that should be already packed in case you have to leave in a hurry.

• Document Valuables

Another step you can take to prepare for disaster is to photograph or videotape the contents of your home, especially items of higher value. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.
It is important that you keep a photographic record of your belongings in order to establish market value of items for insurance and casualty loss claims. Hard copies of your photos should be stored with a friend or family member who lives outside the area. These photos should also be stored electronically with your other documents and you should have a copy burned to a DVD.

• Update Emergency Plans

Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

• Check On Fiduary Bonds

Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

Tax Credits You Should Not Forget

Here are other tax credits that you should claim if you qualify because tax credits reduce your tax liability dollar for dollar.

Child Tax Credit
A taxpayer who has a dependent child under age 17 probably qualifies for the child tax credit. This credit, which can be as much as $1,000 per eligible child, is in addition to the regular $3,500 exemption claimed for each dependent. A change in the way the credit is figured means that more low- and moderate-income families will qualify for the full credit on their 2008 returns. The child tax credit is not the same as the child care credit.

Earned Income credit
The Earned Income (EITC) helps people who work but do not earn a lot. Working families with incomes below $41,646 and childless workers with incomes under $15,880 often qualify. Generally, you must have earned income as an employee, independent contractor, farmer or business owner to qualify. Taxpayers under the minimum retirement age who receive disability payments from an employer plan may also be eligible. Most tax credits tend to reduce your tax liability down to $0. The EITC is a refundable tax credit so that it will reduce the taxpayers tax liability down to $0 and unused amounts will be refunded to the taxpayer. The IRS`has an EITC assistant that will help you determine whether you qualify for this credit.

Credit for Dependent Care
An individual who pays for someone to care for a child so he or she can work or look for work probably qualifies for the child and dependent care credit. Normally, the child must be the taxpayer’s dependent and under age 13. Though often referred to as the child care credit, this credit is also available to those who pay someone to care for a spouse or dependent, regardless of age, who is unable to care for him- or herself. In most cases, the care provider’s Social Security Number or taxpayer identification number must be obtained and entered on the return. Anyoe claiming this credit must complete Form 2441.

Education Credit

The Hope credit and the lifetime learning credit help parents and students pay for post-secondary education. Normally, a taxpayer can claim both his or her own tuition and required enrollment fees, as well as those for a dependent’s college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time. A taxpayer can also choose the lifetime learning credit, even if she is only taking one course. In some cases, however, she may do better by claiming the tuition and fees deduction, instead. The education credit is claimed on Form 8863.

Savers Credit

The saver’s credit is designed to help low- and moderate-income workers save for retirement. A taxpayer probably qualifies if his income is below certain limits and he contributes to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2007 are:

$26,500 for singles and married taxpayers filing separately
$39,750 for heads of household and
$53,000 for joint filers

Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply. There is still time to put money into an IRA and get the saver’s credit on a 2008 return. 2008 IRA contributions can be made until April 15, 2009. The savers credit is claimed on Form 8880.

More Year End Planning Part 3

Make a charitable transfer: Individuals who are at least 70½ years old can also make a tax-free transfer from their IRA of up to $100,000 to a charity, as long as the transfer is direct to the organization. This can be useful for retirees who must take required minimum distributions from an IRA, but since the money goes untaxed, donors do not get to deduct the contribution.

Prepay bills: Prepaying things such as January's mortgage bill, a child's spring semester tuition, local property taxes or state income taxes and even tax-advisory and preparation fees can help drive up the amount of deductions you can itemize.

• Prepay Deductible Expenditures: Early payments for some deductible expenditures that are made this year -- instead of in early 2009 -- will produce higher write-offs for your 2008 tax return. This strategy makes sense if you expect to be in the same or lower tax bracket next year. Of course, that’s a big "if," but let’s assume it’s the case. Monthly mortgage payment Perhaps the easiest expense to prepay is your house payment due Jan. 1. By paying it this year, you'll have 13 months' worth of mortgage interest to write off for 2008. You can pull the same prepayment trick with a vacation home. By prepaying this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll only have 11 months of interest to deduct for the first year you stop.

• State and local income and property taxes: Prepayment of state and local income and property taxes that aren't actually due until early next year can also generate a larger 2008 deduction. Thanks to a new tax-law provision, even non-itemizers can deduct real property taxes paid during 2008. However, the maximum write-off under the new rule is $1,000 for married joint-filing couples and $500 for others and the deduction cannot exceed the amount you actually pay by year's end. Do not do these prepayment drills if you know you’ll owe the dreaded alternative minimum tax (AMT) for this year. Write-offs for state and local income and property taxes are completely disallowed under the AMT rules. Therefore, prepaying these expenses will do little or no tax-saving good for AMT victims.

• Medical expenses and itemized deductions: Also, consider prepaying expenses that are subject to limits based on your adjusted gross income (AGI). The two prime candidates are unreimbursed medical expenses and miscellaneous itemized deductions. Medical expenses are deductible only to the extent they exceed 7.5% of AGI. Miscellaneous deductions for investment expenses, tax preparation fees, tax advice, and unreimbursed employee business expenses are deductable to the extent they exceed 2% of AGI. If you can combine these expenditures into a single calendar year, you’ll have a fighting chance of clearing the AGI hurdles and getting some write-offs. Unfortunately, this strategy may not work for AMT victims. Under the AMT rules, medical expenses must exceed 10% of AGI to be deductible and miscellaneous itemized deductions are completely disallowed.

• Prepay College Tuition: If your 2008 adjusted gross income (AGI) allows you to qualify for the Hope Scholarship or the Lifetime Learning higher education tax credits, consider prepaying college tuition bills for 2009 if that would result in a bigger credit on this year’s 1040 form. Specifically, you can claim a 2008 credit based on prepaying tuition for academic periods that begin in January through March of next year. If your 2008 AGI is too high to be eligible for the Hope or Lifetime credits, you might still be able to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills for academic periods that begin in the first three months of 2009 if that would result in a bigger write-off on this year’s Form
  
  

Business expenses: Smaller items also add up, so restocking work-related supplies, renewing subscriptions to professional journals or prepaying dues for professional organizations can also help reduce taxes.

Medical expenses: Review your medical bills to see whether the total spent is close to 7.5 percent of adjusted gross income. If your expenses are at or near that threshold, it might make sense to have other elective work done or prepay some expenses to take advantage of that deduction.

Make a gift: The law also allows taxpayers to deduct gifts of up to $12,000, or $24,000 for a married couple filing a joint return. What's more, there's no cap on gift deductions for educational and medical expenses if the payments are made directly to the educational organization or medical provider.

Think alternative energy or hybrid: Finally, there are tax credits available for several energy-saving investments, including installing alternative energy devices such as solar panels, fuel cells or wind turbines to provide electricity for a home, and for buying alternative fuel vehicles. There are tax credits available for the purchase of a hybrid or electric car. A list of the credits available for different models is available on the Internal Revenue Service Web site, http://www.irs.gov/.

More Year End Planning Part 2

I always view Thanksgiving as a time for family getting together and being thankful for all of our blessings, and the start of the Christmas season when spending money on gifts becomes a priority. It is also a good time to do some end of the year tax planning so that we don't get any surprises when we file our tax returns.

Get organized: The first step in the planning process is to make sure your records are organized and up to date. Without records and without substantiating your deductions, you have no deductions.

Defer income into the new year: If you are scheduled to receive a bonus ask to receive it in January so that the additional income is not included in your 2008 AGI. For the self-employed, sending invoices out late in December could make it more likely you'll receive payment in the new year.

Check on capital gains and losses: It's important to find out whether you might have capital gains to report. A lot of mutual funds have been forced to sell assets as investors bailed out of the market. So despite the fact that the fund probably posted losses, investors might be receiving a capital gains distribution. In addition, you might want to consider selling some holdings that have lost value as the market tanked to offset any capital gains. Current law allows investors to claim up to $3,000 in short term capital losses.

Determine whether you're subject to AMT: The Alternative Minimum Tax, which was designed to make sure that high-income earners with multiple deductions pay at least some tax, now captures many upper middle-class workers because it is not indexed to inflation. So if you live in a state such as New York this is something you should be concerned about. Congress included a measure to adjust the AMT so that most people are exempt in the bailout bill, but figuring out whether you need to pay can still be a complicated task that might require help from a tax adviser.

Boost your charitable deductions: Any check written or item donated before Dec. 31 can be deducted. So if you haven't done this yet, clean out your closets and donate those old suits, dresses and other items that you aren't wearing any more as well as any furniture to charity. Since many organizations are also feeling pinched by the economic downturn. If you don't have much credit card debt, you can charge a donation before the end of the year and pay it off in 2009.

Some Year End Tax Planning

1. Book a tax-planning meeting in order to devise a year end strategy specifically for your firm. Why the need for fine-tuning? Some small companies' revenues are down for 2008, not because their business has declined but because pinched customers are paying their bills more slowly. As a result, additional revenue will trickle in as late payments during early 2009 just when tax rates may go. Some companies may have the equivalent of 10 months of income this year, and 14 next year and they may not want to defer additional income into 2009.

2. Take advantage of bonus depreciation.
For qualified assets placed in service in 2008, you may claim an extra 50% deduction in addition to normal depreciation and deductions available under the Internal Revenue Code's Section 179. The Section 179 "expensing" deduction allows a business to write off the full cost (rather than depreciating it over several years) of certain business assets, including machinery, vehicles, equipment, and computers, up to a certain dollar level. For 2008, the maximum deduction limit was increased to $250,000. The asset must be "placed in service" in 2008 in order to take advantage of the increased dollar limit for assets that will be expensed under section 179. Therefore, you cannot deduct the cost of a computer system you've ordered but that won't be operating in your office until January. "If you need a piece of equipment, make the purchase and get it placed in service in the same year.

3. If you have a vehicle that you use both for work and business, increase your business driving and decrease your personal driving to get the most out of the tax deduction for personally owned vehicles. If you use your vehicle for 50% business driving and 50% personal driving, try increasing your business driving in order to increase the allowale percentage of vehicle expenses as well as other vehicle expenses, like oil changes and maintenance.

Alternatively, you can choose to take the standard mileage rate for 2008. That was 50.5¢ per mile for the first half of 2008 and 58.5¢ per mile for the second half. Only small business owners that file Schedule Cs, such as sole proprietors, are allowed to choose which way to take their vehicle deductions.

4. If your company operates on the accrual basis for tax purposes, fix your employees' bonus amounts before Jan. 1, but pay them early next year. Generally, the bonuses aren't taxable to employees until 2009, but they can be deducted on your company's 2008 return so long as they're announced in 2008 and paid by Mar. 16, 2009.

5. If you're doing major renovations at your business location, make sure you schedule repairs and maintenance jobs separately. "Capital improvements aren't deductible as business expenses, however, ordinary and neccessary maintenance repairs are. Improvement costs are added to the 'basis' of the property for tax purposes." Lumping all the work into one project could cheat you out of 100% deductible business expenses.

6. Keep detailed records of collection efforts that will support any deductions you take for bad debt that becomes worthless in 2008. If you can't get one of those pinched clients to pay up, you can write the amount off provided you can show you made a good-faith effort to collect the debt. That means keeping records of telephone calls, letters, and other efforts you've made to get the money, including hiring a collection agency.